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The hazards of relying on unaffiliated auditors in cross-border group audits

Graham Stirling

When too many cooks spoil the soup

Not so long ago, an audit firm might sign off a set of group financial statements prepared by another auditor without batting an eye at their audit work papers. But those days are over – and rightfully so.

Many businesses today are expanding across international borders to reap the rewards of Asia Pacific’s burgeoning markets. However, they are often caught unawares by the unique challenges that overseas subsidiaries bring to the financial reporting and auditing process. As these companies are discovering, professional advisors with experience and international reach are proving vital to staying compliant in today’s global landscape.

Multinationals are usually good at meeting local statutory audit requirements. It is the consolidated group financial statements that prove to be a challenge. Often enough, a company appoints an international audit firm in the primary location—for example, Singapore—and small firms overseas. The obvious benefit is cost, and there may never be compliance issues if the overseas branch is immaterial and remains out of scope for group audit purposes. However, businesses with significant overseas subsidiaries may quickly find a group compliance nightmare on their hands.

Compliance challenges in cross-border group audits

Group audits in Singapore, including cross-border assignments, are governed by SSA 600 “Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors)”, which is consistent with its international equivalent, ISA 600. This defines a group auditors’ responsibilities during such an assignment. The standard identifies a significant component as being an individual entity with financial significance to the group and notes that the group or component auditor must perform an audit of said component. It explicitly confirms the responsibility of the group auditor for the direction, supervision and performance of the group audit in compliance with professional standards and applicable legal and regulatory requirements. Even if an overseas auditor is involved, the group auditor holds the ultimate responsibility—and therefore risk—of signing the group audit report.

ISA 600 also requires the group auditor to determine the work on the financial information of the foreign subsidiaries of any overseas auditors and to communicate requirements to them. The group auditor must therefore be involved in the overseas auditor’s planning, fieldwork and concluding procedures of the component audit and is not just presented with a set of signed local statutory financial statements to be relied upon for group audit procedures.. Unfortunately, audit firms are regularly expected to sign off on group financial statements using statutory financial statements audited and issued by local accounting firms. This means the group auditor has not been able to oversee the work of the component auditor as required by ISA 600.

Hidden costs of bringing in unaffiliated component auditors

Even if the local auditor’s work papers could be obtained, language may also be an issue. We were once given a local component auditor’s files only to discover they were in Khmer, a local Cambodian language none of our team members could read. In another instance, we disagreed with the technical accounting treatment signed off by a component auditor and could no longer rely on their work.

In both situations, the strict requirements of ISA 600 necessitated the re-audit of the component financial statements, leading to additional audit fees and a delay in the group audit report. The initial cost savings of appointing a small local auditor were lost in what turned out to be a more expensive and time-consuming group audit.

While ISA 600 doesn’t require a single global audit firm to be appointed in cross-border group audits, there are inherent challenges to using multiple service providers. Some accounting firms prohibit access to their workpapers, preventing the group auditor from reviewing their work. Others do not maintain audit evidence in a format that can be easily be shared across international borders, incurring overseas travel expenses for the group auditor to review the component auditor’s work. Finally, differences in culture, language, audit methodology and time zones can make cross-border communication between unaffiliated firms notoriously difficult. From management’s perspective, what seemed like an exciting opportunity for growth quickly devolves into an audit compliance nightmare.

How Grant Thornton can steer you in the clear

Having over 50,000 people across 700 offices in 135 countries gives Grant Thornton both global reach and local agility, empowering us to respond quickly and effectively to the unique needs of your company. In Asia Pacific alone, we have over 14,000 people across 80 offices.

Our unified audit methodology and software ensures all audits are performed to a consistently high standard in each of our offices across the globe. Our audit files  can be electronically shared across international borders, ensuring efficient work reviews without costly travelling. Having close working relationships with our neighbouring offices also means we can maintain effective communication between group and component auditors throughout the audit, as specifically required by ISA 600.