Statutory Audits for the Middle Market Multinational

Congratulations; you navigated the logistical hurdles to become multinational! Today, globalization has substantially reduced the economies of scale that were historically required to operate internationally.

Now you will be rewarded with a larger pool of resources and access to a seemingly endless supply of customers. You may also have the pleasure to be scrutinized by your favorite CPA when it is time to perform your first statutory audit. For those of you who have dodged the audit bullet up to this point, get ready for an exciting ride!

Now, this is no normal audit. First, you have to play by their rules, which are in no way related to any of the rules you’ve played by up to this point. In fact, you’ll be happy to know that each country has its own rules of engagement. Fortunately, not all of them require statutory audits. Some, will even allow you to use your current financial statement audit for their requirements. However, some countries require that you have an audit performed on just the legal entity in that country. It is important that you talk with your CPA to understand the specific requirements in your country or countries of operations.

Most of the time, the audit will have to be performed on the country’s basis of accounting. This will require you to become comfortable with every CPA’s favorite four-letter word – IFRS. One thing that will complicate your familiarity with International Financial Reporting Standards is that it is not a single standard. There is a central IFRS established by the International Accounting Standards Board (IASB) that most countries adopt. However, many countries adopt IFRS and then add their own nuances. The Financial Accounting Standards Board (FASB), which establishes US GAAP, is working closely with the IASB to converge US GAAP with IFRS, but there will still be country specific rules that will result in accounting principle differences. There are numerous publications that can help you identify the differences between US GAAP and IFRS. Once you understand those differences, you can then identify the country specific nuances and plan for them.

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If you have no audit requirement in the US, then it is easy to record transactions in whichever GAAP is needed to support your statutory audit requirement. If you need to produce US GAAP financials, then there are two approaches to compliance with both sets of standards. First, you can keep another set of books and record all transactions twice. A good Enterprise Resource Planning (ERP) system will help you automate much of this process, but this will require a potentially substantial, up-front investment. Sometimes, a more practical approach is to record all transactions on a US GAAP basis, and then record statutory audit adjustments “top-side” – meaning that you don’t record them in your ledger; you simply make the adjustments directly to your statutory financial statements. This will require some time to think through the differences, and identify how to properly reflect them on your financial statements.

The varying rules and reporting requirements in each country can be intimidating, so don’t go at it alone. Saville can help. We have US professionals who are experienced in dealing with these issues, and as a member of Allinial Global, we have access to a network of 100 other independent firms in the US and Canada and 300 international firms. This network provides us substantial resources to better serve both your national and international needs. Our goal is to make this process as easy as possible for you and your company. We can help you identify the statutory reporting requirements impacting you and help you identify a plan to comply with them. We can also help you identify the differences between IFRS and US GAAP and help you develop a process to efficiently implement both sets of standards. We would love to serve as your trusted advisor to navigate the thorns, so you can enjoy the fruits of operating in the international jungle.

Written by: Billy Bob Messer, Audit Manager, CPA

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