Managing the audit relationship can be a challenging process for both the report-
ing entity as well as for the auditors seeking appointment. This is particularly true for
international companies with worldwide operations as audit and accounting require-
ments vary from country to country.
Selecting auditors involves:
- Clearly identifying management expectations of the auditors
- Assessing the qualifications of the candidates
- Establishing the deliverables or terms of reference
Maintaining a successful relationship with auditors further involves evaluating per-
formance, both the company’s and the auditor’s, and providing feedback in both di-
rections.
Throughout the process of selecting and maintaining a relationship with auditors,
communications are the most critical success factor. The challenges to successful
communications for international companies and their auditors are many—language
differences, time differences and distance, different and changing accounting and re-
porting requirements from country to country, and, most importantly, the differences
in national cultures.
Further, an international company may need financial statements all stated in U.S.
generally accepted accounting principles (GAAP), whereas local auditors may not be
familiar with such principles, thus requiring auditors from the U.S. to complement
local auditors. A goal for international companies is to have financial statements in
both U.S. GAAP and in International Accounting Standards by the middle of this
decade. After reading this chapter the reader should be better able to manage the se-
lection and continuing relationship with auditors.
31.2 ESTABLISHING EXPECTATIONS. It is particularly important that companies
focus on their expectations of their auditors if they wish to obtain the maximum value
from the relationship. This should include clearly identifying those expectations and
communicating them to the auditors.
The Sarbanes-Oxley Act of 2002 recently enacted in the United States is expected
to impact the services auditors may provide and the responsibilities of audit commit-
tees, and managements of companies. The Act addresses matters of corporate gover-
nance as well as the scope of services and professional responsibility of external au-
ditors. The Act, which applies to all public companies reporting to the Securities and
Exchange Commission (SEC), requires, among other things, certification of the fi-
nancial statements by the company’s CEO and CFO, audit committee composition
solely of “independent” directors one of which must be a “financial expert” and the
following which affect the function of the audit committee and the relationship be-
tween the external auditor and the audit committee and management:
- All audit services must be preapproved by the audit committee.
- The audit committee is exclusively responsible for retention, compensation, and
oversight of the external auditor. - Preapproval of all nonaudit services to the extent that such nonaudit services are
permitted and disclosure of such services - Audit committees are to have the authority to engage independent counsel and
professional advisors
31 • 2 MANAGING THE AUDIT RELATIONSHIP IN AN INTERNATIONAL CONTEXT