Abstract
In light of reported increases in the offshoring of audit procedures, we propose that understanding the potential risks and rewards of auditor offshoring is important. In this article, we provide a background intended to deepen readers’ understanding about the rewards and risks of offshoring audit procedures, discuss views of practitioners engaged in offshoring and perceptions of audit committee members concerning offshoring. On the basis of the background and feedback, we suggest questions that audit committee members and senior management may want to ask their independent auditors in order to help reduce the risk of audit quality not being maintained at the desired level, and to ensure that companies are able to share in the rewards of offshoring audit procedures.
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Notes
On the basis of discussions with practitioners, other large accounting firms are contemplating offshoring certain audit procedures but, to our knowledge, have not yet commenced doing so. See Daugherty and Dickins (2009) for a discussion of the initial phases of the offshoring of certain audit procedures by Big 4 firms.
Big 4 panelists included Jim Brady, CEO, AERS India, Deloitte & Touche Overseas LLC; Gary Birkenbeuel, Partner, Ernst & Young Americas Financial Accounting Advisory Services; Dan Rahill, Partner-in-Charge, Tax, KPMG Chicago; and David Sharpe, Partner, PricewaterhouseCoopers (APLG, 2011).
Questionnaires were distributed using the address of each middle-market audit committee members’ affiliated company, as reported by Audit Analytics. Of the 1267 questionnaires distributed, 73 were returned as ‘no longer affiliated with X company’, or with incorrect – no forwarding available – addresses and 13 replies were usable. We surmise that our poor response rate (1 per cent) is primarily attributable to questionnaires received at the company location not being passed along to audit committee members, and the poor rate of response to surveys in general. The introduction to the survey reminded audit committee member participants, ‘External auditors may occasionally request that affiliated offshore entities perform auditing procedures on the behalf of their US-based offices. For example, a US-based auditor may ask their Indian affiliate to coordinate the preparation, distribution, and collection of cash confirmations from US-based banks’.
Actual and perceived audit quality risks are influenced by the outsourcing risks: inadequate project management skills, unsatisfactory transition and insufficient knowledge-based skills. Confidentiality risks are influenced by the offshoring risk, theft of intellectual capital. Risks of unanticipated geopolitical changes, foreign currency fluctuations, compliance risks and cultural differences are viewed as primarily impacting the audit firm as opposed to the audit client.
DeAngelo (1981) posits that audit quality is a function of auditor expertise and auditor independence. For purposes of our discussion, independence of AOE personnel is assumed.
Generally accepted auditing standards require auditors to physically observe inventories when material to a company's financial position (AU Section 331, AICPA, 1972).
To our knowledge, this recent ethics ruling was not prompted by an increased use of offshoring by accounting firms.
At PCAOB academic conferences held in 2009 and 2011, PCAOB representatives indicated that the inspectors were aware of the offshoring of certain audit procedures and intended to address the matter in future inspections.
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Dickins, D., Daugherty, B. Should those charged with corporate governance care about auditor offshoring?. Int J Discl Gov 9, 52–61 (2012). https://doi.org/10.1057/jdg.2011.11
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DOI: https://doi.org/10.1057/jdg.2011.11