Effects of Globalisation on Accounting and Auditing - Essay Example

?AUDITING Table of Contents Introduction 3 Globalisation 3 Effects of Globalisation on Accounting and Auditing 4 Auditors and Auditees 5 Driving Factors 6 Changes in Audit Process 7 Conclusion 8 References 9 Bibliography 12 Introduction The term “globalisation” has become the most discussed buzzword among the academicians, politicians and economists in recent times. Various driving factors and inherent benefits for different companies are proving to be incentives for the organisations towards enhanced financial globalisation. The growing interdependence of developed economies on developing and emerging economies is contributing towards increased globalisation (Hamilton & Quinlan, 2008, p.iv). However, globalisation is also associated with different business and financial risks. Globalisation can have varied effects on different economies in the world. Various forces like investors, borrowers, financial institutions, etc. are having an impounding effect on increased levels of financial globalisation (Schmukler, Zoido & Halac, n.d., p.1). With globalisation and associated risks, accounting and auditing procedures are also encountering significant changes worldwide. In this report the effects of globalisation on auditing mechanisms and various developments of auditing procedures have been studied. Globalisation Globalisation can be defined as the process of increasing association of the markets worldwide and the interdependence between the business processes followed by different organisations all over the world. Recent years have encountered a rapid increase in such phenomenon. Globalisation describes the spread and interconnectivities of new advanced technologies, communication systems and production all over the world (Smith & Doyle, 2002). The two important driving factors towards globalisation are: a) Advancements in infrastructure of telecommunications and b) the increasing use and advancement of internet. The economies of the world are getting connected and resulting in increased opportunities for business concerns as well as rising competitions amongst themselves. There is a development of sharing of international cultures as well. The expansion of trade worldwide and globalisation have brought about significant benefits for different economies all over the world. However the recent Global Financial Crisis has somewhat put a hold on the globalisation process (International Monetary Fund, n.d.). Various benefits to citizens of a country as a result of globalisation includes admittance to increased varieties of products and services at lower costs, increased number of job opportunities, higher standard of living, etc (International Monetary Fund, February 2008). Effects of Globalisation on Accounting and Auditing The number of business organisations operating globally is vast and it is increasing at an increasing rate. This puts emphasis on the development of accounting language which is common to all the countries in the world. Globalisation has brought about significant changes in the accounting and auditing procedures all over the world. There had been profound changes in reporting standards of financial statements of organisations as a result of globalisation. This is quite evident from instances like the convergence agreement that has been signed between International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) in the year 2002 and the adoption of International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS) by the European Union (EU) in the year 2005 (Ding, Jeanjean & Stolowy, 2008, p.145). Globalisation is having a significant effect on the accounting profession itself. With the advancement of information technology and internet web based financial reporting systems are becoming more common and also mandatory for most of the business concerns. The accounting models used by different business organisations have changed. Globalisation has also brought about changes regarding the systems of communicating financial information by the business concerns (Lymer, et al., 1999, p.6-9). Globalisation is resulting in the convergence of auditing standards as well. However, research and studies reveal that globalisation have not resulted in the convergence of Return of Assets of companies. In fact ROA is having a diverging effect across different economies in the world and over a period of time (Chan, Morris & Kang, 2009, p.33). The profile of internal audit function in organisations has been raised because of increased globalisation effects. Corporate governance is a key element of any business organisation today and internal auditors are responsible for it. The activities regarding internal audit functions in an organisation are getting globalised (Ramamoorti, n.d., p.15). Auditors and Auditees Auditors are those officials who have the responsibility of ensuring the accuracy and correctness of financial information data presented by the business organisations. The organisations for which the audit is done by the auditor are known as auditees. The present business scenario is encountering significant changes with increase in globalisation. Most of the organisations now are operating globally and have to work simultaneously in different parts of the world. Internal audit processes followed by different organisations are also experiencing profound changes as a result of technical changes caused by globalisation. These changes can have both merits and demerits associated with the auditing process. Some auditors might perceive it as an opportunity and the others might experience difficulties in keeping pace with these changes (Mustata, Matis & Bodea, 2007). Globalisation has an impact on the Internal Control Systems of organisations and auditing of the internal control systems are an important task of internal auditors of the organisation. Auditing is now a global profession as a result of globalisation of trading activities followed by different organisations in different countries throughout the world (Puttick, et al., 2008, p.35). Comparability is the key factor regarding the financial statements represented by different organisations. All the financial statements prepared must be easily compared by its users all over the world. Moreover it is the responsibilities of the auditors to ensure that all the requirements of financial reporting systems are complied with and the financial statements of the organisations give a true and fair view about the company. Driving Factors Various factors led to the changing audit mechanisms followed by different companies on account of globalisation. One of the most important driving force being changes in the risk environment of business concerns. Internal control and management of risks are now considered as the two fundamental factors concerned with various business operations. Most organisations are now striving for establishing an auditing process having common and unified approach. Corporate governance, business and financial risks and compliance are the three major factors associated with any audit process. The continued improvements in technologies and globalisation have led to the changes in accounting and business models of many organisations. With the changing business models it has also accounted for developing new auditing procedures by the auditors (Price Waterhouse Coopers, 2012, p.5). There has been an increased volatility in the financial market as a result of globalisation. Significant growth in outsourcing by business organisations has also affected the internal audit process of business concerns. The supply chain worldwide is now more interconnected because of globalisation. Most of the organisations are now seeking to capture the global market and expand their business all over the world. Now with most of the companies going global, it calls for the need of organising a global internal audit procedure. Political risks arising out of globalisation have also led to considerable changes in internal auditing procedures and the changing roles of auditors and auditees. Changes in Audit Process Globalisation has led to the development of business and financial risks of organisations on a global scale. Internal auditors of the companies now have the responsibilities of addressing these global risks. They have the new role of examining the risks occurring due to globalisation. The companies are now more focussed on expanding their business globally, resulting in outsourcing of many different functions and activities of the organisations. International Accounting Standards and IFRS have been developed as a result of globalisation. There is also a growing concern in many companies about the internal groups which are quite smaller group to be able to successfully handling all the functions related to assessing and examining the global risk of the organisations. It also calls for the decision of companies regarding the development of internal audit mechanism to be controlled either centrally from a specific location or to have different roles in auditing spread over different locations worldwide. Global risks being the primary focus of organisations, internal audit procedures are now more concentrated towards some audit procedures like management of risk, internal controls, E-Business, Corporate Governance, Outsourcing, etc (Williams, 2002, p.4). The time of audit process is being affected because of development of new technological advancements. The auditors are now able to monitor and assess the business and financial risks within the organisation on a continuous basis. This in turn will result in added responsibilities for internal auditors. The level of compliance with Sarbanes-Oxley Act is expected to remain at the same level or even decline with the changes in internal audit roles (Enterprise Risk Management Initiative, 2009). Detection of fraud risks and its assessments are also expected to be the key factors which are to be assessed by the internal auditors of the companies. Hence internal auditors will have vital roles to play in the risk management of a company. With globalisation companies are increasing their responsibilities towards risks and its control. As a result of that, internal auditors of the companies are also expected to widen their approach towards audit procedures. Internal auditors will no longer be confined to the task of just giving assurance about compliance with financial regulations and assessing the operational and financial controls of the companies and its effectiveness for the organisation (Price Waterhouse Coopers, 2012). Conclusion Hence it can be concluded that globalisation has a significant impact on the accounting practices and auditing procedures followed by companies worldwide. Globalisation is associated with increased exposure to business and financial risks for companies. With more companies going for global expansion and outsourcing their services and activities to the outside world, they are being exposed to increased risks. This has a considerable effect on the changing focus of organisations towards risk. Internal auditors of the companies are no longer constricted to the responsibility of assessing the operational effectiveness of companies only, but have an additional responsibility of assessing the risks associated with companies operating globally. Globalisation also brings with it increased exposure to political risk for companies too. Developments of IAS and IFRS can be attributed to the effect of globalisation. Comparability is the key towards preparing financial statements by the companies in order to facilitate easy comparisons by the users of the financial statements. As a result of this auditing, roles by internal auditors are expected to have considerable changes in the near future. References Chan, J., Morris, R. & Kang, H. (2009). Globalisation, IFRS and Convergence of Accounting Information: The Case of Return-on-Assets. [Pdf]. Available at: http://www.afaanz.org/openconf/2009/modules/request.php?module=oc_program&action=view.php&id=86. [Accessed on April 17, 2012]. 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Available at: http://www.imf.org/external/np/exr/ib/2008/pdf/053008.pdf. [Accessed on April, 2012]. International Monetary Fund. (no date). Crisis Jolts Globalization Process. [Online]. Available at: http://www.imf.org/external/np/exr/key/global.htm. [Accessed on April 17, 2012]. Lymer, A. et al. (1999). Business Reporting on the Internet. [Pdf]. Available at: http://www.cs.trinity.edu/rjensen/Calgary/CD/iasb/busrepw.pdf. [Accessed on April 17, 2011]. Mustata, R. V., Matis, D. & Bodea, G. B. (2007). The Impact of Globalization on Regulations and Accounting Systems. Dimensioning and Quantification. [Pdf]. Available at: http://mpra.ub.uni-muenchen.de/6214/1/MPRA_paper_6214.pdf. [Accessed on April 17, 2012]. Price Waterhouse Coopers. (2012). Internal Audit 2012. A Study Examining the Future of Internal Auditing and the Potential Decline of a Controls-Centric Approach. [Pdf]. Available at: http://www.utsystem.edu/aud/ReferenceDocs/pwc_ias_2012.pdf. [Accessed on April 17, 2007]. Puttick, et al. (2008). The Principles and Practice of Auditing. (Ed.9). South Africa: Juta and Company Ltd. Ramamoorti, S. (no date). Internal Auditing: History, Evolution and Prospects. [Pdf]. Available at: http://users.cba.siu.edu/odom/acct465/roia/Ch1.pdf. [Accessed on April 17, 2012]. Schmukler, S.L., Zoido, P. & Halac, M. (no date). Financial Globalization, Crises and Contagion. [Pdf]. Available at: http://www. citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.200.3215.pdf. [Accessed on April 17, 2012]. Smith, M. K. & Doyle, M. (2002). Globalization. The Encyclopedia of Informal Education. [Online]. Available at: http://www.infed.org/biblio/globalization.htm. [Accessed on April 17, 2012]. Williams, E. J. (2002). The Impact of Globalization on Internal Auditors: The Evolution of Internal Auditing. [Pdf]. Available at: https://na.theiia.org/about-us/Public%20Documents/Sawyer_Award_2002.pdf. [Accessed on April 17, 2012]. Bibliography Carmichael, D. R., Whittington, O. 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