Audit Risks in Certain Emerging Markets Revealed

Jack Humphrey, Regulatory journalist
October 06, 2011 /

The Public Company Accounting Oversight Board has published a Staff Audit Practice Alert to increase auditors’ awareness of risks when performing audits of companies with operations in emerging markets.

“While this practice alert is for auditors, it also is a good reminder to investors and audit committees of the heightened fraud risk found in some emerging market companies that trade on U.S. exchanges, especially those in countries where the PCAOB is blocked from conducting inspections of auditors’ work,” said PCAOB Chairman James Doty.

Staff Audit Practice Alert No. 8: Audit Risks in Certain Emerging Markets focuses on the risks of misstatement due to fraud that auditors might encounter in audits of companies with operations in emerging markets, auditors’ responsibilities for addressing those risks, and certain other auditor responsibilities under PCAOB auditing standards.

“PCAOB standards require auditors to perform their audits to respond to fraud risks and other risks of material misstatement. Observations by PCAOB staff and recent public disclosures of possible financial reporting improprieties by companies in certain large emerging markets highlight the need for heightened awareness of risks when performing audits of companies with operations in these markets,” said Martin Baumann, Chief Auditor and Director of Professional Standards.

The PCAOB has observed from its oversight activities, and companies have reported in filings with the Securities and Exchange Commission, some conditions and situations in certain companies in emerging markets that indicate to auditors a heightened fraud risk.

They include, for example, discrepancies between a company’s financial records and audit evidence obtained from third parties; auditor difficulties in confirming cash and receivable balances; and the recognition of revenue from contracts or customers whose existence cannot be corroborated.

Although the conditions, situations, and fraud risks described in this alert have been observed in audits of companies in certain emerging markets, they might also be present at companies in other markets. The matters discussed in this alert are relevant whenever such conditions, situations, or fraud risks are present in audits of companies located in emerging or developed markets.

Staff Audit Practice Alerts are published by the PCAOB to highlight new, emerging, or otherwise noteworthy circumstances that may affect how auditors conduct audits under the existing requirements of PCAOB standards and relevant laws.

Auditors should determine whether and how to respond to these circumstances based on the specific facts presented, PCAOB said.

Meanwhile, PCAOB has scheduled an open meeting for Tuesday, Oct. 11, at 9:30 a.m., to consider issuing for comment proposed amendments to its standards that would bring greater transparency to public company audits.

The proposed amendments would require registered public accounting firms to disclose the name of the engagement partner in the audit report,
amend the Board’s Annual Report Form to require registered firms to disclose the name of the engagement partner for each audit report already required to be reported on the form, and require disclosure in the audit report of other accounting firms and certain other participants that took part in the audit.

The proposal to require disclosure of the name of the engagement partner would follow and build upon a related Concept Release issued by the Board on July 28, 2009.

The meeting will take place in the Board’s meeting room at 1666 K St. N.W., Washington, D.C. It is open to the public and will be accessible online on the day of the event, and archived for access via podcast later in the day.

 

Share your opinion