Statutory audits: What they are & what they are not

Internationally active companies likely have subsidiaries that undergo annual statutory audits.  What many companies don’t understand is what that statutory audit really is.  Unlike the United States where audits are only required for public companies and certain other regulated entities while generally being optional for private companies, many foreign countries legally require most companies, including private companies, to be audited with the resulting financial statements being made available to a government authority.  A statutory audit is typically performed using auditing and accounting standards prescribed by the local government.

Companies must be careful when relying on the statutory audit report as evidence that their subsidiary’s financial records are accurate for various reasons, including:

1. A high likelihood of differences between local and U.S. accounting standards
2. The statutory audit process being different from the U.S. audit in many respects and potentially lacking the depth in areas important to the parent company (regardless of the amount of complaining heard locally about the amount of sampling that is performed)

One consideration is simply analyzing your statutory audit fees.  Even when adjusting for differences in the costs of professionals in foreign countries, it might be obvious that the auditor is spending much less time with your subsidiary than would be necessary for the amount of reliance being placed on their work in the U.S.  The key is for the parent company and its auditors to be highly involved in this process to have an understanding of the work being performed and whether it can be adjusted to better serve everybody’s needs.

What has your experience been with statutory audits?  Do you feel that your subsidiaries and auditors have given you enough insight in what you’re getting with your statutory audit?