Accounting and Auditing Considerations When Expanding Internationally

In today’s globalized economy, expanding beyond domestic borders is no longer merely aspirational. It is often an expected component of a company s growth strategy. However, international expansion introduces a range of accounting, auditing and compliance risks that, if not properly managed, can result in significant challenges for companies, their customers and other stakeholders. Practitioners should carefully consider the following risk areas and related mitigation strategies.

Differences in Standards

Statutory filing requirements in foreign jurisdictions may necessitate the use of accounting standards other than U.S. GAAP. While International Financial Reporting Standards (IFRS) are widely adopted, some jurisdictions require country-specific standards, such as U.K. GAAP. These requirements may result in conversion adjustments between accounting frameworks.

It is critical for management and auditors to understand the logistical and administrative complexities associated with maintaining multiple sets of accounting records and performing ongoing conversions between standards.

Application of Standards

International expansion increases the risk that accounting policies may not be applied consistently across entities. For example, differences in local sales practices may affect how revenue is recognized under Accounting Standards Codification (ASC) 606 and/or IFRS 15, particularly with respect to identifying performance obligations and deter mining the timing of revenue recognition.

Foreign currency accounting presents another area of heightened risk. Consistent application of ASC 830 and/or International Accounting Standards (IAS) 21 across entities requires a clear understanding of each entity s functional currency and its relationship to the reporting currency. Differences in exchange-rate sources or inconsistent application of translation methodologies can create significant variances, potentially resulting in misstatements in other comprehensive income (OCI) and intercompany balances.

Internal Controls

Rapid international growth can strain a company s internal control framework. New foreign operations may lack formally documented processes, appropriate segregation of duties or effective oversight, whether at the local level or by headquarters. The risk of management override may also increase, as senior leadership may feel pressure to accelerate operations and achieve profitability in new markets.

Establishing and maintaining effective internal controls across international operations is critical, both for financial reporting reliability and regulatory compliance.

Legal, Regulatory and Compliance Risks

A common misconception is that compliance with domestic legal and regulatory requirements automatically translates to compliance abroad. In practice, laws and regulations vary significantly by jurisdiction, including tax regimes, employment laws and corporate governance requirements. Depending on a company s organizational structure and geographic footprint, foreign jurisdictions may also require local statutory filings and, in some cases, standalone statutory audits.

International operations can also increase exposure to bribery and corruption risks. This risk is not limited to early-stage or smaller companies. For example, in 2008, a global industrial automation company with $180 billion in market capitalization was found to have paid more than $1.4 billion globally to secure infrastructure, medical equipment and telecommunications contracts.

Audit Planning

While there is no one-size-fits-all approach to auditing international operations, it is certain that all phases of the audit will be affected.

• Planning: New locations often require additional audit resources, including specialized tax or local accounting expertise. Auditors should also anticipate delays in obtaining audit evidence, as documentation from foreign locations may be deprioritized or more difficult to obtain.
• Risk assessment: New international operations generally increase the risk of material misstatement. Auditors should expect expanded substantive procedures and reassess materiality thresholds.
• Fieldwork: The nature, timing and extent of audit procedures will likely change. This may include site visits, the involvement of local audit teams, rotating entities in scope and additional procedures to address compliance with laws such as the Foreign Corrupt Practices Act (FCPA).
• Reporting: International expansion adds complexity to statutory filing timelines and their interaction with consolidated reporting deadlines. Issues identified in foreign subsidiaries may need to be resolved before issuing a consolidated audit opinion. Auditors should pay particular attention to subsequent events and going-concern.

With thoughtful planning, robust internal controls and a clear understanding of cross-border accounting and auditing considerations, practitioners can help ensure high-quality audits and reliable financial reporting.

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Christopher Brandes Chris Brandes is a partner in the capital markets practice at CFGI and can be reached at cbrandes@cfgi.com.

Zachary B. Cohen Zackary B. Cohen, CPA, is a senior manager with CFGI and can be reached at zcohen@cfgi.com.