The problems of international auditing harmonisation

Term Paper, 2007

27 Pages, Grade: 1,0


Table of Contents


1. Executive Summary

2. Introduction & Background

3. Problems of Harmonisation
3.1 Cultural Obstacles
3.2 Social Obstacles
3.3 Political Obstacles
3.4 Legal Obstacles
3.5 Economic Obstacles

4. Conclusion

5. Appendix

6. Bibliography & References


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1. Executive Summary

This essay provides an analysis of the many hurdles in the process of truly harmonised international auditing standards. The method of analysis for this essay included a review of the current literature available in libraries and on the internet.

The International Standards on Auditing (ISA) have come a long way since they have been developed. However, there are still many serious obstacles to overcome. The editor specifies five major problems of international auditing harmonisation. Therefore, in this essay the process of convergence is critically seen from the view of cultural, social, political, legal and economic difficulties.

The cultural barriers are regarded as the most difficult to overcome since they comprise of people’s behaviours as well as languages. It is shown that differences in people’s behaviours, which vary widely, define the way the audit process is done. Further, it is stated that the translation process is one of the major hurdles since words in different languages are not equivalent to the English ones. Consequently, standards and technical terms may be diversely interpreted. Moreover, cultural diversity may also cause a general resistance as the standards are dictated by big audit firms. Additionally, the IFAC is mainly influenced by the USA and the EU which might continue to cast a damning light on the ISA.

Alternatively, the level of education and the lack of professional auditing bodies in some developing countries embody the social problems. It is depicted that the poor level of education in most developing countries cause an acute shortage of qualified auditors as well as professional bodies. Thus, even if these countries want to implement ISA there would not be enough knowledge to successfully complete this.

The political hurdles contain the pride of sovereignty and the political system of countries. People are proud of their national features and do not want to give them up. Additionally, governments are reluctant to abandon their right to prescribe the standards for professions. Furthermore, it will also be difficult to find a majority in the national parliaments because current national standard-setters or representatives from businesses might exert pressure on the members of parliament to reject ISA.

On the other hand, differences in national legislation as well as in the legal system are the main part of legal obstacles. Nowadays, a marked distinction can be drawn between the common law which is predominant in Anglo-Saxon countries and the codified law which is applied in many European continental countries. These two legal systems particularly differ in the legal thinking and in the way of making court decisions. Beyond this, differences in the effectiveness of countries legal structure and national regulations like auditors’ liability, accounting rules also adversely impair the harmonisation process.

Lastly, the economic hurdles are characterised by different user orientation of financial statements and the stages of technological developments. Auditors are mostly appointed by shareholders; hence, the audit procedures are geared to the different interests of these investors. Further, auditors in developed countries need other standards as their counterparts in developing countries due to the growth of e-commerce and e-business.

Finally, it is concluded that truly harmonised standards may not be feasible because of the many differences between countries. It seems more important to achieve a minimum set of international auditing standards as unitary standards generate many benefits. These benefits comprise, among others, better quality and acceptance of audits, continuance as well as more collaboration between regulators and a reduction of financial scandals.

2. Introduction & Background

This essay critically discusses the problems in the aspiration of international auditing harmonisation. The essay commences by presenting the history of the International Federation of Accountants (IFAC) and its issued ISA. Following, the third section identifies five major obstacles of international auditing convergence. In this regard, cultural, social, political, legal and economic hurdles are pointed out and analysed in detail. This essay concludes with outlining the advantages of harmonisation and gives an ultimate statement about the chances of success.

The foundation for global uniform auditing standards was carried out in 1969 when the Accountants International Study Group issued a set of reports concerning international auditing. In 1977, 63 accountancy bodies stemming from 49 countries concluded an agreement founding the IFAC. The primary purpose of the IFAC is the development and publication of worldwide harmonised auditing standards[1]. In the late 1970s, the IFAC established the International Auditing Practices Committee (IAPC) with the authority to provide procedural and reporting guidelines to auditors. During the period of 1980 until 1991 the IAPC pronounced the International Auditing Guidelines (IAG), which were the precursor of the later IAS. In 1991 the first International Standard on Auditing was published[2]. As a consequence of the reorganisation of the IFAC, the IAPC was renamed as the International Auditing and Assurance Standards Board (IAASB) in 2002. Before the IAASB promulgated the full text of ISA in 2003, the intention to have ISA for all statutory audits pan-European from 2005 had been approved by the European Parliament and by the Council of Ministers in 2002 (ICAEW, 2007)[3]. The UK was one of the first EU member states[4] that put ISA into national legislation in December 2004. Nowadays, the IFAC is, more than ever, a worldwide standard-setter as the total number of its members has risen to 155 representing more than 2.5 million accountants from 118 countries. Moreover, over 100 countries are currently applying, or are on the brink of adopting, ISA as their national auditing rules (IFAC, 2007).

In this regard, the term “harmonisation” embodies the process of bringing ISA into some sort of agreement so that financial statements from different countries are audited in accordance with a common set of rules. Yet, by considering the fact that no country is equal to another, the question arises as to what problems may occur in the quest for truly harmonised auditing standards.

3. Problems of Harmonisation

The overwhelming success of the ISA has some flaws. Even in the introduction of the ISA it is recognised that “national differences of culture, language, legal and social system” may cause problems of global standards (ICAEW, 2006, p. 19). Moreover, as a result of the heated debate within the IAASB regarding the necessity of uniform roles, the EU deliberately fixed no deadline and illustrated few guidelines regarding the implementation of ISA (Jopson, 2006). Further, the EU member states have the right to make some necessary adjustments before putting the standards into their national legislation[5].

In the following section some light will be cast on the many hurdles which may cause serious difficulties in the process of international auditing convergence. In practice, mainly five major problems (cultural, social, political, legal and economic obstacles) are identified[6].

3.1 Cultural Obstacles

Cultural differences are the most critical and most difficult barrier to overcome, as they are concerned with people’s behaviours, religions, attitudes, values as well as languages. Many respected authorities among others Hofstede and Trompenaar[7] researched and classified different cultural behaviours in the past. They emphasises that people’s behaviours and views are simply different from each other due to their diverse cultural influences. By considering ISA 220 in this context, which requires safeguards to guarantee auditor independence, it seems complicated to specify the degree of necessary independence. For example, in Latin America, Asia and southern Europe personal relations are of uppermost importance and gift-giving is widely-used in business life.

Whereas, in North America and northern Europe auditors are expected to eclipse close personal relationships and to reject any gifts in business (Groeschl and Doherty, 2000). Moreover, people’s diverse values and manners describe how things are done and how each international standard is interpreted[8].

One the other hand, according to Parker (1998), approximately 6000 different languages are spoken globally. Translating the real meaning of the English ISA in all languages is a major challenge since words in different languages are not equivalent to the English ones. Translators might regularly face problems as exact expert terms do not have equivalents in the target language. Additionally, the different interpretations of standards and key terms in the translation process are one of the main sources of inconsistency between countries. Indeed, incorrectly translated standards cause serious misunderstandings as well as confusions and hamper the process of auditing harmonisation. For example, the German term “Grundsätze ordnungsmäßiger Abschlussprüfung” (GoA, “principles of an orderly audit”) and the English term “true and fair view[9] ” are significant expressions in auditing. However, they often provoke bewilderment by their direct translation. The translated German term “GoA” is often mistaken for the US GAAS, whereas the frequently interpreted English term “true and fair” appears not congruent to the original meaning in any other languages. Beyond this, it should also be noted that differences also exist within one language. For instance, some words in American English have other meanings in British English. In this regard, the accounting term ‘property’ comprises in the UK only land and buildings, whereas in the USA this term has a wider meaning as also tangible fixed assets are included (Evans, 2004).

Furthermore, in some countries there could be a general resistance to international standards, as the ISA are not a product of direct experiences and do not mirror the needed relevance of each nation. Especially, in Africa and South America the IFAC is still regarded as a Trojan horse concealing the Anglo-Saxon auditing principles inside a more reputable international framework. In reality, the IFAC cannot acquit itself of the accusation of being strongly biased by the EU and the USA. It is a simple fact that the IFAC is between the devil and the deep blue sea. In other words, their principles would have no value if they are not accepted by the two most powerful economies (the EU and the USA). However, the IAASB tries to be as much multinational as possible since the ten board members come from eight diverse nations (IFAC, 2007). Moreover, small- and medium-sized entities are neglected in the process of developing international standards since big audit firms amount to 13 of the 18 IAASB members and the remaining one are filled by public sector auditors and academics. Thus, second-tier audit firms may be reluctant to implement the ISA (Jopson, 2006). Additionally, even the IFAC (2006) confirms that there are “challenges faced by small and medium practices (SMPs) in applying ISAs to the audits of small and medium enterprises (SMEs)…”

In fact, the ISA are regarded as too focused on the auditing of large multinational entities rather than of entities of all size. Hence, the IFAC is increasingly being asked to make sure that guidelines being developed for application by SME reflect the user needs appropriate to this section of the economy[10].


[1] The European Federation of Accountants (FEE) supports the IFAC as it not only represents the European accountants but also tries to develop uniform auditing standards pan-European (FEE, 2007).

[2] Nevertheless, the IAASB aims at finishing all redrafted ISA not earlier than the 15th December 2008.

[3] Simultaneously, the modernisation of the EU Eighth Directive in 2005 which sets common guidelines concerning statutory audit of annual accounts can be regarded as the next advance to harmonised auditing standards in the EU.

[4] For example, Germany intents to adopt the ISA in 2008 (Eulner, 2007).

[5] It should be noted that ISA are voluntary standards since the IFAChas no power to enforce them in any country (IFAC, 2007).

[6] This classification is mainly geared to the problems claimed in the ISA.

[7] In this context, see in particular Morden (1995).

[8] For instance, in particular the ISA 300 (Planning and audit of financial statements), ISA 230 (Documentation), ISA 500 (Audit evidence), ISA 700 (The auditor’s report on financial statements) and ISA 530 (Audit sampling and other means of testing) might be applied in different ways in each country (ICAEW, 2006). This is one reason why the ISA merely give vague paraphrases; however, true harmonisation will not be achieved in this way.

[9] The EU 4th directive requires that the „true and fair view“ should override all the other principles. Yet, some EU member states (e.g. Germany) have not converted it into national legislation up to now. However, Higson and Blake state that “the ambiguity and cultural dependence of the phrase (true and fair view) appear to make it an inappropriate basis for transnational accounting harmonization” (1993, p. 114).

[10] However, the IFAC also argues that specific standards are developed by the SMP Permanent Task Force to solve this problem. According to the IFAC, these guidelines will be issued in early 2007. On the other hand, all companies with a turnover of less than £5.6m in the UK (€8.3m in Germany) do not require an audit. Thus, this criteria nearly equals within the EU, however, it differs widely around the world (e.g. in Turkey no statutory requirement to audit a company exists at all).

Excerpt out of 27 pages


The problems of international auditing harmonisation
University of Glamorgan
International Accounting & Auditing
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ISBN (Book)
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This essay provides an analysis concerning the obstacles of the quest for true cross-border auditing harmonisation despite the existence of International Standards on Auditing (ISA). Thereby, cultural, social, legal, political and finally, economic hurdles are examined.
International, Accounting, Auditing
Quote paper
Stefan Bode (Author), 2007, The problems of international auditing harmonisation, Munich, GRIN Verlag,


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