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Industry comment: Understand your global clients

by Philip Coleman, audit partner at RSM.

The UK Competition Commission is reviewing the UK's listed company audit market. Among its working papers is a document considering the merits and otherwise of international networks, since all the major UK and international audit and accountancy practices are part of global networks.

One of the more interesting observations in that paper is that "International professional service networks have historically developed from a single firm's need to service existing clients that expanded overseas, and have since grown as newly created overseas offices became legally independent firms."

It is a recognised fact that professional services firms exist to serve their clients, but if the global networks exist and have developed to serve their global clients, what are the implications?

Registration and understanding

Clearly, geography and regulation play significant roles. In most countries, the ability to audit an entity is based on the need for registration in that jurisdiction and having a strong understanding of local laws and regulations. One also needs to be able to deploy resources cost-effectively and therefore "troops on the ground" are helpful.

While this is also true of an effective business client, the registration footprint is more specific to the audit network and can often be misunderstood by clients who believe that global audit firms are one group, like a commercial business, and not a network of individual businesses who are independent of one another.

Regulatory differences often cause issues on the scope and cost of compliance. In jurisdictions where audit exemption is the norm, understanding the compliance requirements of universal or widespread audit requirements - and the not insubstantial cost, both internally and externally - can be a problem.

Bob Dohrer, RSM's global leader - quality and risk, observes that the rate of growth in these regulatory differences is accelerating as regulators around the world engage in what seems to be a game of one-upmanship where no regulator wants to be seen as being more lenient than another.

Until regulators can all agree on one set of globally accepted regulations, the global auditor will need to have information regarding these differences in regulation to hand in language understandable to clients.

Additionally, the effective global auditor needs to pay great attention to culture, language and practice, both within the client organisation and within the cross-border audit teams.

Again, Dohrer adds that while differences in regulation are difficult enough to comprehend, the risk of misunderstanding is multiplied when those differences need to be explained and understood in a variety of languages and cultures.

In many cases, the way something is said or how it is said can be more meaningful than the words that are used, and this is easily lost in cold email traffic, technical or complex group instructions and out-of-hours' conference calls.

The global auditor also has to pay specific attention to group legal structures and understand the differences between legal and management structures.

Legal structures are usually based on tax efficiency - observe Amazon - while the way in which the group is run may be totally different.
A global auditor has to report to "those charged with governance", but also has to recognise the importance of the management team that actually runs the business.

If group structures don't always reflect a tidy and neat hierarchy of entities rising in a regular pyramid, understanding the innate complexity of the audit client and the implications for audit processes across borders is a key skill in an effective audit of group financial statements.

Events or practices that can manifest themselves as relatively small matters in a particular territory can rise unchecked to cause issues at the global level, especially where they arise from factors which are acceptable in one territory but not in others.

The globalisation of regulation, such as the Foreign Corrupt Practices Act and the UK Bribery Act, has made the audit process more global in its approach.

The standard-setters' response, at a global level, has been the development of ISA 600 and its more recent US equivalent, AU-C 600, addressing the unique aspects of group audits.

Over the past two to three years, these key standards have reversed the traditional concept of "the group auditor" in pulling together a disparate collection of audit work that ticked local boxes and added up to "enough coverage across the group".

The role now is clearly focused on being the auditor of the consolidated financial statements, with risks and responses collated and played out at group level and key aspects of the work effectively assigned to those troops on the ground.

International professional service networks were born of a need and desire to serve their clients.
Obstacles and challenges in serving global clients exist due to a variety in how clients are structured, added complexity from varying local regulation, and underlying these obstacles are cultural differences. In order to provide exceptional service to clients, knowing and understanding your global client has never been more important than it is today.

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