personnel. The lack of availability of key operating personnel to provide the neces-
sary understanding of the company’s operations and explanations for the financial
impacts of those operations can significantly affect the efficiency of the audit process.
Historically, fees for audit services were generally negotiated and agreed upon by
financial management and the engagement partners at the individual operating unit
level. Such an approach had the advantage from the company’s perspective of being
able to match closely the value of services received with the fees paid for those serv-
ices. However, across large international companies, apparent anomalies in fee lev-
els could result between operating units that would appear to require similar levels of
service. See section 31.2 for requirements under the Sarbanes-Oxley Act to have the
audit committee have exclusive responsibility for retention, compensation and over-
sight of the external auditors.
More recently, many international companies have negotiated and agreed upon a
single worldwide fee. Negotiations normally were between the financial management
at the corporate or parent company level and the audit firm’s engagement partner at
the comparable level. The global fee was then allocated by the audit firm to the var-
ious offices serving the international company. The global approach has the obvious
benefit of overall cost control but also entails the risk of not fairly reflecting circum-
stances and differences in individual operating units.
An example of the latter can occur in highly inflationary countries. In those coun-
tries, rates of inflation do not necessarily correspond to the devaluation of the local
currency versus hard currencies at the official exchange rates. Typically, companies
have tended to fix the audit fees in those countries in a hard currency. If the devalu-
ation does not properly match the inflation, the impact on the audit firm in that coun-
try can be severe and unwarranted. In such circumstances, it is desirable, if not im-
perative, to allow local adjustment of the fee after the services have been provided
and inflation/devaluation factors are known in order to maintain a productive work-
ing relationship between the auditors and the company.
In the final analysis, there are three questions that audit committees of interna-
tional companies must answer in judging the fees paid to auditors:
- Is the value received commensurate with the fee being paid?
- Are the fees reasonably competitive?
- Are the fees commensurate with the scope of work required?
If the answers to the first and third questions are no, the second question is not rel-
evant. If the answers to the first and third questions are yes but the answer to the sec-
ond question is no, the international company will undoubtedly seek an adjustment
from their auditors. In all but rare cases, an appropriate adjustment will be agreed.
31.4 ESTABLISHING THE TERMS OF REFERENCE OR DELIVERABLES. The final step
in the process is to formalize the terms of reference or deliverables in an engagement
letter or memoranda of services to be provided by the audit firm selected.
(a) Rationale. While engagements have been undertaken by auditors on the basis of
an oral or handshake agreement only, the extent and complexity of providing profes-
sional services to an international company requires more formal arrangements. The
31 • 16 MANAGING THE AUDIT RELATIONSHIP IN AN INTERNATIONAL CONTEXT