Challenging Global Group Audits: The Perspective of US Group Audit Leads*

Abstract

Regulators are concerned about the quality of group audits because of poor inspection results, recent enforcement actions against component auditors, and the significance of these audits to the global economy. Yet research in this area is nascent. In response, we survey and interview US‐based global group audit leads to better understand the group audit process and their perceptions of challenges that arise on such engagements. Our findings indicate that group auditors organize their audits consistent with the client's structure, which drives component auditor selection, scoping, and fees. Group auditors routinely find fault with component auditors, perceiving that work performed and/or documentation provided is not sufficient, not appropriate and/or not communicated timely, to comply with US standards and reporting deadlines. In some cases, they perceive that the component auditor is unable and/or unwilling to comply and in others, that the component auditor misunderstands group instructions due to language proficiency or differing interpretation of the standards. Notably this perspective is ethnocentric, as group auditors almost exclusively attribute issues to component auditors. While ethnocentric tendencies appear myopic, they provide insight into unrecognized or overlooked aspects of the global firm model of cooperative arrangements. This study highlights the significance of the global firm's network structure to global group audits. Thus, we encourage intercommunity research, among (quantitative and qualitative) scholars and standard setters, to consider group audits in the broader context of firm networks.

Comments of the AFAANZ Auditing and Assurance Standards Committee on Proposed International Standard on Auditing 600 (ED 600)

“…While we agree with the assignment of ultimate responsibility to the group engagement partner, we feel that the proposed standard presents too much of an authoritative tone that likely exacerbates an already insufficient sense of accountability and responsibility among component auditors (Downey and Westermann, 2020). We feel that the proposed standard does not assign sufficient responsibility to the group engagement partner and their local office engagement team for facilitating and working within an environment in which communication and coordination challenges are minimised.…”

“…Organisation Theory (e.g., Puranam and Raveendran, 2012) points towards reciprocal (mutual) predictability of action as an important factor in minimising coordination difficulties among agents who may be evaluated on the basis of a combined output (in a group audit setting, the group engagement partner is responsible for the conclusions drawn on the basis of the work completed by others such as component auditors). Research in auditing highlights the importance of a team/shared identity working towards a common goal in facilitating reciprocal predictability and minimising coordination and communication issues (Downey and Bedard, 2019;Downey and Westermann, 2020). Audit offices put effort into developing a common identity and a commitment to office-wide quality that facilitates predictable behaviour and an environment within which direction, supervision and review are most effective.…”

“…Component auditors, coming from different offices, do not always subscribe to this team identity, thereby detracting from reciprocal predictability, exacerbating coordination concerns, and reducing the effectiveness of component auditor's work (Downey and Bedard, 2019;Downey and Westermann, 2020). This is relevant, not only for group audits involving component auditors, but for all group audits.…”

“…Engagement resources, and group audit quality, are not only a function of the competence and capabilities of component auditors (paragraphs A41-A44 detail considerations in this regard), but also the competence and capabilities of the group engagement partner (and those to whom responsibilities are assigned) who will be directing, supervising and reviewing the work of component auditors. Downey and Westermann (2020) suggest that communication and coordination challenges in a group audit are accentuated by an ethnocentric approach where component auditors are expected to yield to the culture of the group auditor. Research suggests that group audit quality is likely improved when the group engagement partner, and others who will be directing, supervising and reviewing the work of component auditors, take an ethno-relativist perspective, putting themselves in the position of the component auditor and, in doing so, better understand the cause of, and solution to, coordination challenges.…”

“…Regulators continue to express concerns about the conduct of group audits (e.g., IFIAR, 2020). Academic research suggests that the extent to which component auditors are involved in a group audit is associated with negative audit quality outcomes (e.g., Carson et al, 2019;Burke et al, 2020;Downey and Westermann, 2020) and highlights that investors negatively react to the use of component auditors (e.g., Demek et al, 2020;Hux, 2020;Impink et al, 2020). The work of the IAASB in this area is, therefore, very timely, and very much in the public interest.…”