REPLYOVERVIEWThe student will post one reply for this discussion. Your one reply must be a critique of the other student’s Discussion: Professional Roles and International Analysis in this course. INSTRUCTIONSThe critique should be between 1000 and 2500 words, twelve-point type. The student will claim the work to be critiqued by a posting in reply to the selected student’s work. The critique will consist of a thread in reply to the selected student’s work. A proper critique will address each item in the Case Analysis in order, starting with the Case Summary, stating whether you agree with the posted work and adding such comments as you think will add to the Case Analysis. Each question must be written and addressed separately. The Statement of
Case 8.1 – Longtop Financial Technologies Limited
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In the 1990’s Longtop Financial Technologies Limited was founded and quickly became a leading provider of technology for banks. An article talking about banking technology stated, “The development of information technology not only enabled the emergence of new industries but also changed the business model in many traditional sectors, such as banking” (He et al., 2021). Longtop was based in China but in 2007 they went public on the New York Stock Exchange.
The company continued to grow year after year. According to the textbook, in 2010 the company reported “$59 million in profit, total revenues of $169 million and net assets of $600 million” (Knapp, 2001). In addition to doing well, the company also got an unqualified opinion from Deloitte Touche Tohmatsu CPA Ltd. (D & T Shanghai). Because Longtop went public on the NYSE in 2007 they were under the regulation of the Securities and Exchange Commission (SEC).
In 2011, there were allegations made that Longtop was “cooking their books” by $400 million in cash that did not actually exist. The audit firm of D & T Shanghai decided to look into the allegations and found many issues. In order to prove the cash balances the audit firm would ask the local banks, the firm decided to go a step further and ask the headquarters, but Longtop’s officials quickly stopped the inquiries. D & T Shanghai learned that the company didn’t have the cash that they reported.
After learning about the fraud that was occurring in Longtop, D & T Shanghai decided to resign as Longtop’s audit firm. The SEC after learning what was happening at Longtop also found two other companies committing the same type of fraud. They would use local banks and the local banks would lie on behalf of the company. Because three companies were found to be committing fraud in the same way, the SEC asked D & T Shanghai to provide the workpapers that they used in the audit of Longtop. D & T Shanghai told them that they would not give them because it would be violating a Chinese law.
- What are the key conditions or circumstances that must be present for a company to be “auditable”? What uncommon challenges to “auditability” are posed by Chinese companies?
According to an article from the Journal of Business Ethics, “auditability refers to the degree of clarity a qualitative study offers so that it can be audited” (Nair, 2021). There are many key conditions or circumstances that must be present for a company to be auditable. The PCAOB gives a list of items that an audit firm looks at in order to assess a company. The main items include control environment, risk management initiatives, internal controls, and other controls of the company. In order for a firm to accurately present their opinion on whether or not a company is accurately representing their financials.
There are a few uncommon challenges to “auditability” that are posed by the Chinese companies. In the case it mentions that there is a law restricting the Chinese companies from providing documents that relate to the national economy. The main issue is with the government of China. According to an article about China’s policy making about transparency versus the United states, it clearly pointed out that China is a lot stricter (Balla & Xie, 2020).
As Christians we are told we are not to lie to anyone. In this case, we see that the local banks are lying to the auditors. Proverbs 12:22 states, “The LORD detests lying lips, but he delights in people who are trustworthy” (Crossway, 2011). Overall there are many ways that a company should act and Longtop was not acting in accordance with the standards they should’ve been.
- Do the major international accounting firms have a responsibility to ensure that their individual national practice units provide independent audit services that are uniform worldwide? Defend your answer.
Major international accounting firms do have the responsibility to ensure that their audit services are uniform in nature. When firms have the same audit services across the board it helps to ensure they are accurately getting information. The main issue that it causes is confusion for many people. In an article about international auditing standards it stated, “poor national auditing standards have partially contributed to the recent financial scandals in many countries worldwide” (Elmghaamez & Elmagrhi, 2022). In order to have a clear understanding of companies there should be some uniformness even if that is just within each firm.
- Acme, Inc., a multinational company based in the United States, has a large subsidiary located in Beijing, China. Acme is audited by an international accounting firm headquartered in the United States; its subsidiary is audited by the Chinese affiliate of that firm. Under U.S. auditing standards, what responsibilities, if any, does Acme’s U.S. audit firm have to supervise or oversee the audit of the Chinese subsidiary?
According to the International Auditing and Assurance Standards Board, Acme’s U.S. audit firm would act like a supervisor for the audit of the Chinese subsidiary (IAASB, 2015). Because the company is headquartered in the United States the company’s auditor has a responsibility for the company as a whole which includes the Chinese affiliate. Examples of what the U.S. audit firm needs to oversee would be making sure the Chinese audit team knows the responsibilities they have as well as making sure they are sticking with all the audit objectives. The U.S. auditing firm should also make sure that the company is following AICPA guidelines. Overall the U.S. audit firm should make sure that the Chinese subsidiary is conducting the audit the way they should.
- What alternative strategies or approaches could U.S. regulatory agencies consider invoking to ensure that the audits of non-U.S. companies with securities traded on U.S. markets are adequate?
There are a few alternative strategies that U.S. regulatory agencies could consider invoking. One of those would be making a regulation that mandates accurate financial activities. It is also important that a firm is able to do a proper investigation and making sure proper audit procedures are in place for effective fraud detection would be a good strategy. In an article about uniform accounting standards it stated, “Uniform standards have the benefit of easing interpretation of financial reports across the investor community” (Ray, 2018). In the same way that uniform standards help the users of financial statements, the implementation of fraud investigation procedures would help prevent fraud.
- Since ethical and moral values vary from culture to culture and nation to nation, does this mean that a global profession, such as the accounting profession, cannot have a uniform ethical code? Explain.
I would argue that this does not mean that the accounting profession cannot have a uniform ethical code. When it comes down to it accounting is the tracking of the numbers of a business and that is not different from country to country. Because accounting is dealing with the money of a company, there are temptations to commit fraud. The reason a uniform ethical code is in place is to help prevent fraud and that does not differ from culture to culture. There may be certain cases that the ethical code might need to change slightly, but overall a uniform ethical code would be able to help prevent fraud across all countries.
It is also important to note that as Christians our ethical code comes from the Bible which goes across all countries. Matthew 24:14 states, “And this gospel of the kingdom will be proclaimed throughout the whole world as a testimony to all nations, and then the end will come” (Crossway, 2011). The Bible sets our standard as Christians and it is for everyone so therefore, we should proclaim His name everywhere we go.
He, D., You, K., Li, W., & Wu, J. (2021). Determinants of Technology Adoption: Evidence from the Chinese Banking Industry. Emerging Markets Finance & Trade, 57(11), 3167–3189. https://doi.org/10.1080/1540496X.2019.1678027
Nair, L. B. (2021). From “Whodunit” to “How”: Detective Stories and Auditability in Qualitative Business Ethics Research. Journal of Business Ethics, 172(2), 195–209. https://doi.org/10.1007/s10551-020-04479-4
Balla, S. J., & Xie, Z. (2020). Consultation as policymaking innovation: comparing government transparency and public participation in China and the United States. Journal of Chinese Governance, 5(4), 525–545. https://doi.org/10.1080/23812346.2020.1769539
Elmghaamez, I. K., & Elmagrhi, M. H. (2022). Diffusion theory, transnational antecedents and International Standards on Auditing adoption around the world. International Journal of Auditing, 1. https://doi.org/10.1111/ijau.12273
Knapp, M. C. (2001). Contemporary auditing: Real issues & cases. South-Western College Publishing.
Crossway. (2011). In ESV study Bible: English standard version.
IAASB – International Auditing and Assurance Standards Board. (2015, April). The Auditor’s Responsibilities Relating to Other Information. Retrieved February 13, 2022, from https://www.ifac.org/system/files/publications/files/ISA-720-(Revised).pdf
Ray, K. (2018). One Size Fits All? Costs and Benefits of Uniform Accounting Standards. Journal of International Accounting Research, 17(1), 1–23. https://doi.org/10.2308/jiar-51974
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