The Influence of Cultural, Legal and Institutional Factors on Auditors' Roles, Responsibilities and Perceptions of Audit Quality

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This study provides an international perspective on auditing practices by comparing and contrasting the qualitative aspects of auditing across different countries and regulatory environments. It examines how cultural, legal, and institutional factors shape auditors' roles, responsibilities, and perceptions of audit quality.

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Nội dung Text: The Influence of Cultural, Legal and Institutional Factors on Auditors' Roles, Responsibilities and Perceptions of Audit Quality

The Influence of Cultural, Legal and Institutional Factors on Auditors' Roles, Responsibilities and Perceptions of Audit Quality Pham Huy Hung  Hanoi University of Natural Resources and Environment, Vietnam Suggested Citation Abstract: Hung, P.H. (2023). The Influence This study provides an international perspective on auditing of Cultural, Legal and Institutional practices by comparing and contrasting the qualitative aspects of Factors on Auditors' Roles, auditing across different countries and regulatory environments. It Responsibilities and Perceptions of examines how cultural, legal, and institutional factors shape auditors' Audit Quality. European Journal ofroles, responsibilities, and perceptions of audit quality. The research Theoretical and Applied Sciences, 1(5), explores the influence of these factors on auditors' professional 1131-1145. ethics, independence, and accountability. By analyzing the similarities DOI: 10.59324/ejtas.2023.1(5).99 and differences in auditing practices, the study sheds light on the variations in regulatory frameworks and cultural contexts that impact the profession. It highlights the importance of understanding these factors to ensure effective and high-quality audits. The findings contribute to a better understanding of the global auditing landscape and provide insights for regulators, standard-setting bodies, and auditors to enhance auditing practices and standards. The study also emphasizes the need for further research in this area to deepen our understanding of the complex interplay between cultural, legal, and institutional factors in auditing. Keywords: Audit quality, culture, national institutions, regulatory environment, Vietnam. Introduction Understanding international perspectives on auditing is crucial for several reasons. First, it Auditing is a critical component of financial allows for the identification of best practices and reporting and provides assurance to stakeholders the evaluation of different approaches to regarding the accuracy and reliability of financial auditing. By comparing and contrasting auditing statements (Hung, 2022). While auditing practices across countries, researchers can standards and practices are established at the identify areas of improvement and learn from national level, the global nature of business successful practices. This knowledge can necessitates an understanding of international contribute to the development of more effective perspectives on auditing. As companies expand auditing standards and practices globally. their operations across borders, auditors face the challenge of adapting to different regulatory Second, international perspectives on auditing environments, cultural contexts, and shed light on the impact of cultural, legal, and institutional frameworks. Therefore, studying institutional factors on auditors' roles, international perspectives on auditing is essential responsibilities, and perceptions of audit quality. to gain insights into the qualitative aspects that Cultural differences can significantly influence shape auditing practices worldwide. auditors' behavior, judgment, and decision- making processes. Legal and regulatory This work is licensed under a Creative Commons Attribution 4.0 International License. The license permits unrestricted use, distribution, and reproduction in any medium, on the condition that users give exact credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if they made any changes.
frameworks vary across countries, leading to Additionally, the research can provide differences in auditors' responsibilities and the recommendations for harmonizing auditing expectations placed upon them. Institutional practices across countries, leading to greater factors, such as the influence of professional consistency and comparability in financial accounting bodies, also shape auditors' reporting. Furthermore, the study can contribute professional ethics and independence. to the enhancement of auditors' cross-cultural Understanding these factors is crucial for competencies, enabling them to navigate the ensuring the effectiveness and integrity of complexities of auditing in a globalized business auditing practices. environment. Third, studying international perspectives on auditing helps to address the challenges faced by auditors operating in a globalized business Literature Review environment. As companies expand across Overview of Auditing Practices in Different borders, auditors encounter diverse business Countries practices, local regulations, and cultural norms. United States: The United States has a well- By understanding the nuances of auditing established auditing framework, primarily practices in different countries, auditors can governed by the Public Company Accounting enhance their cross-cultural competencies and Oversight Board (PCAOB) and the Generally adapt their approaches to meet the unique needs Accepted Auditing Standards (GAAS). Auditing of clients operating internationally. in the U.S. emphasizes independence, The objective of this research is to compare and objectivity, and adherence to rigorous contrast the qualitative aspects of auditing professional standards (Lee et al., 2019). The role practices across different countries and of auditors is to express an opinion on the regulatory environments. By examining these fairness of financial statements in accordance aspects, the study aims to investigate how with the U.S. Generally Accepted Accounting cultural, legal, and institutional factors shape Principles (GAAP). The Securities and auditors' roles, responsibilities, and perceptions Exchange Commission (SEC) provides of audit quality. oversight and enforcement of auditing standards The rationale for this research stems from the for public companies. need to fill the existing gap in knowledge United Kingdom: In the United Kingdom, regarding international perspectives on auditing. auditing practices are regulated by the Financial While auditing standards and practices are often Reporting Council (FRC) and follow the influenced by international bodies, such as the International Standards on Auditing (ISAs). The International Auditing and Assurance Standards auditing profession is characterized by a strong Board (IAASB), the implementation and emphasis on professional skepticism, interpretation of these standards can vary across transparency, and the provision of non-audit countries. By examining the qualitative services to clients (Ghafran & O'Sullivan, 2017). dimensions of auditing practices, this research The Companies Act 2006 lays down legal seeks to provide a comprehensive understanding requirements related to audit, including the of the factors influencing auditors' decision- appointment, duties, and reporting obligations making processes, ethical considerations, and of auditors. overall effectiveness. Germany: Auditing in Germany is governed by The findings from this research will have the German Commercial Code (HGB) and the practical implications for the auditing Public Oversight Board (POB). The auditing profession. The insights gained can inform the profession in Germany emphasizes the principle development of global auditing standards that of ordentlich (proper) auditing, which focuses consider the diverse cultural, legal, and on verifying the accuracy of financial statements institutional contexts in which auditors operate. in compliance with legal requirements 1132 www.ejtas.com EJTAS 2023 | Volume 1 | Number 5
(Hohenfels & Quick, 2020). German auditors services contribute to the distinct characteristics also play a significant role in providing non-audit observed in different countries' auditing services, leading to discussions around potential practices. conflicts of interest. Cultural Factors Influencing Auditing Japan: Auditing in Japan is regulated by the Practices Certified Public Accountants Act and supervised Cultural factors play a significant role in shaping by the Financial Services Agency (FSA). auditors' behavior, decision-making processes, Auditors in Japan follow the Japanese Generally and overall auditing practices. This section Accepted Auditing Standards (JGAAS) and the explores the influence of cultural dimensions Japanese Generally Accepted Accounting and values on auditing. Principles (JGAAP). The role of auditors extends beyond financial statement auditing, Cultural aspects of the country and their with a focus on internal controls and risk impact on auditing assessment (Skinner & Srinivasan, 2012). The Cultural dimensions of countries provide a profession is characterized by a strong emphasis framework for understanding cultural on group-oriented decision-making and differences. These dimensions include power consensus-building. distance, individualism versus collectivism, China: Auditing practices in China are governed uncertainty avoidance, and long-term versus by the Ministry of Finance (MOF) and the China short-term orientation. Each aspect has Securities Regulatory Commission (CSRC). implications for the auditor's behavior and Auditors in China follow the Chinese Standards judgment. on Auditing (CSA) and the Chinese Accounting Power Distance: High power distance cultures, Standards (CAS). The auditing profession in where hierarchical relationships are valued, may China has witnessed significant growth and result in auditors being more deferential to development in recent years, with a focus on authority and less likely to challenge enhancing audit quality, improving professional management. In contrast, in low power distance ethics, and aligning with international standards cultures, auditors may exhibit greater (Firth et al., 2012). assertiveness and willingness to challenge Brazil: In Brazil, auditing practices are regulated authority. by the Brazilian Securities Commission (CVM) Individualism and Collectivism: Individualistic and follow the Brazilian Generally Accepted cultures emphasize personal goals and Auditing Standards (NBC TA). Auditors in autonomy, potentially leading auditors to Brazil play a critical role in ensuring the reliability prioritize individual professional judgment. In of financial information, with an emphasis on collectivist cultures, auditors may prioritize risk assessment, fraud detection, and compliance consensus-building, group decision-making, and with legal requirements (Memis & Cetenak, maintaining harmonious relationships with 2012). The profession has undergone reforms to clients and colleagues. enhance transparency, independence, and accountability. Uncertainty Avoidance: High uncertainty avoidance cultures, which are risk-averse, may lead auditors These examples highlight the diversity of to prefer strict adherence to rules and auditing practices across countries. While there procedures, and exhibit conservative auditing are commonalities in the adoption of practices. In low uncertainty avoidance cultures, international auditing standards, local legal auditors may be more adaptable, open to requirements and cultural factors influence the ambiguity, and rely on professional judgment. interpretation and implementation of these standards. Additionally, variations in the role of Long-term and Short-term Orientation: Cultures with regulatory bodies, the level of professional a long-term orientation prioritize persistence, judgment, and the provision of non-audit perseverance, and future-oriented planning. 1133 www.ejtas.com EJTAS 2023 | Volume 1 | Number 5
Auditors in such cultures may focus on the long- Impact of Legal Requirements on Auditors' term sustainability of the audited entity and Roles and Responsibilities consider broader societal impacts. Short-term Legal requirements define auditors' orientation may lead auditors to concentrate responsibilities, including the scope of the audit, more on immediate financial performance and the level of assurance provided, and the short-term risks. reporting obligations. For example, in some Role of Cultural Values in Shaping Auditors' countries, auditors may be required to perform a Behavior and Judgments statutory audit, while in others, they may provide only limited assurance or non-audit services. Cultural values, such as integrity, honesty, Legal requirements also influence auditors' accountability, and ethical frameworks, influence obligations to report on internal controls, fraud, auditors' behavior and judgments. Cultures with and noncompliance with laws and regulations. strong ethical values may prioritize ethical considerations, fostering a high level of Moreover, legal liabilities and potential sanctions professional skepticism and integrity among for auditors influence their behavior and auditors. Conversely, cultures with weaker decision-making. The threat of legal ethical values may present challenges for consequences may impact auditors' auditors in upholding ethical standards and independence, professional skepticism, and the resisting potential ethical dilemmas. willingness to exercise judgment. Moreover, cultural values related to trust, Institutional Factors Influencing Auditing transparency, and accountability impact auditors' Practices relationships with clients, regulators, and other Institutional factors, such as the role of stakeholders. Trust-based cultures may foster professional accounting bodies and the influence open communication and cooperation between of institutional arrangements, also shape auditing auditors and clients, leading to more effective practices. The following points highlight these auditing practices. Cultural values related to factors: transparency and accountability can contribute to auditors' independence and the reliability of Role of Professional Accounting Bodies and auditing outcomes. Their Influence on Auditing Standards Legal and Regulatory Factors Influencing Professional accounting bodies, such as the Auditing Practices American Institute of Certified Public Accountants (AICPA) or the Institute of Legal and regulatory frameworks significantly Chartered Accountants in England and Wales shape auditing practices across countries. The (ICAEW), play a vital role in setting auditing following points highlight the influence of legal standards and promoting professional ethics. factors on auditing: These bodies establish codes of conduct, Differences in Regulatory Frameworks provide guidance on auditing practices, and Across Countries contribute to the development of global auditing standards. The influence of professional Countries have varying regulatory frameworks accounting bodies on auditing practices varies governing auditing practices. These frameworks across countries, with some having a more establish the requirements for auditors' significant impact than others. qualifications, audit quality control, reporting obligations, and the enforcement of auditing Institutional Factors Shaping Auditors' standards. Differences in regulatory frameworks Professional Ethics and Independence can lead to variations in auditors' roles, Institutional arrangements, including regulatory responsibilities, and the level of regulatory oversight, professional certification, and oversight. disciplinary mechanisms, shape auditors' professional ethics and independence. The 1134 www.ejtas.com EJTAS 2023 | Volume 1 | Number 5
existence of robust regulatory bodies and Comparative Analysis of Auditing mechanisms to enforce ethical conduct can Practices contribute to auditors' adherence to professional standards. Likewise, the level of public trust in Overview of Auditing Practices in the the auditing profession and the perceived United States independence of auditors are influenced by Regulatory Framework and Legal institutional factors. Requirements Additionally, the presence of professional In the United States, auditing practices are communities, peer review systems, continuing governed by a comprehensive regulatory professional education, and ethical training framework. The primary regulatory body programs contribute to auditors' professionalism responsible for overseeing auditors is the Public and ethical behavior. These institutional factors Company Accounting Oversight Board create an environment that promotes high- (PCAOB). The PCAOB was established under quality auditing practices and instills public the Sarbanes-Oxley Act of 2002 to protect confidence in the auditing profession. investors and improve the quality of auditing in public companies. The PCAOB sets auditing standards, inspects and registers auditing firms, Methodology and enforces compliance with auditing This article uses content analysis method directly regulations. from articles and reports published on Google Legal requirements mandate that audits of Scholar's library database, reputable websites of publicly traded companies must be conducted by Big 4 auditing firms and other auditing independent registered public accounting firms. companies. Establish regulations with These audits are subject to Generally Accepted international accounting and auditing Auditing Standards (GAAS), which provide professional associations on the influence of guidelines for auditors to follow in planning, cultural, legal and institutional factors on audit executing, and reporting on audits. Additionally, quality to provide greater clarity on similarities the Securities and Exchange Commission (SEC) and differences differences in audit quality oversees financial reporting and disclosure across countries due to the influence of the requirements for public companies. above factors. Specifically: Cultural Influences on Auditing Practices Country-specific auditing standards and regulations are collected and analyzed. This Cultural influences play a significant role in includes reviewing official documents, such as shaping auditing practices in the United States. auditing standards issued by professional The culture emphasizes individualism, accounting bodies or regulators. At the same professional skepticism, and a strong legal and time, the academic literature related to auditing ethical framework. Auditors are expected to practices in selected countries will be reviewed. exercise professional judgment, maintain This involves studying articles, books and independence, and adhere to ethical principles. research reports written by academics and The United States' business culture also values experts in the field of auditing. The literature transparency, accountability, and a high degree review helps identify existing knowledge, trends of shareholder protection. Auditors are thus and gaps in the understanding of auditing expected to provide reliable and unbiased practices in different countries. information to stakeholders, ensuring the integrity of financial reporting. Role of Professional Accounting Bodies Professional accounting bodies, such as the American Institute of Certified Public 1135 www.ejtas.com EJTAS 2023 | Volume 1 | Number 5
Accountants (AICPA), play a vital role in maintaining strong relationships with clients are shaping auditing practices in the United States. important in Chinese business culture, which can The AICPA sets ethical standards and issues present challenges for auditors in maintaining auditing guidance through its Auditing Standards independence and objectivity. Board (ASB). Role of Professional Accounting Bodies The AICPA's auditing standards, known as The Chinese Institute of Certified Public Generally Accepted Auditing Standards Accountants (CICPA) is the professional (GAAS), provide a framework for conducting accounting body in China responsible for audits. These standards are continuously regulating auditors and setting professional updated to align with emerging trends and standards. The CICPA issues auditing standards, changes in the business environment. The ethical rules, and guidelines for the profession. AICPA also offers professional development programs and resources to enhance auditors' The CICPA aligns its standards with competencies and ensure adherence to international standards while considering professional standards. China's unique business environment. It plays a crucial role in promoting professional Overview of Auditing Practices in China development, continuing education, and Regulatory Framework and Legal ensuring the competence of auditors in China. Requirements In conclusion, the United States and China have Auditing practices in China are regulated by distinct auditing practices influenced by their multiple authorities, including the Ministry of respective legal, cultural, and institutional Finance (MOF), the China Securities Regulatory contexts. In the United States, a comprehensive Commission (CSRC), and the Chinese Institute regulatory framework overseen by the PCAOB of Certified Public Accountants (CICPA). The governs auditing practices, emphasizing MOF is responsible for setting accounting and independence, professional skepticism, and auditing standards, while the CSRC oversees ethical conduct. Professional accounting bodies auditing practices in the context of publicly listed like the AICPA contribute to shaping auditing companies. standards and ensuring professional competence. In China, auditing practices are The Audit Law of the People's Republic of regulated by various authorities, with cultural China establishes the legal framework for factors such as collectivism and guanxi auditing practices. It requires audits of financial influencing auditors' behavior. The CICPA plays statements for all types of companies and a significant role in setting auditing standards specifies the qualifications and responsibilities of and promoting professional development in auditors. The Companies Law and Securities China. Understanding the nuances of auditing Law also contain provisions related to auditing practices in each country is crucial for promoting and financial reporting requirements. effective and reliable financial reporting and Cultural Influences on Auditing Practices enhancing stakeholder confidence. Cultural factors significantly influence auditing Analyze the Difference practices in China. Chinese culture emphasizes Differences in Auditors' Roles and collectivism, hierarchy, and respect for authority. Responsibilities These cultural values can impact auditors' behavior, as they may prioritize maintaining When comparing auditing practices across harmonious relationships with clients and show countries, differences in auditors' roles and deference to management. responsibilities become apparent. These differences can be attributed to variations in Additionally, China's cultural emphasis on regulatory frameworks, cultural norms, and legal guanxi (relationships) may influence auditors' requirements. relationships with clients. Building and 1136 www.ejtas.com EJTAS 2023 | Volume 1 | Number 5
In the United States, auditors have a significant countries. These factors influence auditors' responsibility to express an opinion on the behavior, the relationship between auditors and fairness of financial statements. They are clients, and the overall approach to auditing. expected to provide reasonable assurance that Cultural factors, such as individualism versus the financial statements are free from material collectivism, power distance, and the importance misstatements. Auditors play a crucial role in of relationships, impact auditors' conduct. For detecting fraud, assessing internal controls, and example, in the United States, individualism and providing insights on financial reporting quality. a lower power distance may encourage auditors In China, auditors have a similar responsibility of to challenge management and exercise expressing an opinion on financial statements, professional skepticism. In contrast, in China, but their role may also extend to verifying collectivism and a higher power distance may compliance with legal and regulatory influence auditors to maintain harmonious requirements. Additionally, auditors in China relationships with clients and show deference to often face pressure to provide non-audit services management. to clients, which can potentially impact their Legal and regulatory frameworks also play a independence and objectivity. crucial role. Differences in laws and regulations Perceptions of Audit Quality and related to financial reporting, auditing standards, Effectiveness and enforcement mechanisms can lead to variations in auditing practices. For instance, the Perceptions of audit quality and effectiveness stringent regulatory framework in the United can vary across countries due to cultural, legal, States, including the Sarbanes-Oxley Act, has and institutional factors. Stakeholders' had a significant impact on auditors' expectations, level of trust, and the overall responsibilities and the overall approach to business environment influence these auditing. perceptions. Institutional factors, such as the role of In the United States, audit quality is a key focus, professional accounting bodies and the level of driven by a strong legal and regulatory independence of regulatory bodies, shape framework. The PCAOB's oversight and auditing practices. The influence and inspection programs aim to ensure high-quality effectiveness of professional accounting bodies audits. Stakeholders, such as investors and in setting standards and promoting professional regulators, generally have confidence in the development impact auditors' competencies and effectiveness of audits, and audit quality is ethical conduct. Similarly, the independence and considered a priority. oversight of regulatory bodies contribute to the In China, perceptions of audit quality have overall quality and effectiveness of audits. evolved over time. Historically, there have been In conclusion, a comparative analysis of concerns about the quality and reliability of qualitative aspects reveals differences in auditors' audits, particularly in relation to fraudulent roles and responsibilities, perceptions of audit financial reporting. Efforts have been made to quality, and the influence of cultural, legal, and enhance audit quality, including stricter institutional factors on auditing practices. These regulations, professional development variations highlight the importance of programs, and increased enforcement. However, understanding the specific context of each perceptions of audit quality in China may still country when assessing auditing practices. By vary, and stakeholders may have differing levels recognizing these differences, it becomes of trust in the effectiveness of audits. possible to identify areas for improvement, Impact of Cultural, Legal, and Institutional exchange best practices, and enhance the overall Factors on Auditing Practices quality and effectiveness of auditing globally. Cultural, legal, and institutional factors significantly shape auditing practices in different 1137 www.ejtas.com EJTAS 2023 | Volume 1 | Number 5
Results and Discussion effectiveness; (ii) Stakeholders, such as investors and regulators, generally have confidence in the Comparative Analysis of Qualitative Aspects effectiveness of audits in the United States. Similarities and Differences in Auditors' Audit quality is considered a priority, and Roles and Responsibilities rigorous standards and inspection programs contribute to these positive perceptions. When comparing the roles and responsibilities of auditors in the United States and China, China: (i) Historically, there have been concerns several similarities and differences emerge. about audit quality in China, particularly related to fraudulent financial reporting. However, Similarities: (i) Both countries place a significant efforts have been made to enhance audit quality responsibility on auditors to express an opinion through stricter regulations, increased on the fairness of financial statements. The core enforcement, and professional development objective of providing reasonable assurance programs; (ii) Perceptions of audit quality in about the absence of material misstatements is China may vary among stakeholders. While common to both auditing practices; (ii) Auditors progress has been made, some stakeholders may in both countries are expected to adhere to still have reservations about the effectiveness of professional standards, maintain independence, audits due to past incidents and the need for and exercise professional skepticism. continued improvement. Differences: (i) The United States places a strong It's important to note that perceptions of audit emphasis on auditors' role in detecting fraud, quality can evolve over time, and efforts to assessing internal controls, and providing strengthen auditing practices can positively insights on financial reporting quality. Auditors impact stakeholders' confidence in both are seen as critical gatekeepers in ensuring the countries. integrity and reliability of financial information; (ii) In China, auditors' responsibilities may In conclusion, the comparative analysis of extend beyond expressing an opinion on qualitative aspects reveals both similarities and financial statements. They often verify differences in auditors' roles and responsibilities, compliance with legal and regulatory as well as perceptions of audit quality and requirements and may face pressure to provide performance in the United States and China. non-audit services to clients. While both countries emphasize the importance of auditors' independence, adherence to These differences can be attributed to variations professional standards, and expressing an in regulatory frameworks, cultural norms, and opinion on financial statements, variations exist the broader expectations of auditors in each due to regulatory frameworks, cultural country. influences, and historical experiences. The Perceptions of Audit Quality and United States is recognized for its strong Performance in the United States and China regulatory oversight and positive perceptions of Perceptions of audit quality and performance in audit quality, while China has made efforts to the United States and China are influenced by a enhance audit quality but may still face some range of factors, including the regulatory lingering concerns. Continued efforts to environment, cultural expectations, and improve auditing practices, exchange best historical experiences. practices, and strengthen regulatory frameworks can further enhance stakeholders' confidence in United States: (i) The United States has a well- audit quality and contribute to the reliability of established and robust regulatory framework, financial reporting globally. with the PCAOB playing a central role in overseeing auditors and ensuring audit quality. This strong regulatory oversight contributes to stakeholders' perceptions of audit quality and 1138 www.ejtas.com EJTAS 2023 | Volume 1 | Number 5
Influence of Cultural Factors on Auditing hierarchical structures and respect for authority Practices are deeply ingrained. On the other hand, in countries with low power distance, such as the Cultural factors play a significant role in shaping United States, auditors are more likely to auditors' behavior, judgments, and the overall challenge management assertions and exercise approach to auditing practices. Cultural values, professional skepticism, as they are encouraged norms, and expectations influence auditors' to critically evaluate information and exercise decision-making processes, their interactions independent judgment. with clients, and the level of professional skepticism exercised. Understanding the Uncertainty Avoidance influence of cultural factors is crucial for Cultural dimensions related to uncertainty comprehending the variations in auditing avoidance also impact auditors' behavior. In practices across different countries. In this societies with high uncertainty avoidance, section, we will explore two key aspects of the auditors may adopt a more conservative influence of cultural factors on auditing approach, focusing on risk mitigation and practices: cultural values shaping auditors' seeking substantial evidence to support their behavior and judgments, and the cultural impact judgments. This cultural tendency can be seen in on audit procedures and approaches. some European countries, where auditors Cultural Values Shaping Auditors' Behavior prioritize minimizing risks and uncertainties. In and Judgments contrast, auditors in societies with low uncertainty avoidance, such as the United States, Individualism vs. Collectivism may exhibit a greater tolerance for ambiguity, Cultural dimensions such as individualism and allowing them to be more flexible and innovative collectivism have a profound impact on auditors' in their approach to auditing. behavior. In individualistic cultures, such as the Cultural Impact on Audit Procedures and United States, auditors tend to prioritize their Approaches independence, objectivity, and professional skepticism. They are more likely to challenge Communication Styles management assertions and exercise Cultural differences in communication styles can professional judgment based on their own significantly influence audit procedures and analysis. Conversely, in collectivistic cultures, approaches. Direct communication styles, such as many Asian countries, including China, commonly found in individualistic cultures, auditors may prioritize maintaining harmonious facilitate open and explicit communication relationships with clients and demonstrating between auditors and clients. Auditors in these deference to management. The cultural cultures are more likely to directly express emphasis on group cohesion and maintaining concerns, seek clarification, and engage in harmony can influence auditors' behavior, detailed discussions with clients. In contrast, potentially leading to a more cautious approach indirect communication styles, prevalent in in questioning management and relying heavily collectivistic cultures, may involve implicit cues, on client-provided information. indirect feedback, and a focus on non-verbal Power Distance communication. Auditors operating in such cultures need to be adept at interpreting subtle Power distance, which refers to the acceptance signals and reading between the lines to and expectation of unequal power distribution in effectively communicate with clients. society, also influences auditors' behavior. In countries with high power distance, auditors may Relationship Orientation: be more inclined to defer to management's Cultural values related to relationship orientation authority and rely on their assertions without impact auditors' interactions with clients. In robustly challenging them. This behavior can be collectivistic cultures, building and maintaining observed in some Asian cultures, where long-term relationships is highly valued. 1139 www.ejtas.com EJTAS 2023 | Volume 1 | Number 5
Auditors are expected to invest time and effort orientation, the nature of audit evidence and in establishing strong personal connections with documentation, and ethical considerations. clients. This emphasis on relationships can affect Recognizing and understanding these cultural auditors' objectivity and independence, as they influences is crucial for auditors operating in may face challenges in maintaining a balance diverse cultural contexts. It allows auditors to between maintaining client relationships and adapt their approaches, strike a balance between exercising professional skepticism. Conversely, cultural expectations and professional standards, in individualistic cultures, auditors place a greater and ultimately enhance the effectiveness and emphasis on the objectivity and independence of quality of auditing practices across different their judgments, often prioritizing the integrity countries and cultures. of financial reporting over relational Influence of Legal and Regulatory Factors considerations. on Auditing Practices Audit Evidence and Documentation Legal and regulatory factors play a crucial role in Cultural factors also influence the nature and shaping auditing practices. They establish the extent of audit evidence gathering and framework within which auditors operate, define documentation. In some cultures, there may be their responsibilities, and set expectations for a preference for formal and extensive audit quality and reporting. In this section, we documentation to ensure accountability and will explore two key aspects of the influence of transparency. Auditors operating in these legal and regulatory factors on auditing practices: cultures may place significant emphasis on the impact of regulatory frameworks on auditors' maintaining comprehensive audit trails and independence and objectivity, and the legal documenting their procedures thoroughly. In requirements influencing audit procedures and contrast, in cultures where oral agreements and reporting. relationships hold greater significance, auditors Impact of Regulatory Frameworks on may rely more on verbal explanations and Auditors' Independence and Objectivity discussions, potentially leading to less extensive documentation. Independence Requirements Ethical Considerations Regulatory frameworks impose strict requirements to ensure auditors' independence Cultural factors also have implications for ethical from the entities they audit. These requirements considerations in auditing practices. Ethical aim to maintain the integrity and objectivity of norms vary across cultures, shaping auditors' auditors' judgments and opinions. Auditors are behavior and judgments. For example, cultures typically prohibited from having financial or that prioritize collectivism and group harmony personal relationships with clients that could may exhibit a greater tolerance for conflicts of compromise their independence. The specific interest or bending ethical boundaries to regulations may include restrictions on providing maintain relationships. In contrast, cultures that certain non-audit services to audit clients, prioritize individualism and transparency may rotation of audit partners, and limitations on emphasize the importance of adhering to ethical financial interests in audit clients. These standards and maintaining independence. measures are designed to mitigate conflicts of In conclusion, cultural factors exert a significant interest and maintain auditors' independence. influence on auditing practices. Cultural values, Regulatory Oversight and Inspection such as individualism vs. collectivism, power distance, and uncertainty avoidance, shape Regulatory bodies, such as the Public Company auditors' behavior, judgments, and decision- Accounting Oversight Board (PCAOB) in the making processes. Moreover, cultural impact United States, have a significant impact on extends to audit procedures and approaches, auditing practices through their oversight and affecting communication styles, relationship inspection activities. These bodies establish and enforce auditing standards, conduct inspections 1140 www.ejtas.com EJTAS 2023 | Volume 1 | Number 5
of audit firms, and review compliance with For example, in the United States, auditors are regulatory requirements. The inspections help required to issue an opinion in accordance with identify deficiencies and areas of improvement, Generally Accepted Auditing Standards (GAAS) ensuring that auditors adhere to professional and use specific language to communicate the standards and maintain the quality of their work. level of assurance provided. Legal requirements Regulatory oversight provides an additional layer ensure consistency and comparability in audit of assurance for stakeholders regarding the reporting, enabling stakeholders to make credibility and reliability of audited financial informed decisions based on audited financial statements. information. Professional Skepticism and Due Care Disclosure and Transparency Regulatory frameworks often emphasize the Legal requirements related to disclosure and importance of professional skepticism and due transparency influence auditors' reporting care in auditing practices. Auditors are expected obligations. Regulations may specify the need for to exercise professional judgment, critically auditors to communicate key audit matters, evaluate evidence, and challenge management significant accounting policies, and other assertions when necessary. Regulatory relevant information in the audit report. requirements may specify the need for auditors Additionally, auditors may be required to report to obtain sufficient and appropriate audit identified fraud, non-compliance with laws or evidence, assess the reasonableness of regulations, or other material irregularities. accounting estimates, and thoroughly evaluate These requirements enhance the transparency of internal controls. These requirements promote the audit process and provide stakeholders with objectivity and ensure that auditors maintain a valuable insights into the entity's financial skeptical mindset throughout the audit process. reporting and governance. Legal Requirements Influencing Audit Legal Liability and Professional Standards: Procedures and Reporting Legal frameworks establish the legal liability of Audit Procedures auditors and the consequences of non- compliance with regulatory requirements. Legal requirements influence the nature and Auditors are expected to follow professional extent of audit procedures performed by standards and exercise due care in their work to auditors. For example, regulations may stipulate mitigate the risk of legal liability. Legal the need for auditors to obtain an understanding requirements may include the need for auditors of the entity's internal control environment, to maintain adequate documentation, retain assess the risk of material misstatement, and audit records for specified periods, and provide design audit procedures accordingly. Legal access to working papers upon request. These requirements can also specify the use of specific requirements ensure that auditors are auditing techniques, such as sampling accountable for their work and provide a basis methodologies, analytical procedures, or the for legal recourse in cases of professional inclusion of specialists in the audit process. negligence or malpractice. These requirements ensure that auditors follow a systematic and comprehensive approach to In conclusion, legal and regulatory factors exert gather audit evidence and evaluate financial a significant influence on auditing practices. statements. Regulatory frameworks shape auditors' independence, objectivity, and adherence to Reporting Standards and Formats professional standards. They establish oversight Legal frameworks establish reporting standards mechanisms and inspection programs to ensure and formats that auditors must adhere to when the quality of auditing practices. Legal expressing their opinion on financial statements. requirements influence audit procedures and These standards may prescribe the content, reporting, specifying the nature and extent of structure, and presentation of the audit report. 1141 www.ejtas.com EJTAS 2023 | Volume 1 | Number 5
audit procedures, the content and format of behavior and conduct. These codes outline audit reports, and the disclosure of key audit principles and guidelines that auditors must matters. Additionally, legal frameworks establish adhere to, such as integrity, objectivity, the legal liability of auditors and provide a basis confidentiality, and professional competence. for accountability and transparency in auditing The codes of ethics provide a foundation for practices. Understanding and complying with auditors' professional conduct, setting these legal and regulatory factors are essential for expectations for their independence, objectivity, auditors to maintain the credibility and integrity and ethical decision-making. Adherence to these of their work and meet stakeholders' codes promotes trust in the auditing profession expectations regarding audit quality and and ensures the integrity of financial reporting. reporting. Continuing Professional Development Influence of Institutional Factors on Professional accounting bodies often require Auditing Practices auditors to engage in ongoing professional Institutional factors play a significant role in development activities to enhance their shaping auditing practices by providing the knowledge and skills. These requirements ensure necessary infrastructure, standards, and that auditors stay updated with the latest regulations for the profession. These factors developments in auditing practices, relevant include professional accounting bodies, regulations, and emerging issues. Continuing regulatory agencies, and other institutional professional development programs may include frameworks that influence auditors' professional mandatory training, seminars, webinars, or ethics, accountability, and overall conduct. In conferences that help auditors maintain their this section, we will explore two key aspects of professional competence and adapt to the the influence of institutional factors on auditing evolving needs of the profession. practices: the role of professional accounting Quality Control and Peer Review bodies in setting standards and regulations, and the institutional factors shaping auditors' Professional accounting bodies typically professional ethics and accountability. establish quality control mechanisms to monitor and assess the quality of auditors' work. These Role of Professional Accounting Bodies in mechanisms may include peer review programs, Setting Standards and Regulations where independent auditors review and evaluate Standard Setting the quality of another auditor's work. The goal is to ensure that auditors comply with professional Professional accounting bodies, such as the standards, maintain independence and International Federation of Accountants (IFAC) objectivity, and deliver high-quality audit and the American Institute of Certified Public services. Quality control measures enhance the Accountants (AICPA), play a crucial role in credibility and reliability of auditing practices and setting auditing standards. These bodies develop contribute to the overall trust in the profession. and issue standards that guide auditors' professional conduct, the performance of audit Institutional Factors Shaping Auditors' procedures, and the reporting of audit results. Professional Ethics and Accountability These standards, such as the International Regulatory Oversight Standards on Auditing (ISAs) or the Generally Accepted Auditing Standards (GAAS), provide a Regulatory agencies, such as the Securities and framework for auditors to follow and ensure Exchange Commission (SEC) in the United consistency and quality in auditing practices States or the Financial Reporting Council (FRC) across jurisdictions. in the United Kingdom, have a significant impact on auditors' professional ethics and Code of Ethics accountability. These agencies oversee the Professional accounting bodies also establish auditing profession, enforce compliance with codes of ethics that govern auditors' professional auditing standards and regulations, and hold 1142 www.ejtas.com EJTAS 2023 | Volume 1 | Number 5
auditors accountable for their actions. professional misconduct or ethical breaches can Regulatory oversight ensures that auditors act in damage the reputation of the auditing profession the public interest, maintain professional and erode public trust. competence, and adhere to ethical standards. In conclusion, institutional factors have a Legal Liability and Liability Limitations significant influence on auditing practices. Professional accounting bodies play a vital role Institutional factors, including legal frameworks, in setting standards, codes of ethics, and influence auditors' professional ethics and continuing professional development accountability through the establishment of legal requirements. They establish the framework liability and liability limitations. Auditors can be within which auditors operate and ensure the held legally liable for their work, and legal quality and consistency of auditing practices. frameworks provide a basis for stakeholders to Regulatory agencies provide oversight, enforce seek legal recourse in case of professional compliance, and hold auditors accountable for negligence or malpractice. The existence of legal their actions. Legal frameworks establish liability encourages auditors to exercise due care, auditors' legal liability and provide a basis for maintain independence, and fulfill their accountability and legal recourse. Corporate professional responsibilities. However, liability governance mechanisms and board oversight limitations, such as the concept of limited contribute to auditors' independence and liability for audit firms, also influence auditors' accountability. Institutional factors collectively accountability and the extent of their liability in shape auditors' professional ethics, certain jurisdictions. accountability, and the overall integrity of the Corporate Governance and Board Oversight auditing profession. Adherence to these Institutional factors related to corporate institutional factors is essential for auditors to governance and board oversight influence maintain public trust, uphold professional auditors' professional ethics and accountability. standards, and fulfill their responsibilities in Corporate governance mechanisms, such as financial reporting. independent audit committees, provide oversight and ensure the independence and objectivity of auditors. These mechanisms Implications and Recommendations contribute to auditors' accountability by creating Insights for Global Auditing Standards and an environment where auditors can operate Practices independently and report their findings without undue influence. Board oversight and corporate The influence of legal, regulatory, and governance frameworks emphasize the institutional factors on auditing practices has importance of auditors' role in financial implications for the development and reporting and promote the integrity and implementation of global auditing standards. transparency of the auditing process. Understanding these implications can help improve the effectiveness and relevance of Public Trust and Reputation auditing standards across different jurisdictions. Institutional factors shape auditors' professional Here are some insights for global auditing ethics and accountability by influencing public standards and practices: trust and the reputation of the auditing Consideration of Diverse Legal and profession. Auditors' ethical conduct and Regulatory Frameworks accountability are critical in maintaining public confidence in financial reporting. Institutional Global auditing standards should be flexible frameworks that emphasize transparency, enough to accommodate the varying legal and professionalism, and ethical behavior contribute regulatory frameworks in different countries. to the perception of auditors as trusted While striving for harmonization, standards professionals. Conversely, instances of should allow for necessary adaptations to align 1143 www.ejtas.com EJTAS 2023 | Volume 1 | Number 5
with local requirements. This approach ensures implementation of these standards by auditors that auditing standards are applicable and and audit firms. practical across jurisdictions, promoting Collaboration among Standard-Setting consistency in audit quality while respecting legal Bodies and regulatory differences. Global collaboration among standard-setting Emphasis on Auditor Independence and bodies, such as the International Auditing and Objectivity Assurance Standards Board (IAASB) and Given the impact of regulatory frameworks on national standard-setting bodies, is crucial for auditors' independence and objectivity, global harmonizing auditing practices. These bodies auditing standards should place a strong should actively engage in dialogues, share best emphasis on these principles. Standards should practices, and work towards converging auditing provide clear guidance on maintaining standards. Collaboration ensures that standards independence and avoiding conflicts of interest, are developed with a global perspective and take regardless of the jurisdiction. By setting high into account diverse legal and regulatory standards for independence, global auditing environments. standards can contribute to the credibility and Sharing of Experiences and Knowledge reliability of audited financial statements worldwide. Countries and professional accounting bodies should promote the sharing of experiences and Consistency in Audit Procedures and knowledge related to auditing practices. This can Reporting be achieved through international conferences, Global auditing standards should strive for forums, and research collaborations. Sharing consistency in audit procedures and reporting experiences helps identify effective practices, requirements. While acknowledging jurisdiction- address challenges, and learn from each other's specific legal and regulatory requirements, experiences. By leveraging collective knowledge, standards can establish a common foundation auditors and regulators can improve their for performing audit procedures and producing understanding of global auditing practices and audit reports. This consistency promotes work towards harmonization. comparability and facilitates the understanding Enhancing Auditors' Cross-Cultural of financial information by stakeholders across Competencies borders. As auditing practices become increasingly Recommendations for Harmonization of globalized, auditors need to develop cross- Auditing Practices cultural competencies to effectively operate in Harmonization of auditing practices across diverse environments. Here are some jurisdictions is a desirable goal that can enhance recommendations to enhance auditors' cross- the effectiveness and efficiency of audits. To cultural competencies: achieve this, the following recommendations can Cultural Awareness and Sensitivity be considered: Auditors should develop cultural awareness and Alignment with International Standards sensitivity to understand the cultural nuances Countries should strive to align their auditing and business practices prevalent in different practices with internationally recognized jurisdictions. This includes understanding standards, such as the International Standards on cultural values, communication styles, and Auditing (ISAs). This alignment promotes decision-making processes. By being culturally consistency, facilitates cross-border investments, sensitive, auditors can build stronger and enhances the credibility of audited financial relationships with clients, adapt their audit statements. Governments and regulatory bodies approach, and navigate potential cultural should encourage and support the adoption and barriers. 1144 www.ejtas.com EJTAS 2023 | Volume 1 | Number 5
Training and Education and implementing the recommended strategies, stakeholders in the auditing profession can work Professional accounting bodies and audit firms towards achieving consistent, high-quality audits should provide training and education programs that meet the needs of a globalized business to enhance auditors' cross-cultural environment. competencies. These programs can include modules on cultural intelligence, intercultural communication, and cross-cultural negotiation. By equipping auditors with the necessary References knowledge and skills, training programs can help Firth, M., Rui, O. M., & Wu, X. (2012). How do them effectively engage with clients and various forms of auditor rotation affect audit stakeholders from different cultural quality? Evidence from China. The International backgrounds. Journal of Accounting, 47(1), 109-138. International Assignments and Exchanges https://doi.org/10.1016/j.intacc.2011.12.006 Encouraging auditors to participate in Ghafran, C., & O'Sullivan, N. (2017). The international assignments or exchanges can impact of audit committee expertise on audit provide valuable exposure to different business quality: Evidence from UK audit fees. The British environments and cultures. These experiences Accounting Review, 49(6), 578-593. allow auditors to gain firsthand knowledge of https://doi.org/10.1016/j.bar.2017.09.008 global auditing practices, develop cross-cultural Hohenfels, D., & Quick, R. (2020). Non-audit competencies, and build international networks. services and audit quality: evidence from Audit firms should consider creating Germany. Review of Managerial Science, 14, 959- opportunities for auditors to work in different 1007. https://doi.org/10.1007/s11846-018- countries or engage in international 0306-z secondments. Hung, P. H. (2022). Audit Service Quality And Collaboration and Networking Loyalty To Audit Firms: Empirical Evidence Auditors should actively engage in professional From Vietnam. Journal of Positive School networks and collaborate with peers from Psychology, 6(7), 5266-5281. different jurisdictions. Participation in Lee, H. S., Nagy, A. L., & Zimmerman, A. B. international auditing conferences, seminars, (2019). Audit partner assignments and audit and professional associations allows auditors to quality in the United States. The Accounting exchange ideas, share experiences, and learn Review, 94(2), 297-323. from professionals with diverse backgrounds. http://dx.doi.org/10.2139/ssrn.2825357 Collaboration and networking foster cross- Memis, M. U., & Cetenak, E. H. (2012). cultural learning and contribute to the Earnings management, audit quality and legal development of auditors' cross-cultural environment: An international competencies. comparison. International journal of economics and In conclusion, the implications and financial issues, 2(4), 460-469. recommendations discussed in this section Skinner, D. J., & Srinivasan, S. (2012). Audit provide insights for global auditing standards quality and auditor reputation: Evidence from and practices, recommendations for Japan. The Accounting Review, 87(5), 1737-1765. harmonization of auditing practices, and https://doi.org/10.2139/ssrn.1557231 strategies for enhancing auditors' cross-cultural competencies. By considering these implications 1145 www.ejtas.com EJTAS 2023 | Volume 1 | Number 5