Expanding Operations Overseas May Mean Expanded Audits

Nathan Curtis, Senior Manager – Assurance and Advisory Services

Is your company thinking of expanding its operations overseas? As part of the decision making process, you need to consider the effect that the accompanying expanded financial reporting requirements will have on your company. The addition of a foreign subsidiary will add new complexities to your financial reporting process—such as foreign currency translation, reconciliation between U.S. generally accepted accounting principles (GAAP) and other financial reporting standards (such as International Financial Reporting Standards (IFRS)), and coordinating among different reporting periods.

Create Auditing Procedures

Before the end of each applicable reporting period, your auditors will need to determine what additional audit procedures should be applied. Factors the parent company's auditors will consider when determining what procedures, if any, will be required of a foreign subsidiary include:

• the quality and reliability of financial information already available from the subsidiary,
• the relative size of the subsidiary's operations compared to the parent, and
• the complexity of the transactions entered into by the subsidiary.

Decide Whether Overseas Auditors Are Necessary

The more activity your company has in a foreign country, the more likely you'll need to hire auditors in that country to participate in the parent company's audit. An entity with a sales office or small research and development facility overseas will likely not need local auditors in order for the parent company's financial statements to be audited. A subsidiary with significant inventory overseas may simply need to hire an independent auditor to observe the inventory at the end of the reporting period. But an entity with substantial overseas operations, such as a subsidiary with manufacturing facilities, may require an audit be completed on the subsidiary's financial statements.

Plan for Differences in Procedures

Administering an audit or certain audit procedures in another country can be more complex as well. Some standard audit procedures, such as confirming cash balances held at a bank, can be coordinated and completed within a matter of days in the United States. But in other countries, due to statutory and regulatory requirements, the same procedure can take weeks or even months to complete. Failure to plan for such circumstances can substantially delay the completion of an audit.

Involve Your Accountants

Coordinating the financial reporting and local audits of a foreign subsidiary in a different time zone—including overcoming language barriers—can be time consuming and daunting for those not familiar with the process. For a company setting-up a foreign subsidiary for the first time, planning will be crucial to achieving and maintaining timely financial reporting. The more complex the subsidiary's operations, the more planning and coordination will be required. The first step to ensure timely and accurate financial reporting at a reasonable cost is to begin the discussion with your auditors before the end of the reporting period. Engaging an accounting firm with experience in auditing entities with foreign subsidiaries will help your company avoid common pitfalls, which will help to reduce audit fees and limit the amount of internal resources needed to complete an audit.

Download Expanding Operations Overseas May Mean Expanded Audits - September 17, 2009 Article