Differences Existing between National Environments - Essay Example

Using Both Professional and Academic Literature, Analyse Two Important Challenges Facing International Auditing Firms. Justify Your Choices. Table ofContents Using Both Professional and Academic Literature, Analyse Two Important Challenges Facing International Auditing Firms. Justify Your Choices. 1 Table of Contents 2 Introduction 3 Differences Existing Between National Environments 4 Economic, Political and Business Environment 5 Legal Framework 5 Education 6 Culture 7 Perceptions of Audit 8 Heightened Focus on IT Risks and Compliance Risks 9 IT Risks 10 Compliance Risk 11 Conclusion 12 References 13 Introduction The auditing firms are gradually gaining their significance with the growth of organisations in the public sector as well as private sectors. It has become mandatory for every medium scale and large scale business organisations to conduct auditing at a regular interval in order track the areas of improvement that would help the business to run smoothly. Auditing is generally the process of investigating and reviewing various financial as well as non-financial aspects of an organisation. An organisation may recruit either internal auditors or external auditors who are responsible for auditing. Internal auditors are internal for an organisation and they are responsible to report to the directors or the auditing committee of the organisation regarding the financial and non-financial changes that would serve beneficial for the company (The Institute of Internal Auditors, 2012). They also formulate specific risk management policies and ensure that the policies are being implemented successfully. Whereas, the external auditors belong to some particular auditing firms and they are mostly being hired by large organisations for auditing. They directly report to the shareholders of a company regarding the truthfulness of the financial statements of the firm as revealed by the company. However, there are certain specific auditing policies and standards established by every country that are necessary to be followed by the auditing firms in conducting auditing of organisations. According to a survey, it has been found that there are various challenges being faced by the international auditing firms because of diverse procedure followed in the auditing standards in different countries (International Federation of Accountants, 2015). The auditing standards of all the countries are not enough effective and thus it negatively affect the organisations of those nations. Among the major challenges includes, the existence of differences between the national environments and heightened focus on IT risks and compliance risks (Henderson, 2013). Therefore, in this paper an elaborative discussion will be provided regarding these two challenges that are being faced by the international auditing firms. Differences Existing Between National Environments One of the major challenges being faced by international auditing firms is the differences among the national environments of various countries. During the past few years, a significant progress in the field of auditing is identifiable through the execution of international standards of higher quality that has been fruitful for the auditing firms (Financial Stability Board, 2015). However, the International Financial Reporting Standard (IFRS) serves as the most effective processes for auditing firms to maintain an international standard in the auditing process of organisations. Even though, IFRS is considered as the most effective standard for auditing firms all across the world, there are certain limitations that are being found in it that has a negative impact on organisations of a particular nation. According to a research it has been found that IFRS fails to completely abolish the effects of national difference in case of ‘financial reporting practice’ because the incentives of the auditors, enforcers and the preparers remain local primarily (American Institute of CPAs, 2011). However, it is being believed that implementation of a single accounting standard would not serve in a effective manner in producing the comparability of disclosure and reporting practices, even though if the auditing standard is being implemented in various international countries. A broader convergence of institutional framework of the countries are required that serves effective for organisations. However, some national characteristics that highly influence the way of carrying out auditing in these countries are notable among the operation of the financial proceedings. Moreover, these national characteristics also affect the way of application of auditing standards. Such factors include political, economic and legal environment, legal framework, education, culture and perceptions of auditors (United Nations, 2008). Economic, Political and Business Environment The characteristics of economic, political and business environment greatly influence the ‘audited financial statements’ quality and therefore create a huge challenge for the auditing firms. Among the national differences includes bribery and corruption in private and public sector organisations, transparency and accountability of the local government, business ethics, characteristics of the capital market, foreign investment in the economy efficiency of governance in various economic activity of the country. The motivations of the auditors are noted to be affected by these business environments prevailing within organisations. Large business establishments often consider that the report of the external auditors does not add value to the organisations and thus they avoid their reports. Even the organisations those take help of these external auditors, often pay less incentive to them for their reliable information that highly de-motivates them. Thus, the hindrance faced at various level of auditing creates a challenge for the auditing firms to conduct transparent auditing (United Nations, 2008). Legal Framework Various types of laws and policies implemented by the government affects the business environment of a country because they are formulated in order to administer the behaviour of business and protect the creditors and investors. The legal framework of a country generally provides a set of stipulated principles and rules regarding the practice of business to be adopted and the responsibilities of a business. Moreover, with the help of an effective legal framework various types of disputes as well as property right issues can be easily solved. However, if these laws and government policies are weak in certain countries, it affects negatively in the implementation of ‘International Accounting and Auditing Standards’ as well as affects the audited financial statements quality (Hegarty et. al., 2004). Some countries are bound by the administrative and constitutional laws, which prevent them to contribute their domestic lawful force to other international standards being issued by the international non-governmental organisations. Therefore, ‘external quality assurance systems’ are necessary to be adopted in order to reduce the negative implications on the audit quality. However, the characteristics of legal frameworks of various countries create a great challenge for the international auditing firms (Hegarty et. al., 2004). Education Education is the most vital thing that is required in order to ensure an efficient economic activity as well as an effective public administration. Moreover, it is very essential to have financially literate individuals in the business that possesses the necessary experience and skills for overseeing various financial aspects of the organisation and thereby make proper application of various accounting laws as well as standards (The Institute of Internal Auditors, 2012). However, there are few countries, which do not support proper educational system and thus the proportion of financial literacy is lower in these countries. This hampers the quality of financial reporting that negatively affects the performance of the auditors in conducting auditing. Even in case if the quality of reporting system is good, it is necessary for the auditors to possess the required experiences and skills for performing auditing using proper judgement. However, the extent of experience, skills and education are not only affected by the education system of a particular country but it is also influenced by certain other factors that includes cross-border communications between countries, global connectivity, mobility and relationships with other nations. Scope of entry and exit and language barriers creates hindrance for the countries to establish relationships with other foreign countries. Therefore, proper access to an educational system is one of the greatest challenges faced by these auditing firms. Culture The cultural impact that is prevalent in a country is highly affected by the auditing and accounting standards that are being implemented in a particular country. The differences in culture of various countries are revealed through the way the business activities are being conducted and the way the business establishments handle different situations. The cultural orientations are revealed through the manners, customs, etiquettes, protocols, communication, negotiating tactics and their dressing style. In this regard, it could be said there are some countries where the business activities are carried out through legal contracts in a formal manner and in others, the business contracts are being achieved just through an informal handshake. Moreover, the differences in culture are also revealed through the preferences and professional judgements regarding transparency and confidentiality. However, analysis of the national culture helps in identifying the characteristics of the national environments of various countries that may create international inconsistency in the quality of auditing. The culture of any nation depends upon the social and economic conditions prevailing in the particular country that creates a great challenge for the international auditing firms to audit the organisations following the guidelines provided under IFRS (Chartered Institute of Internal Auditors, 2014). Perceptions of Audit The perceived value of auditing in various countries affects the ‘audited financial statements’ quality and therefore creates a challenge for the financial firms. It is therefore very essential for these countries in understanding the history of auditing and its importance as well as demand in the present day organisations. The advancements and the development of the accounting regulations and standards over time have a considerable impact on the perception of the auditors towards performing audits. There are various countries where the role of the auditor and auditing nature are established clearly. While, in other countries there exists an intimate relationship between the management of an organisation and the auditor. Such as, the countries where high concerns are given on the creditors and external shareholders are probably to have established the significant role for external auditing (The Institute of Internal Auditors, 2012). Whereas, the countries perusing the ‘insider capital models’ provides less importance on audits and consider ait as a constituent of the ‘internal governance structure’ of the organisation. However, the origination and development of audits differ across various countries. It is noted that some countries where the main objective of auditing is considered as to serve the needs of the government of those countries rather than creditors, owners and investors. The roles and objectives of auditing are changing day by day and thus it is becoming more challenging for the auditors in adjusting themselves as per the new objectives and standards. Even it takes a considerable amount of time for the training organisations and educational systems to reflect the newly developed standards and policies related to auditing. However, it is very essential to focus on the factors that may affect the motivations of the auditors. These factors include: Regulations and disciplinary rules that are being implemented over the auditors Perception of auditing as a profession in the minds of the auditors Complexity among high quality people regarding adopting auditing as a profession The personal background of the auditors influences the perception of auditing as a profession. Moreover, it also affects the way in which an auditor presents himself before the client or implements the standards of auditing in their profession. Therefore, it completely depends upon the perception of the auditors whether they would accept the profession positively. If the profession is perceived to generate lower value, it will prevent the auditors from performing a satisfactory job and thus it will become challenging for them (Tasios & Bekiaris, 2012). Heightened Focus on IT Risks and Compliance Risks With time, the business establishments are realising the importance of internal auditing and thereby the challenges are increasing significantly (Nel, 2012). With the advent of globalisation, the companies are expanding their business all across the world. Thus, it has become inherent for the internal auditing departments to recruit and train employees in order to make them effective to operate efficiently in the international business sites. However, one of the major challenges that the international auditing firms are facing is the increasing risk associated with IT and compliance that are being highly focused to overcome them (Tapestry Networks, Inc., 2013). IT Risks According to ‘Audit Committee Leadership Networks (ACLN) and Europe Audit Committee Leadership Networks (EACLN)’ it has been found that the cyber-risks have become a major challenge for the international auditing firms and thus measures are to be taken in order to overcome the associated problem. It was being believed that cyber security was the most challenging issues only for banks and financial institutions, but it is found that most of the organisations along with their intellectual property are at high risk, being affected with this issue. The internal auditing being carried out by the organisations serves beneficial in analysing the protocols, policies and security systems at the procedural as well as technical levels (Dow Jones & Company, Inc, 2015). Moreover, it would also help in eliminating the risks associated with the implementation of IT systems in large scale and thereby ensure the continuity of business establishments along with proper planning for crisis management. Majority of the times it is found that the business establishments have expanded internationally with the help of acquisitions mainly face the IT related challenges in its business processes. A host of Enterprise Resource Planning (ERP) systems are becoming prominent in multinational organisations that create complexity in the internal control system of the organisations (Chartered Institute of Internal Auditors, 2015). However, majority of the organisations does not conduct a proper planning and implementation of the IT auditing in their organisations that is necessary for ensuring critical Information Technology operations, risk evaluation and make available a secure IT environment. Since majority of the activities of a company are dependent on technology, therefore they face the main challenge of implementing a secure and well established IT environment (Dow Jones & Company, Inc, 2015). Therefore, all these factors hindering the proper implementation of an effective IT system creates challenge for the auditing firms. According to a survey, it is found that majority of the companies are not successful in providing required resources for IT auditing and therefore the auditors fail to disclose completely the potential risks that are associated with the company, which is a great challenge faced by the auditing firms operating under the present domain (Chartered Institute of Internal Auditors, 2015). Compliance Risk Compliance risk is also one of the greatest challenges that are being faced by the international auditing firms. Due to the increased rate of regulatory changes during the past, few years have created difficulty for the auditing firms to operate in different jurisdictions and face problem in implementing, tracking and monitoring compliances with the changing auditing regulations. However, the regulations and standards are being changed in order to comply with the changes in the national environment and thereby it is required to ensure that it is understandable by all. However, the business establishments are lagging behind in order to meet with the compliances and thus it is necessary to accelerate change and implement the practice of internal auditing in the changes. It is believed that having a customised internal auditing department in a company would serve beneficial for a company to cope up with the change. Moreover, the change in regulations and policies in accounting and auditing standards creates challenges for the international auditing firms to comply with various national environments (Anderson & Vacca, 2012). Conclusion Thus, it can be concluded that auditing firms are gaining their significance with the expansion of business establishments both nationally as well as internationally and the government rules along with regulations that has made it mandatory to conduct auditing in large organisations. A company may therefore conduct internal auditing as well as external auditing depending upon the characteristics of the organisation and its financial structure. However, there are certain challenges that are being faced by the international auditing firms due to the variations hat are prominent within the regulations and practices being established as international standards. Among the challenges includes the national environments difference and the risks associated with Information Technology and compliance risk that affects the business organisations of various countries in performing various essential business activities. Thus, it affects on the auditing firms to conduct auditing in these organisations. References American Institute of CPAs, 2011. International Financial Reporting Standards (IFRS). Journal, pp. 1-12. Anderson, U. A. & Vacca, S., 2012. Compliance and Internal Audit: A Dangerous Combination? Journal. [Online] Available at: http://www.higheredcompliance.org/resources/publications/Compliance-and-Internal-Audit-A-Dangerous-Comb.pdf [Accessed March 21, 2015]. Chartered Institute of Internal Auditors, 2014. Culture and the Role of Internal Audit. Journal, pp. 1-19. Chartered Institute of Internal Auditors, 2015. Technology Risks Are Beyond Most Firms IT Audit Capabilities. Audit & Risk. 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