Coordination and Communication Challenges in Global Group Audits

Abstract

Inspectors frequently identify deficiencies on global group audits (GGAs) attributed to problems in coordination and communication among the multiple participating firms. As GGAs involve large multinational entities with extensive global reach, the costs of audit failure are high. Prior research and theory suggest that coordination and communication challenges are common when interdependent teams perform work in complex environments. Studying actual experiences of 147 group audit leaders, we find that clients' size/regulatory status and global structure contribute to coordination/communication challenges, but language/cultural barriers are less important. We also investigate strategies that group auditors can use to mitigate challenges, finding that modularization (advance scripting of work) and ongoing communication (availability/use of communication channels) are not as effective as tacit coordination (leveraging common ground through knowledge/experience). The variation in knowledge of component teams reported by participants leads to the question of whether group auditors can influence the training and/or selection of component personnel.

Managing group audit risk in a multicomponent audit setting

“…See Stewart (2012) for an explanation of the use of the hypergeometric distribution using an Excel function. 21 While information on the number of components in actual group audits is rare, Downey and Bedard's (2017) survey evidence shows a maximum number of 54 components in a nonrepresentative sample of recent Big 4 global group audits. For example, the AICPA (2014) provides table values for determining sample sizes for audit sampling.…”

“…Even with larger populations, commonly used software such as ACL (Audit Command Language @ acl.com) which uses the binomial distribution, using the same parameters, computes the number of components in Example 1 to be 17, rather than the 15 as noted in the example which uses the hypergeometric distribution. 21 While information on the number of components in actual group audits is rare, Downey and Bedard's (2017) survey evidence shows a maximum number of 54 components in a nonrepresentative sample of recent Big 4 global group audits. Thus, we illustrate situations with both fewer and more components than found in their sample.…”

“…Since 1938, when the inventory misstatement at McKesson and Robbins was revealed (e.g., Dutta, 2013, p. 62), auditors have been challenged to provide reasonable assurance on the fair statement of aggregate financial statements when components exist at multiple, geographically dispersed locations, while simultaneously controlling audit costs. 1 While this issue is commonly discussed in the context of global group audits for Big 4 firms (e.g., Downey & Bedard, 2017), it is also a real and practical audit issue for an increasing number of medium and smaller entities that have a profile for which allocating audit effort across components or subsidiaries is needed. Notably, reports from the PCAOB and other auditing regulators continue to highlight "group audits" as a source of concern.…”

“…Notably, reports from the PCAOB and other auditing regulators continue to highlight "group audits" as a source of concern. 1 While this issue is commonly discussed in the context of global group audits for Big 4 firms (e.g., Downey & Bedard, 2017), it is also a real and practical audit issue for an increasing number of medium and smaller entities that have a profile for which allocating audit effort across components or subsidiaries is needed.…”

Overcoming Communication Challenges: Can Taking the Specialist's Perspective Improve Auditors' Critical Evaluation and Integration of the Specialist's Work?

“…Further, our findings of how auditors' critical evaluation of the specialist's evidence can be improved should be of interest to the PCAOB because it notes that complex transactions which require the specialist's expertise are likely the areas of financial reporting that are susceptible to material misstatement (PCAOB 2015b). Last, our results have implications for cross-functional teams in professional service firms and geographically distributed teams who must collaborate on joint projects (e.g., see Hanes 2013;Downey and Bedard 2016).…”