International Auditing

Finding fraud in any company can be very hard.  The most egregious financial statement frauds are often the result of a coordinated effort by multiple individuals, who design the fraud in a way that will allow it to go undetected by standard audit procedures.  Even nonstandard audit procedures can fail to detect a well designed, strategic fraud.  Combine that with international audit clients operating in emerging economies, and you have a recipe for disaster.  This is creating problems for auditors in China, as highlighted by the WSJ:

A series of alleged frauds at Chinese companies listed in the West has spotlighted the role of some of the world's biggest auditors in a fast-growing market where they have expanded quickly and competed aggressively in recent years.

Since February, the so-called Big Four accounting firms have resigned or been dismissed from at least seven Chinese companies listed in the U.S., according to SEC filings.

In most of those cases, the auditors said they had concerns about the accuracy of information provided by their clients, and in three instances, auditors quit the accounts before completing the auditing of any financial reports.

Dozens of mostly smaller Chinese companies listed outside that country have come under fire in recent months from regulators and investors, as a wave of fraud alleged by short sellers has erased billions of dollars in the Chinese firms' market value and triggered lawsuits and U.S. regulatory probes.

 This may just be the tip of the iceberg, as auditors struggle to find ways to achieve a high level of audit quality in an environment that is stacked against them.  I am very interested in how the audit firms will respond to the events that are unfolding in the Chinese assurance market.