Resumen de Lessons for China and other developing economies from the crisis in US auditing
Michael G. Alles, Alexander Kogan, Miklos A. Vasarhelyi
The continuing series of business scandals, from Enron to WorldCom have severely undermined the credibility of auditors and audited financial statements in the US. With developing economies such as China looking to emulate western models of corporate governance, what lessons should they draw from these apparent failures in auditing? There is a danger that those opposed to modernization of accounting and auditing will use these scandals as an excuse to delay the adoption of new standards and methods. Indeed, the Enron/Andersen scandal was apparently one reason that Chinese authorities watered down proposals to require firms seeking new Class-A shares to hire a foreign auditor to supplement their local auditor.
In this paper we discuss a more productive lesson that developing countries seeking to bring their accounting infrastructure up to Western levels can draw from the recent US experience, using China as a case study. China is the most important of all developing economies, and its impending entry into the WTO makes reform there particularly urgent. The path that China takes is also likely to serve as a role model for much of the rest of the developing world, especially in South East Asia. We argue that developing countries have the opportunity to "leapfrog" existing auditing techniques in the West that have proven to have serious shortcomings, and instead, go straight to the cutting edge methodologies of continuous assurance and tertiary logging. Continuous assurance is a type of auditing which, by making use of the "electronization" of the firm, produces audit results simultaneously with, or a short period of time after, the occurrence of relevant events. In comparison with the traditional financial statements audit, continuous assurance is distinguished by being timelier, more comprehensive, more accurate and more supportive of the management process. These capabilities are especially valuable for Chinese firms who face an environment with weaker legal, regulatory and management controls than in the West. However, the tenuous nature of the auditing infrastructure in China makes it essential that it also adopts tertiary logging as a way of "guarding the guards". We discuss how logging the audit in a continuous assurance setting will increase the deterrence capability of peer review, as well as serving as a source of institutional memory in the case of mandated auditor rotation, the separation of auditing from consulting and the unique Chinese proposal for dual auditing.
