Question

Q: Would an auditing-standard convergence prevent fraud at the top-executive level? If No, how to deter top executives from engaging in illegal conduct?

Answer 1

We must agree that convergence of auditing standard would lead to lesser fraud at the top executive level and over a period may enable us to prevent to a larger extent. This is because convergence of standards across nations and regions will lead to the following:

1. More transparency as most MNCs find loopholes in difference in regulatory and audit requirements across borders. With a higher convergence, for example, an audit report in one country/ region would be interpreted in a similar way across the globe and will be independent of the local regulations judging the audit report.

2. The organisations nowadays have management from across the globe and similar audit standards will enable the management to not commit frauds out of ignorance and lack of knowledge. Thus, time taken to on-board the management about new regulations across countries/ companies will not be wasted and uncertainty will be reduced.

3. Centralised/ more converged auditing standards will enable clear position of the companies in the capital markets across globe and managers may not be able to leverage information asymmetry across borders/ organisations.

4. Convergence of audit standards will lead to less number of standards and hence, redundant audits and corresponding costs will not be borne by the organisations/ senior management anymore. This will be benefit in two ways: a more strengthened audit system taking holistic view across industries and countries; and management will be less provoked to find loopholes in the standards assuming a one time clearance would suffice all regulatory requirements.

While we cannot guarantee the benefits in the short term and that it is human nature to accrue more wealth but more stringent measures will definitely reduce loopholes, redundancy and opaqueness across borders, industries and organisations.