ACC 617 exam 3 CH 11 Auditing & Corporate Governance: An International Perspective
•History of state-owned enterprises in China affected view on valuation reserves:
-All products were seen as good for something, someday à no need for inventory obsolescence reserves -Enterprises were state-owned and state credit was always considered "good" à no need for bad debt provisions
Detection probability is affected by actual work done by auditors, including:
-Competence of auditors (eligibility & qualifications) -Conduct of the audit (quality review & monitoring) -Reporting requirements
Exercise of legal rights in a court of law in Japan
-Exercise of legal rights in a court of law is not in accordance with underlying Japanese belief in the maintenance of harmony in interpersonal and intergroup relationships and the avoidance of open confrontation
principles of corporate governance covers...
-Legal -Institutional -Regulatory
Cultural values in China are likely to have implications in the audit judgment area:
-Respect for seniors -Desire to avoid confrontation and look for agreeable compromises -Concern for "saving face"
corporate governance exercises authority and control over:
-Rules -Relationships -Systems -Processes
UK Accountancy Foundation
-The Accountancy Foundation was established in 2000, introducing a strong, independent element to the regulatory framework
purpose of the new PCAOB standard, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (2017)
-To enhance relevance and usefulness of audit report
corporate governance emphasis: United States
-capitalist/shareholder emphasis
Financial Reporting Council (FRC) took over responsibilities of the:
Accountancy Foundation in 2004
The OECD issued what to assist governments in their efforts to evaluate and improve frameworks for corporate governance
Principles of Corporate Governance (2004)
external audit
Provides assurance to financial statement users that the information contained in those statements is of high quality
regulation of auditing: Anglo Saxon
Regulate auditors within framework of self-regulation
In the U.S., PCAOB was established under:
SOX
UK FRC - functions relevant to auditing
Setting, monitoring and enforcing auditing standards, statutory oversight and regulation of auditors Operating and independent investigation and discipline scheme for public interest cases involving professional accountants Overseeing the regulatory activities of professional accountancy bodies
auditing in Germany
Supervisory Boards use external auditors to fulfill their audit and control duties (reporting responsibility to supervisory board, not shareholders)
The Financial Reporting Council (FRC) in the U.K. published this framework in 2008
The Audit Quality Framework
PCAOB adopted a new auditing standard:
The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (2017)
A country's corporate governance structure correlates with:
audit purpose
audit technologies..
audit technologies beneficial in one area may be ineffective or cost prohibitive in another
Reporting probability is affected by:
auditor's independence
corporate governance emphasis: Germany and Japan
banker
detection probability is affected by:
by actual work done by auditors
Different legal systems also affect auditing in different countries:
code law and common law
International Auditing and Assurance Standards Board (IAASB) requires auditors of listed entities to:
communicate "key audit matters" and the EU has a similar requirement
the Accountancy foundation handles...
complaints and disciplinary violations
which countries have the stakeholder-oriented model
continental Europe
Perception of ethical conduct influenced by:
cultural norms
OECD principles and stakeholders
deals with roles of various stakeholders
OECD principles and disclosures
deals with the importance of disclosure and transparency of information
OECD principles and the BOD
deals with the responsibility of the board
In the United Kingdom, accountant is not...
defined in statute and there is no qualification requirement to practice as an accountant
The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (2017) requires:
discussion of critical audit matters(CAM) and disclosure of the tenure of the auditor
corporate governance should facilitate...
effective monitoring
Perception of independence based on:
environmental differences
corporate governance encompasses the framework designed to:
exercise authority and control within a company
Accounting infrastructure affecting auditing issues: laws
govern production, transmission, and usage of information
audit functions
internal v external audit
the Accountancy foundation conducts....
investigations
Approaches to regulate auditing in different countries range from:
leaving the task in the hands of the profession to relying heavily on the government
legal liability suits in Japan
legal liability suits against Japanese auditors are almost nonexistent
two-tier boards: function of management board of executive directors
managerial function
auditing in China
many former state-owned enterprises, responsible for education and health care of citizens as well as employment and production; role of auditors less clear, but beginning to adopt Anglo-Saxon concepts
Accounting infrastructure affecting auditing issues: legal entities
monitor and implement laws
two-tier boards: function of supervisory board of nonexecutive directors
monitoring
Differences in audit environment affect the:
nature and demand for audit services and complexity of the audit task
Audit quality is also affected by...
nature of legal liability regime that exists
principles of corporate governance provides...
objectives and monitoring procedures
Corporate Governance in countries has evolved based on:
political, economic and cultural philosophies
Rules-Based versus Principles-Based Approach? UK
principles-based approach
audit quality
probability that an error or irregularity will be detected and reported
UK - statutory auditors must have:
professional qualification
Good corporate governance should provide:
proper incentives for the board and management to pursue objectives that are in the interests of the company and shareholders
PCAOB reaffirmed the need for:
reaffirmed the need for auditor independence, in fact and appearance
UK - statutory auditors are subject to:
requirements of recognized supervisory body
Rules-Based versus Principles-Based Approach? US
rules-based approach
Germany examinations of auditors
set by the Ministry of Economics
2 corporate governance models
shareholder-oriented model and stakeholder-oriented model
According to OECD principles, auditors should be accountable to:
shareholders, not management
IIASB v PCAOB
similar but not identical to PCAOB
shareholder-oriented model
single-tier boards and several committees within one board
corporate governance emphasis: France
socialistic/employee stakeholder
what theory is the stakeholder-oriented model
stakeholder theory
The Companies UK Act (1985 & 1989) provides:
statutory regulations for auditors
OECD: the BOD should effectively oversee...
the financial reporting function, ensuring appropriate systems of control are in place.
corporate governance
the manner in which an organization is governed or managed
stakeholder-oriented model
two-tier boards: a supervisory board of nonexecutive directors and a management board of executive directors
FRC became the U.K.'s:
unified, independent regulator for corporate reporting and governance
Audit quality is likely to:
vary across different audit environments
In short, Corporate Governance is about:
what the Board of Directors of a company does and how it sets the values of the company
the Accountancy foundation monitors...
work of accountants and auditors
UK - Financial Reporting Council (FRC) states that to be recognized as statutory auditor must be recognized by:
§Association of Chartered Corporate Accountants (ACCA) §Institute of Chartered Accountants in England and Wales (ICAEW) §Institute of Chartered Accountants in Ireland (ICAI) §Institute of Chartered Accountants in Scotland (ICAS)
audit technologies beneficial in one area may be ineffective or cost prohibitive in another:
•Accounting and securities market regulation •Economic and political systems •Patterns of business ownership •Complexity of business firms Stages of economic development
Accounting infrastructure affecting auditing issues:
•Producers of information •Final users of information •Information intermediaries Laws Legal entities
Major variations in aspects of External Auditing across different countries:
•Purpose of external auditing •Audit environment •Regulation of auditing •Audit reports
roles of BOD
•Strategy •Leadership •Supervising management •Reporting to shareholders
Duties of Supervisory Board (German Commercial Code)
•Supervise management of corporation in all branches of administration •Review cash on hand, access to books of account •Audit financial statements (can be turned over to external auditors) •Call general assembly if necessary or in interest of corporation
the UK Audit Quality Framework identifies:
•key drivers of audit quality
PCAOB expanded...
•the auditor's reporting responsibility
role of auditor in US and UK
•to report to shareholders whether financial statements give a true and fair view of financial position and results of operations
auditing in anglo saxon
1-tier board; auditor primary responsibility to shareholders
Auditors of SEC-registered companies must be members of PCAOB, which has the authority to:
1.Establish or adopt auditing standards, quality control standards and ethical rules 2.Inspect audit firms
auditing in EU
2-tier board; broader responsibility to state/society
who has ultimate responsibility for governing a company?
BOD
Concept of independent auditor in Japan
Concept of independent auditor is neither historically nor culturally appropriate in Japan
audit environment
Cultural values impact nature and quality of audit work undertaken
OECD principles and shareholders
Deal with rights and fair treatment of various groups of shareholders
uniform regulation of auditing in the UK
There is no uniform system of examination in the U.K., where four professional bodies conduct their own examinations
code law
Germany and France more reliance on stated legal objectives of auditing profession
internal audit
Monitoring risks and providing assurance regarding controls are the two main functions
important parts of corporate governance
Morality and ethics
common law
U.K. Canada more reliance on auditing profession to set general tone for profession
countries with shareholder oriented model
US and UK
what theory is the shareholder-oriented model
agency (shareholder) theory
auditing
improves the precision, quality and reliability of information made available to users of financial statements
role of auditors in Germany
in addition to statements auditors look at management reports; client includes state and society
UK: specific provision for..
independence of company auditors