United States

7 signs that it’s time to re-evaluate your statutory audit approach

INSIGHT ARTICLE  | 

Taking advantage of global opportunity often means expanding into numerous foreign jurisdictions. International expansion offers tremendous strategic advantages, while opening risks in dealing with statutory audit requirements and other compliance burdens in every jurisdiction. Too often, companies view compliance as a negligible nuisance, leaving management of statutory audits to their foreign operations – that can be a costly mistake. Failure to comply timely or thoughtfully with these obligations can mean:

  • Fines and penalties which, depending on the jurisdiction, can be substantial
  • Loss of your license to do business in a jurisdiction
  • Personal liability for your executives and directors, including the possibility of arrest

Effectively meeting your statutory audit obligations is a vital part of managing your global risk and maintaining solid corporate governance and citizenship. What’s more, a solid statutory audit process can provide a foundation upon which to manage international tax planning and compliance - including transfer pricing - that supports global strategic planning efforts through heightened visibility and confidence into company finances.

At a minimum, an efficiently managed global statutory audit program minimizes the overall work and expense of compliance efforts, shortening audit delivery times and freeing up critical resources for other valuable global efforts.

Have you seen any of the following at your company?
If so, it may be time to reconsider your statutory audit processes.

In RSM’s experience, the following seven indicators are signs that you need a statutory audit process overhaul:

  1. You have critical foreign mass, meaning six or more foreign locations, though this number can be lower depending on complexity of activities, corporate structure, maturity of internal controls and other issues
  2. You do not currently have an annual process to analyze and document foreign audit requirements in each country from a centralized location
  3. You do not currently gather, analyze, or house completed foreign audit reports centrally, nor make that information accessible to those who need it
  4. You have multiple overseas subsidiaries held under foreign holding companies that require a foreign consolidated audit
  5. You have recent overseas mergers and acquisitions or restructuring activities
  6. You have experienced substantial deviations of global audit fees from agreed-upon fees, indicating efficiencies may be possible
  7. You have foreign locations that are audited twice – once for the global audit ,then again for the statutory audit

Now what? Five steps to managing your global statutory audit challenge

  1. Perform statutory audits everywhere they are required. It may seem simple, but an assessment of local compliance requirements is critical. Centrally document the statutory audit thresholds, rules and deadlines in every country where you have operations, establish a plan to ensure that you are conducting all required audits on-time, and in accordance with local regulations, and conduct an annual review of all local operations against local requirements to ensure your approach is up to date. While the cost of compliance may seem high, the cost of failure is higher. When you balance the expense of a disciplined global statutory audit approach against the potential of losing your business license in key jurisdictions, possible fines and potential legal liability for your company and your leadership, you’ll see that effective compliance is a relative bargain.
  2. Understand what’s needed in each jurisdiction. You may not need to complete a statutory audit in every jurisdiction. Some countries allow foreign subsidiaries to opt out of a local audit if they are below certain thresholds. That doesn’t mean, however, you don’t need an accurate accounting of local results. Some companies choose to have an audit anyway for internal control purposes. However, a full audit is expensive and is not the best way to ensure an internal controls are in place. Conducting limited, agreed-upon procedures focused on key areas can be a more effective and less expensive way to manage risk.
  3. Know when to re-evaluate your compliance requirements.  Multinational acquisitions, carve-out acquisitions, and global restructuring events all can affect your compliance requirements. Understanding the statutory audit ramifications of such events should be built in to your planning process. Different jurisdictions can have vastly different statutory audit rules for newly acquired businesses. You may be able to opt out of an audit or extend the audit period beyond 12 months. Carve-out acquisitions, for example, have a reset effect in most countries, which may allow you to extend an audit beyond 12 months, possibly as long as 24 months. Understanding the rules allows management to balance the costs and benefits of all options.
  4. Analyze locations that are audited twice. A U.S. consolidated audit, which is conducted shortly after year-end, often includes audit procedures at foreign locations. Companies then sometimes see the auditor sending a second team later in the year to address the local statutory audit. Working with your auditor to combine consolidated audit and statutory audit work can yield significant savings.

    Some U.S. parent companies that have European holding companies with multiple foreign entities are required to have a European consolidated audit and another consolidated audit at the parent company level. This requires a lot of effort and expense for both the company and its auditor. A U.S. company may be able to streamline its reporting if the European country allows a business to use its U.S. consolidated report in place of the European report. However, companies must understand the trade-offs. While this may save the company time and money, it also means that its U.S. financial statements may become publicly available in Europe. For a public company, this is not an issue. But private companies will want to consider the ramifications of revealing their financial statements to the world to save costs.
  5. Analyze your global audit provider network.  The firm performing your global consolidated audit is not always the right firm to use for your local statutory audit needs. The firm conducting the global audit will conduct its work according to the relative materiality of your various foreign subsidiaries, which could mean that they are not the most effective or cost-efficient resource to meet your statutory audit needs. By considering alternative relationships with global networks that are better scaled to the size of your foreign operations and coordinating that work with your consolidated audit, you may realize a better service value.

Statutory audits are vital to your global compliance effort, can provide information to support transfer pricing and other important international strategies and can provide key insights into improving your global operations. If your company is treating them like a compliance nuisance, not only may you be risking enforcement trouble with local jurisdictions, you also are failing to leverage their inherent value and may well be driving up the overall effort and expense of your global accounting effort. Give statutory audits the attention they deserve, and you can gain real benefits for your company. 

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