Comparative International

Auditing and Corporate

Governance

AKUNTANSI INTERNASIONAL
Chapter Topics
 Recent trends in international corporate
governance.
 International diversity in external auditing.
 Harmonization of international external
auditing.
 Auditor liability and independence.
 Audit committees.
 International internal auditing.
 Audit regulation.
Learning Objectives
1. Define corporate governance and discuss
the circumstances that caused it to receive
worldwide attention in recent years.
2. Explain the link between auditing and
corporate governance in an international
context.
3. Examine international diversity in external
auditing.
4. Explain the steps take toward international
harmonization of auditing standards.
Learning Objectives
5. Demonstrate an understanding of the
issues concerning auditor liability and
auditor independence.
6. Explain the role of audit committees.
7. Discuss internal auditing issues in an
international context.
8. Discuss the provisions in the Sarbanes-
Oxley Act of 2002 in relation to auditing
issues.
International Trends in Corporate
Governance
 Recent accounting scandals, particularly those
in the U.S. (e.g., Enron, WorldCom) have led to
increased focus on corporate governance.
 The Sarbanes-Oxley Act of 2002 was a direct

response to these scandals.

 This act includes new rules pertaining to

corporate governance and auditing.

 These events in the U.S. are consistent with a

worldwide movement to improve corporate

governance and auditing.
International Trends in Corporate
Governance
OECD guidance
 Principles of Corporate Governance (1999)
provide guidance to help governments improve
corporate governance within their borders.
 Corporate governance, “…involves a set of

relationships between a company’s management,

its board, its shareholders, and other
stakeholders.”
 These principles also make clear that the board

of directors has ultimate responsibility for

governance.
International Trends in Corporate
Governance
OECD guidance
 In 2004, revisions to the corporate
governance code point out that external
auditors should answer to shareholders.
 These revisions also highlight the board of

directors responsibility for overseeing

financial reporting.
 These revisions also strengthen shareholder

rights in most OECD member countries.

International Trends in Corporate
Governance
Sarbanes-Oxley Act of 2002
 Public Company Accounting Oversight Board (PCAOB)
was created to oversee the accounting profession.
 Certification of financial statements by CEOs and CFOs.
 External auditors to report directly to audit committee.
 Restriction on allowable non-audit work for auditors.
 Increased penalties for financial statement fraud.
 The NYSE followed suit by introducing additional listing
requirements related to corporate governance
International Diversity in External
Auditing
Background
 Globalization is leading to increased importance of
auditing internationally.
 Significant international diversity exists in various

aspects of auditing.
 The purpose of external audits varies between

countries.
 The environment in which auditing takes place

varies.
 Regulation of the audit function varies.
 The content of audit reports also varies.
International Diversity in External
Auditing
Purpose of auditing
 In the U.S. and UK, the purpose of the
external audit is to provide assurance that the
financial statements are fairly presented.
 In the U.S., Sarbanes-Oxley also requires

audits of internal controls.

 Such a report provides assurance about the

process of financial statement preparation.

 In Germany, auditors are also responsible for

evaluating the report of management.

International Diversity in External
Auditing
Purpose of auditing
 Internationalvariation in the purpose of audits
seems to be related to differences in corporate
governance structure.
 The supervisory board in Germany has essentially

equivalent responsibilities to a U.S. board of

directors.
 German law includes specific regulations about the

composition of the supervisory board.

 German supervisory boards are more broadly

representative than their U.S. equivalent.

International Diversity in External
Auditing
Environment of auditing – Culture and history
 Cultures that value saving face and societal
harmony are less accepting of the questioning
inherent in auditing.
 Collectivist cultures often distrust outside auditors.
 Recent Chinese history of state-owned enterprises

is related to explicit limits regarding application of

lower-of-cost-or-market and allowance for bad
debts.
 All of these factors can surprise auditors from a

western perspective.
International Diversity in External
Auditing
Environment of auditing
 Countries with less developed financial infrastructure
would need less sophisticated auditing.
 When banks or families are the primary source of

financing, there is less demand for auditing.

 Common law countries tend to have a more influential

auditing profession relative to code law countries.

 Audit 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 auditors
International Diversity in External
Auditing
Audit regulation
 Auditing in Anglo-Saxon countries has
historically been self-regulated
 However, recent scandals have led to

increased government oversight.

 In many other countries (e.g., Germany,

China) government exercises much more

control.
 Auditor qualifications vary significantly from

country to country.
International Diversity in External
Auditing
Audit reports
 The content of audit reports varies significantly
between countries, and sometimes between
companies in the same country.
 For example, audit reports sometimes refer to

local audit standards, non-local audit standards,

multiple sets of audit standards, or are addressed
to different audiences.
 The Sarbanes-Oxley Act in the U.S. includes a

requirement to provide assurance on the internal

controls.
to be continued
TERIMA KASIH