Audit Quality: A Cross-National Comparison of Audit Regulatory Regimes

• In Event: Breakfast and Research Forum
  In Roundtable Session: Table 8: Audit Quality Considerations

Abstract

The series of high-profile accounting scandals at the beginning of the millennium prompted the legislating of more stringent regulations over corporate governance and financial reporting. It also led to the setting up of such audit oversight bodies as the PCAOB in the U.S. and the POB in the UK. In parallel, the growing globalization of business has brought forth the globalization of capital markets and calls for adherence to a common set of International Financial Reporting Standards (IFRS). The creation of operations abroad, entrance into joint ventures, and the growth in the number of firms that seek to list on foreign stock exchanges, calls for new attention to how audit regulation is undertaken. Auditing failures and ineffective audit control can be destructive to global capital markets and cause significant investor loss. The recent accounting scandals of US-listed Chinese firms and the standoff between the US SEC and PCAOB and Chinese authorities highlights the urgency of this issue. Apparently, the issue of audit quality control and policy compliance is not the PCAOB’s sole problem, but a global issue that requires cross-national collaboration. Therefore, we believe it is important to investigate the auditing regulatory regimes in different nations and the status of cross-border audit inspections. Accordingly, we begin by describing the cross-national institutions (e.g., the International Federation of Accountants) that impact national regulatory choices. Then we survey the audit regulatory practices of public company auditors of a select group of major economic powers, subject to the restriction that we have at least one from each continent except Australia. The latter is excluded due to its close historical and cultural ties to the UK. Based on the research result, we then discuss the challenges and obstacles to engaging in intra-national audit, cross-national audit/inspections and the challenges posed by differences in auditing standards used in various linked (e.g., by joint ventures, etc.) nations. We include in this discussion the effects of national culture, investor legal protections, and differing financial standard sources. Finally, we suggest ways in which international regulation of auditing can be improved.

Authors

• Gary Kleinman, Montclair State University

• Beixin Betsy Lin, Montclair State University

• Dan Palmon, Rutgers, The State University of New Jersey