Bài giảng môn Kế toán, kiểm toán - Chapter 14: Comparative international auditing and corporate governance

Chapter 14:ComparativeInternational Auditingand CorporateGovernanceChapter TopicsRecent trends in international corporate governanceInternational diversity in external auditingInternational harmonization of auditing standardsAuditor liability and independenceRole of audit committeesEthical issues involved in external auditing at the international levelInternal auditing issues in an international contextAudit regulation14-2Learning ObjectivesDefine corporate governance and discuss the circumstances that caused it to receive worldwide attention in recent yearsDescribe the corporate governance guidelines at the international levelExplain the link between auditing and corporate governance in an international contextExamine international diversity in external auditingDescribe the steps taken toward international harmonization of auditing standardsDiscuss the issues concerning auditor liability and auditor independence14-3Learning ObjectivesExplain the role of audit committeesDiscuss the ethical issues involved in external auditing at the international levelExamine internal auditing issues in an international contextDescribe the provisions in the Sarbanes-Oxley Act of 2002 in relation to auditing issues14-4International Trends in Corporate GovernanceRecent corporate scandals, particularly those in the U.S. (e.g., Enron, WorldCom) have led to increased focus on corporate governanceThe Sarbanes-Oxley Act of 2002 was a direct response to these scandalsIncludes detailed provisions pertaining to corporate governance and auditingThese events in the U.S. are consistent with a worldwide movement to improve corporate governance and auditing14-5International Auditing and Corporate GovernanceOECD guidancePrinciples of Corporate Governance (1999) provide guidance to help governments improve corporate governance within their bordersCorporate governance, “involves a set of relationships between a company’s management, its board, its shareholders, and other stakeholders”Make clear that the board of directors has ultimate responsibility for governanceFormed the basis of the corporate governance component of the World Bank/International Monetary Fund’s Reports on the Observance of Standardsand Codes(ROSC)14-6International Auditing and Corporate GovernanceOECD guidanceIn 2004, revisions to the corporate governance code point out that external auditors should answer to shareholdersHighlighted the board of director’s responsibility for overseeing financial reportingAlso strengthen shareholder rights in most OECD member countries14-7International Auditing and Corporate GovernanceThe International Federation of Accountants (IFAC) 2007 survey “Financial Reporting Supply Chain—Current Perspectives and Directions”Positive areas include: Increased awareness that good corporate governance countsNew codes and standard improvements in board structureRisk managementMore transparency in reporting5 areas of concern:Governance in name, but not spiritOverregulationChecklist mentalityPersonal risk/liability for directors and senior managementCost/benefit14-8International Auditing and Corporate GovernanceThe International Federation of Accountants (IFAC) 2007 survey “Financial Reporting Supply Chain—Current Perspectives and Directions”Proposed improvements:Behavioral and cultural aspects of governanceReview of existing rulesQuality of directorsBetter relation of remuneration to performanceExpansion of view from compliance governance to business governance14-9International Auditing and Corporate GovernanceSarbanes-Oxley Act of 2002Public Company Accounting Oversight Board (PCAOB) was created to oversee the accounting professionCertification of financial statements by CEOs and CFOsTightened definition of “independent” audit committee membersExternal auditors to report directly to audit committeeProhibitions on certain nonaudit services by external auditorsIncreased penalties for financial statement fraudThe NYSE followed suit by introducing additional listing requirements related to corporate governance14-10International Auditing and Corporate GovernanceFinancial Reporting Council (FRC) in the U.K. published “The Audit Quality Framework” in 2008 which provides key drivers of audit quality:The culture within an audit firmAudit partners’ and staffs’ skills and personal qualitiesEffectiveness of the audit processReliability and usefulness of audit reportingNon-controllable factors affecting audit quality14-11International Auditing and Corporate GovernanceIn their 2009 annual report Volkswagen Group in Germany said:“Sustainable economic success can only be generated in our company if we comply with international rules and standards, because that is the only way to strengthen the trust of our customers and investors. Transparent and responsible corporate governance takes the highest priority in our daily work.”14-12International Diversity in External AuditingBackgroundGlobalization is leading to increased importance of auditing internationallySignificant international diversity exists in various aspects of auditingPurpose of external audits varies between countriesEnvironment in which auditing takes place variesRegulation of the audit function variesThe content of audit reports also varies14-13International Diversity in External AuditingPurpose of auditingIn the U.S. and U.K., the purpose of the external audit is to provide assurance that the financial statements are fairly presentedIn the U.S., Sarbanes-Oxley also requires audits of internal controlsSuch a report provides assurance about the process of financial statement preparationIn Germany, auditors are also responsible for evaluating the report of management14-14International Diversity in External AuditingPurpose of auditingInternational variation in the purpose of audits seems to be related to differences in corporate governance structureThe supervisory board in Germany has essentially equivalent responsibilities to a U.S. board of directorsGerman law includes specific regulations about the composition of the supervisory boardGerman supervisory boards are more broadly representative than their U.S. equivalent14-15International Diversity in External AuditingEnvironment of auditing – Culture and historyCultures that value saving face and societal harmony are less accepting of the questioning inherent in auditingCollectivist cultures often distrust outside auditorsRecent Chinese history of state-owned enterprises is related to explicit limits regarding application of lower-of-cost-or-market and allowance for bad debtsAll of these factors can surprise auditors from a western perspective14-16International Diversity in External AuditingEnvironment of auditingCountries with less developed financial infrastructure would need less sophisticated auditingWhen banks or families are the primary source of financing, there is less demand for auditingCommon law countries tend to have a more influential auditing profession relative to code law countriesAudit quality and independence are likely to be influenced by level of rigor to join the profession and by the extent of legal liability assigned to auditors14-17International Diversity in External AuditingRegulation of Auditors and Audit FirmsAuditing in Anglo-Saxon countries has historically been self-regulatedHowever, recent scandals have led to increased government oversightIn many other countries (e.g., Germany, China) government exercises much more controlAuditor qualifications vary significantly from country to country14-18International Diversity in External AuditingAudit reportsThe content of audit reports varies significantly between countries, and sometimes between companies in the same countryFor example, audit reports sometimes refer to local audit standards, non-local audit standards, multiple sets of audit standards, or are addressed to different audiencesThe Sarbanes-Oxley Act in the U.S. includes a requirement to provide assurance on the internal controls14-19International Harmonization of Auditing StandardsInternational auditing has historically received less attention than international accountingRecently, globalization has increased the importance of cross-national understanding of audit reportsHarmonization of international auditing standards will help increase consistency of auditing worldwideThe increased level of assurance on financial statements should result in more efficient global capital markets14-20International Harmonization of Auditing StandardsThe International Federation of Accountants (IFAC) develops international auditing standardsThrough International Auditing and Assurance Standards Board (IAASB) IFAC’s Forum of Firms, as well as its Compliance Committee, deal with international regulation and complianceIFAC’s efforts at harmonization are supported by the International Organization of Securities Commissions (IOSCO)14-21International Harmonization of Auditing StandardsIFAC pronouncementsA set of International Standards on Auditing consisting of nine sections has been publishedSection 200 covers auditor responsibilities in conducting an auditSection 500 deals with audit evidenceSection 700 covers audit reportsSections 800 deals with engagements other than a standard auditPCAOB is proposing Rule 4012 where the board would place full reliance on the inspection program of non-U.S. auditor oversight entities14-22Auditor Liability and IndependenceAuditor liability – BackgroundAuditors are subject to civil liability, criminal liability, and professional sanctionsCivil liability can result from breach of contract or civil duty (e.g., negligence)Criminal liability can result from criminal conduct (e.g., fraud)Professional sanctions can result from violation of the rules of a professional bodyThe potential for legal liability varies internationally and is highly significant in some countries (e.g., the U.S.)14-23Auditor Liability and IndependenceAuditor liability – BackgroundAuditors are subject to civil liability, criminal liability, and professional sanctionsCivil liability can result from breach of contract or civil duty (e.g., negligence)Criminal liability can result from criminal conduct (e.g., fraud)Professional sanctions can result from violation of the rules of a professional bodyThe potential for legal liability varies internationally and is highly significant in some countries (e.g., the U.S.)14-24Auditor Liability and IndependenceAuditor liability – Recent eventsAndersen, a big five firm, was effectively put out of business by a criminal conviction, later overturned, in connection with its Enron auditOne remaining big four firm, PricewaterhouseCoopers, suggested to U.K. authorities that auditors are in a legally untenable positionA 1998 German court decision resulted in auditors being liable to third parties for the first time in that country14-25Auditor Liability and IndependenceLimiting Auditor’s LiabilitySeveral solutions to limiting auditor liability exist in order to limit potential damage to firmsChange of ownership structure to limit or eliminate joint and several liabilityProportionate liability that limits auditor liability to the proportion for which they are deemed responsibleStatutory caps to limit damagesDisclaimer of liability to avoid unintended liability Some U.K. auditors use these, but the U.S. SEC rejects them as invalid14-26Auditor Liability and IndependenceAuditor Independence – BackgroundIndependence is a fundamental principle of auditingAuditors in the U.S. are required to adhere to a detailed set of independence rulesThe SEC has additional rules for auditors of public companiesAuditor independence is a subject of intense debate internationally as well as in the U.S.14-27Auditor Liability and IndependenceProposals to strengthen auditor independenceInvolvement of stockholders in auditor appointmentRestrictions or prohibitions of certain consulting activitiesIncreased regulatory oversightIncreased involvement by the board of directors and audit committeeMandatory rotation of audit firms or engagement partnersSeparating consulting operations from the auditing practiceIncreasing the stringency of admission criteria to the profession14-28Auditor Liability and IndependenceProposals to strengthen auditor independenceA principles-based approach to auditor independence, in contrast to a lengthy set of “bright-line” rules, which would maintain some specific rulesA conceptual approach that includes no list of specific prohibitionsFocuses on the underlying aim rather than detailed prohibitions14-29Audit CommitteesAudit committees – United StatesCommittee of the board of directors responsible for financial reporting oversightIncreased attention has been paid to this topic in recent yearsIn the U.S., the Blue Ribbon Committee made a series of recommendations to enhance its role Sarbanes-Oxley includes specific provisions 14-30Audit CommitteesAudit committees – InternationallyIncreasingly being seen as an important component of corporate governanceWide acceptance globally that the auditor works for the audit committeeAustralia, for example, requires listed companies to have audit committees composed completely of outside directorsAlso now required for publicly listed companies in Malaysia and Singapore14-31Ethical Issues in International External AuditingCan the moral standing of the accounting profession be based on a consensus of international morals and values?Formerly local professional fundamentals and values are now globalIFAC provides ethics educationPIOB (Public Interest Oversight Board) oversees work of IFAC committees and considered and approved revised Code of Ethics for Professional Accountants issued by the Accounting Practices BoardThe revised code clarifies requirements for all professional accountants and significantly strengthens auditor independence requirements14-32Ethical Issues in International External AuditingWalker Review into Corporate Governance of UK banks emphasizes accountability over how banks are runEthical codes may offer opportunities for “creative accounting”Focus on individual benefits has led to recent corporate failuresU.S. has focused on rules of behavior rather than social norms and this is not always the best pathA more communitarian view of professional ethics may be needed14-33Internal AuditingInternal auditing – Background An independent, objective assurance and consulting activity designed to add value and improve an organization’s operationsThe SEC requires an internal audit function of public companiesCan enhance the effectiveness of internal controls over financial reportingThe clearest difference between external and internal auditing is the consulting function of the latter, particularly in risk management14-34Internal AuditingInternal auditing – BackgroundGiven their complexity, multinational corporations (MNCs) are increasingly demanding risk management consultingInternal auditors also commonly perform compliance audits, and effectiveness and efficiency auditsPCAOB’s Auditing Standard No. 5 “An Audit of Internal Control Over Financial Reporting” implements Sections 103 and 404 of the Sarbanes-Oxley ActIt must be used for all audits of internal controls no later than for fiscal years ending on or after November 15, 2007This standard applies a principles-based approach and eliminates unnecessary procedures from the audit14-35Internal AuditingThe Foreign Corrupt Practices Act (FCPA)Requires companies to maintain effective internal controls and not pay bribesThe logic is that effective internal controls over financial reporting will mitigate the risk of bribe paymentsWas a reaction to the discovery, in the 1970s, that many U.S. companies did pay bribesEnforcement of the FCPA has resulted in large fines against major U.S. companies14-36Sarbanes-Oxley and the Future of AuditingMost significant legislation pertaining to financial reporting and auditing since the establishment of the SEC in the 1930sHad an observable impact on business, one example of which is the increase in financial expertise on audit committeesCompanies have spent significant resources enhancing internal controlsOn a more negative note, many financial executives are experiencing increased stress due to Sarbanes-Oxley14-37Sarbanes-Oxley and the Future of AuditingOther international audit issuesThere is increased demand for internet-based financial reporting and the related assuranceContinuous assurance on real-time informationIncreased competition in the audit marketIncreased exposure of international audit firmsThe risk that increases in litigation will lead to more of a checklist approach to auditingThe enhanced partnership between external auditors, internal auditors, and audit committees14-38End of Chapter 1414-39