CHAPTER 14
COMPARATIVE INTERNATIONAL AUDITING AND
CORPORATE GOVERNANCE
Chapter Outline
I. Auditing is an integral part of multinational corporate governance.
A. Auditing is expected to improve the precision, quality and reliability of information
made available to the market, and to enhance investor confidence in such information.
B. With the current trend toward globalization of markets, and rapid growth in
international transactions, securing investor confidence is crucial for MNCs.
C. The Organization for Economic Cooperation and Development’s (OECD) revised code
of corporate governance emphasizes among other things, that auditors should be
accountable to shareholders, and that boards of directors should effectively oversee
the financial reporting function.
D. Some of the specific measures introduced by the Sarbanes-Oxley Act to improve
corporate governance relate directly to auditing, for example, establishment of a new
oversight board for the accountancy profession, tightly defining ‘independence’ of audit
committee members, requiring external auditors to report directly to audit committee,
and prohibition of certain non-audit services by external auditors.
II. There are major variations in many aspects of external auditing across countries, including
the purpose of external auditing, the audit environment, regulation of auditing, and audit
reports.
A. The purpose of external auditing can be different between Anglo-American countries
and continental European countries. For example, German auditors take a much
broader view of the concept of “client” than do their counterparts in the U.K., perhaps
due to the particular corporate governance structure in Germany.
B. The cultural value orientation of a particular country can have an impact on the audit
environment in that country. For example, the perception of auditor independence and
audit judgment can be affected by culture. The audit environment of a country is also
heavily influenced by its accounting infrastructure, which includes preparers and users
of information, information intermediaries, and mechanisms for regulating accounting
information.
C. Approaches taken to regulate auditing in different countries range from those that
leave the task largely in the hands of the profession, such as in Anglo-American
countries, to those that rely heavily on government, such as in China.
D. There are significant differences in the audit reports in different countries, and
sometimes different companies within the same country. For example, such
differences could arise as a result of an audit conducted by using a different set of
standards from that used in preparing the financial statements (e.g., Toshiba), or by
using both local and international standards (e.g., Bayer AG), or by using multiple sets
of standards aiming at different audiences (e.g., Unilever).
III. International harmonization of auditing standards is important mainly to assure the
international capital markets that the audit process has been consistent across
companies.
A. The responsibility for developing international auditing standards rests with the
International Federation of Accountants (IFAC).
B. As a condition of membership, IFAC member bodies support the auditing standards
and other statements developed by the IFAC through its International Auditing and
Assurance Standards Board (IAASB).
C. In December 2004, the IAASB issued a revised ISA 700 aiming at enhancing the
transparency and comparability of auditors’ reports across international borders.
D. Auditors are expected to comply with IFAC’s Code of Ethics for Professional
Accountants.
E. In accordance with IAS 1, the International Auditing Practices Committee (IAPC)
specifies that financial statements should not be described as complying with IFRS
unless they comply with all the requirements of each applicable standard and each
applicable interpretation of the IFRIC.
F. The International Organization of Securities Commission (IOSCO) supports IFAC’s
standards on auditing.
IV. Issues concerning auditors’ liability have been the subject of debate and discussion in
many countries recently.
A. Big 4 accounting firms strongly advocate that auditors’ liability should be limited.
B. In some countries, audit firms are allowed to change their ownership structure in order
to limit their liability.
C. In the U.K., for example, audit firms can operate as limited liability companies.
D. Another approach taken to limit auditors’ liability is the use of the concept of
proportionate liability, such as is found in Australia and Canada.
E. Statutory cap is yet another strategy for limiting auditors’ liability. This approach is
used in Germany.
E. Sometimes auditors include disclaimers of liability in their audit opinions to protect
themselves from unintended liability. This is a common practice among the U.K.
auditors.
V. One of the main principles governing auditors’ professional responsibilities is
independence.
A. Having stockholders involved in the auditor appointment process is expected to
strengthen the independence of auditors from management. However, this may not be
very effective as it is the management of the company who actually selects the auditor,
after negotiating fees and other arrangements.
B. Prohibition of the provision of certain non-audit services to client companies is another
method aimed at securing auditor independence. The Sarbanes-Oxley Act in the
United States contains specific provisions in this regard.
C. Regulatory oversight often is used to secure auditor independence. Examples include
the Professional Oversight Board for Accountancy (POBA) in the U.K., the Public
Company Accounting Oversight Board (PCAOB) in the U.S., and the Public Interest
Oversight Board (PIOB) of the IFAC.
D. Mandatory rotation of audit firms has often been advocated as a means of
strengthening auditor independence.
E. The large accounting firms have resorted to splitting the organizations into separate
entities, each dealing with a specific operation area as a way of addressing the auditor
independence issue.
F. In some countries, such as the U.K., the admission criteria for professional auditors
have made more stringent on the assumption that it would help secure auditor
independence.
G. Some countries have taken a principles-based approach, for example, Canada,
whereas some others have taken a conceptual approach, for example, Germany, in
addressing the issue of auditor independence. Under a principles-based approach the
requirements go beyond any specific situation and mandates a proactive approach
based on clearly articulated principles, whereas a conceptual approach focuses on the
underlying aim rather than detailed prohibitions.
VI. An audit committee is a committee of the board of directors that oversees the financial
reporting process including auditing.
A. In many countries, listed companies are required to establish an audit committee.
B. An audit committee is generally responsible for monitoring the financial reporting
process, overseeing the internal control system and overseeing the internal audit and
independent public accounting function.
C. The Sarbanes-Oxley Act contains specific provisions dealing with issues related to
audit committees, expanding their role and responsibilities.
D. In 2003, the SEC introduced new rules to prohibit the listing of companies that fail to
comply with the Sarbanes-Oxley Act’s requirements.
VII. Internal auditing is a segment of accounting that utilizes the basic techniques and methods
of auditing, and functions as an appraisal activity established within an entity.
A. The internal auditing function includes review of the accounting and internal control
systems, examination of financial and operating information, review of operating
controls, including non-financial controls, of an entity, and review of compliance with
laws, other regulations, and management policies.
B. The function of internal auditing is directly related to corporate governance, and the
Institute of Internal Auditors (IIA) has issued many statements strengthening the
function of internal auditing.
C. The Sarbanes-Oxley Act specifically recognizes the importance of internal auditing in
restoring credibility to the system of business reporting, and the SEC requires listed
companies to have an internal audit function.
D. Internal auditing is an integral part of managing a MNC. The U.S. Foreign Corrupt
Practices Act 1977, the Treadway Commission Report 1987, the Report of the
Committee of Sponsoring Organizations (COSO) of the Treadway Commission 1992,
and the International Anti-Bribery and Fair Competition Act 1998 all recognize the
importance of internal auditing.