By Philip Smith, journalist
Presenting a clear, understandable picture of the financial situation of a massive global entity demands year-round planning and a consistent approach
Recent criticisms of the audits of certain multinational groups in India have suggested that lapses could be attributable to the complicated nature of companies’ subsidiary structures. At a time of increasing regulatory focus on the role of auditors around the world, the practical issues involved in checking the financial statements of huge, highly complex multinational companies present a continuing challenge for engagement partners.
The Challenges in Auditing Complex Structures
These businesses may have a vast global web of subsidiaries, employ tens of thousands, operate complex supply chains, and face reporting requirements that vary across jurisdictions.
So what are the challenges in auditing such structures, in communicating with their senior executives around the world and ensuring consistency within the audit team? How large should the audit team be and what skills will it need? And what is the role of technology?
Above all, how is it possible to pull together the disparate threads of the audit to ensure it delivers a comprehensive and coherent result in the form of an audit report that the group engagement partner has confidence in and is willing to sign?
‘As lead engagement partners, we are all very aware that we are single audit partners who have complete personal responsibility when it comes to signing an audit report,’ says Gilly Lord, PwC’s head of audit strategy and public policy. ‘For large multinationals that might mean we need to pull together a team of 2,000 auditors in 60 countries looking at a complex series of activities to a point where we can sign off the audit.’
“As lead engagement partners, we are all very aware that we are single audit partners who have complete personal responsibility when it comes to signing an audit report," says Gilly Lord.
However, Lord observes that the challenges she and her colleagues confront will be mirrored by those faced by the directors of the business, which can give an initial direction for the audit team to follow. ‘They will all have a structure of their own, so you shape the audit team to reflect that,’ she explains.
From there, the auditor will be able to identify the components required to tackle the audit and therefore build a team to cover each of these areas. Breaking the process down in this way ensures that tasks remain manageable.
Global audits will generally be governed by international standards of auditing (ISAs), as set by the International Auditing and Assurance Standards Board (IAASB), though there may be local variations depending on the requirements of particular jurisdictions. However, while auditors of private companies in the US can use ISAs, the US Securities and Exchange Commission sets its own standards for listed companies through the Public Company Accounting Oversight Board (PCAOB).
Relying on other firms
For cross-border international group audits not governed by the PCAOB’s standards, the headline standard is ISA 600, Special Considerations – Audits of Group Financial Statements. This standard governs the work carried out by auditors in different countries, setting out how a group auditor can rely on the work of other firms.
ISA 600 is currently being revised by an IAASB task force, with an exposure draft expected to be approved by the board in March 2020. At an IAASB update meeting in June 2019, board member and ISA 600 task force chair Len Jui highlighted a number of issues that the task force is seeking to address. These included the major area of public interest issues as well as the risk based approach that is being adopted for the standard.
Among the public interest issues the task force has added fostering the appropriately independent and challenging sceptical mindset of the auditor – this will require the identification and assessment of the risks of material misstatement due to fraud in component entities. The group engagement team will also need to evaluate whether sufficient and appropriate audit evidence has been obtained by component auditors to provide a basis for the opinion on the group financial statements.
Communications between the group engagement team and component auditors are also highlighted as a major public interest issue. Here, ISA 600 will need to align with ISA 220, Quality Control for an Audit of Financial Statements to cover communications between the group engagement team and component auditors, facilitating stronger two-way communications, as well as various aspects of the group engagement team’s interaction with component auditors. This includes communicating the relevant ethical requirements and determining the competencies and capabilities of component auditors.
Then there is the issue of scalability – recently the IAASB has focused on how its standards could apply to small and medium-sized enterprises. But Jui emphasised that ‘scalability is not just about scaling downward, but also about the largest, most complex multinational group structures’.
However, there is an extra tier of support for these highly complex international audits – the global networks of the audit firms themselves. ‘The member firms will have the same technology and methodology, and will speak the same business language. There will also be the global quality programmes that ensure standards are maintained,’ says Lord.
IFAC plays a role here. Members of IFAC’s Forum of Firms, which include 30 of the top international accountancy networks and regional groups, must demonstrate their commitment to adhere to and promote the consistent application of high-quality audit practices worldwide.
Audit team members around the world need to be able to trust the work produced by others in the team, as well as the information produced by the senior executives of the group being audited. This is why a considerable amount of travel is still involved in such audits – often there is no substitute for ‘being in the room’ when critical matters are under discussion.
There are obvious practical challenges in this type of audit. Even if all use the same language there can be subtle differences in meaning. A good auditor will also be sensitive to and respectful of local culture. Technical skills are an obvious requirement, and there will be a need to understand and implement a particular firm’s audit methodology – which can require individuals being seconded to particular locations to ensure consistency, especially where specific skills and industry expertise are required.
Technology is already having a significant impact on how such audits are carried out, but again, there needs to be consistency. As Lord says: ‘A shared platform ensures we are working together – there are huge efficiency benefits and huge quality benefits.’
Lord sees a future where technology will create the ability for greater centralisation of even the most complex groups, which will reflect how these groups organise themselves as well. But she believes there will always be the need for auditors: ‘I think the elements of human interaction will remain important. Have you understood the culture, the tone from the top and how it influences the organisation?’