The Perceived Influence of Language Barriers on Multinational Group Audits

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Thesis Simone Vliek

MSc Accountancy S3116220

Word count: 7,742 22 June 2020

The Perceived Influence of Language Barriers

on Multinational Group Audits

Simone Vliek University of Groningen

Supervisor: dr. S. Girdhar

ABSTRACT: Due to ongoing globalization, multinational group audits (MGAs) are becoming a more prevalent type of audit. However, regulators have expressed concerns about the quality of MGAs. This study looks at the perceived influence of language barriers on multinational group audits. Through interviews with 11 Dutch auditors from group engagements, this research found that language barriers are perceived to negatively influence the audit, as findings and misstatements could go undetected. Furthermore, the study found that language barriers in the audit industry are perceived to be high, despite the importance of effective communication. Lastly, the study found that the choice of media can be an important factor in mitigating language barriers. These findings help to increase the understanding of professionals, standard-setters, and regulators on the influence of language barriers on MGAs.

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1. INTRODUCTION

Early 2003, Deloitte announced suspension of the 2002 audit for Royal Ahold, after uncovering that the retail concern had withheld crucial evidence from the auditor (Knapp & Knapp, 2007). According to Smit (2004), this had led to the unlawful consolidation of foreign subsidiary profits. Moreover, material misstatements were found at subsidiary U.S. Foodservices. It was also discovered that the internal control within the firm was insufficient. The total misstatements were later established at €970 million (Smit, 2004). This scandal is just one of the many in the early 2000s and shows great similarities with the 2003 Parmalat scandal and the 2009 Satyam scandal (Kleinman et al., 2014; Pagano & Immordino, 2007). A commonality between all these scandals was that they were all multinational group audits affected by poor communication between different audit teams, causing misstatements to go unnoticed (Carson et al., 2016).

Multinational group audits (MGAs) have become a more prevalent type of audit due to globalization, which causes firms to increasingly operate internationally (Graham et al., 2018; Patel & Psaros, 2000). For business and tax reasons, companies may choose to set up subsidiaries in countries other than their country of residence (Connaughton & Shuffler, 2007). These foreign subsidiaries (components) are audited by local component auditors who communicate their findings to the group auditor, who is based in the parent company’s country of residence (Sunderland & Trompeter, 2017). The group auditor is responsible for the overall audit opinion on the consolidated financial statements, as stated in International Audit Standard (ISA) 600 for group audits (IAASB, 2018). This standard is based on the premise of full responsibility for the group auditor. The group auditor therefore decides on which risks to address, which proceedings to perform, the required expertise of component auditors, and the planning of the audit process (IAASB, 2018).

The Public Company Accounting Oversight Board (PCAOB) has recently expressed its concern about the quality of MGAs (Carson, Simnett, Trompeter, & Vanstraelen, 2014; Downey & Bedard, 2019; Sunderland & Trompeter, 2017). The US regulator has suggested suboptimal communication might be the root cause for many MGA deficiencies (Downey & Bedard, 2019). Communication is an important factor within MGAs, as audit teams work remotely on their own proceedings (Downey & Bedard, 2019). Findings should be communicated with the group auditor, which is usually done in English (Ehrenreich, 2010; Sunderland & Trompeter, 2017). However, communicating in a non-native language can cause misinterpretations and misinformation (Connaughton & Shuffler, 2007). In the audit industry, this may lead to an inappropriate audit opinion and thus low audit quality (Pagano & Immordino, 2007). However, ISA 600 barely addresses language and makes no mention of the complications it may cause (IAASB, 2018). Under A33, it is mentioned that the procedures are affected by the degree to which there is “consistency or similarity of (..) language and culture” (IAASB, 2018, p. 602). Later, in A35, several methods are mentioned in order to obtain an understanding about this topic, such as written

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4 confirmations. In A40, the standard explains that “less than serious concerns” (IAASB, 2018, p. 604) – i.e. not being independency concerns – can be overcome by being more involved or performing additional procedures. If, in the evaluation process, the component auditor’s work is considered insufficient, additional procedures are to be performed by either the group auditor or the component auditor. So, the standard states that language barriers affect the audit procedures and prescribes how the consequent risks can be managed. However, the risk of language barriers is completely overshadowed by the standard’s emphasis on the risks caused by a possible lack of independence, professional competence, and regulations. This may cause auditors to insufficiently realise how language barriers can impact the audit and address these issues.

This study aims to research how auditors perceive the influence of language on MGAs. Through interviews with team members of MGAs, the ways in which language differences influence the group audit are explored, as well as the ways in which group auditors mitigate the consequent risks. The main research question of this paper is:

How are language barriers perceived to influence multinational group audits?

By focussing specifically on group audits, this study explores a relatively underresearched topic within audit literature. Several aspects that set group engagements apart from regular engagements, have been researched before, such as the costs and quality of MGAs (Carson et al., 2014); group audit risk (Graham et al., 2018); component materiality (Stewart & Kinney, 2013) and the effects of ISA 600 on audit quality (Carson et al., 2016). It is noteworthy that all of these papers are motivated by the concerns of low group audit quality. Some articles have focussed specifically on the problems of MGAs. Downey & Westermann (2019) have done qualitative research into the challenges that auditors experience during group audits. Similarly, Sunderland & Trompeter (2017) identified several potential challenges for MGAs, including language and cultural barriers. Lastly, Downey & Bedard (2019) have specifically focused on the communication challenges during MGAs, where language barriers were also found to be a challenge. Thus, language barriers have been mentioned many times as challenging, although literature has failed to show how this influences the audit, particularly MGAs.

The outcomes will contribute to existing literature on MGAs and the challenges they bring (e.g. Barrett et al., 2005; Carson et al., 2016; Detzen & Loehlein, 2018; Downey & Bedard, 2019; Sunderland & Trompeter, 2017). Furthermore, this article adds to academic knowledge on the effects of language barriers in international business (e.g Bamer-Rasmussen & Bjorkman, 2007; Fleischmann et al., 2017; Klitmøller et al., 2015; Klitmøller & Lauring, 2013; Lauring & Selmer, 2010; Luo & Shenkar, 2006). Although, as stated before, language barriers in MGAs have been considered as possibly challenging in many studies, the influence has – to my knowledge – not been empirically researched before. Working in multinational audit teams has shown to bring challenges (Connaughton & Shuffler, 2007), yet it remains unclear how this impacts the audit. Indeed, Detzen & Loehlein (2018) studied the role of

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5 language within Big Four-firms and conclude that future research should explore how language skills affect the audit. Downey & Westermann (2019) state that current literature offers little insights into why MGA quality is remarkably low. Downey & Bedard (2019) therefore call for a better understanding of how language barriers affect communication and, essentially, the audit. Similarly, Sunderland & Trompeter (2017) identify this as an essential future research subject and argue that a better understanding can help improve audit quality.

The results of this study show that auditors perceive language barriers to be troubling for communication. Therefore, group auditors should take more time to communicate with less proficient component auditors. If one fails to do so, language barriers could negatively influence the audit, as findings and misstatements could go undetected. For this reason, taking more time to communicate with component auditors is considered an appropriate method to mitigate language issues. However, as the group auditor should take his responsibilities serious and take more time to communicate with component auditors, this could result in time pressure, which is also perceived to be unfavourable for the audit. In short, language barriers are perceived to negatively influence multinational group audits, despite group auditors’ efforts. Furthermore, the study found that language barriers in the audit industry are perceived to be high, despite the importance of English language proficiency, indicating that universities do not incorporate English language skills sufficiently in their curricula. Language proficiency was perceived to be particularly low in Asia, Scandinavia, and Southern Europe. Lastly, the study found that choice of media can be an important factor in mitigating language barriers.

The outcomes of this research will help professionals, regulators, and legislators to better understand how language barriers influence the audit. This knowledge helps to identify the cause of several deficiencies in MGAs. Audit firms might use this information to enhance firm policies on communication, whereas regulators might find this information useful in providing auditors with better guidance. Furthermore, it will help standard-setters in assessing whether the current ISA 600-standard sufficiently addresses the risks of language barriers on group audits, and how these risks might be further mitigated in the future.

The remainder of the paper is organized as follows. Chapter 2 gives an overview of relevant theory and prior research on language barriers. Chapter 3 describes the research methodology used and its motivation. Chapter 4 provides the results from the interviews and the most significant findings. Chapter 5 presents the conclusion, limitations, and suggestions for further research.

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2. THEORETICAL FRAMEWORK

Language in international business

Political and economic developments in the last decades have led to more international business opportunities (Munteanu & Berechet, 2016). Consequently, firms have expanded their businesses to other countries (Everett, 2003). Furthermore, people from around the world have become more connected due to the rise of the internet (Perera et al., 2003; Wang & Haggerty, 2009). Where the world used to consist of countries, divided by borders, it is quickly evolving into one global unity (Stela, 2013). We call this process globalization (Alon & Dwyer, 2012). Throughout this process, English has grown out to be the lingua franca, i.e. the accepted common language for international communication (Charles, 2007; Ehrenreich, 2010; Hilton, 1992). Also in the audit industry, most documentation and communication is done in English, especially in Big Four-firms (Detzen & Loehlein, 2018; Ryan et al., 2012; Tenedero & Vizconde, 2015). Although the choice for English as lingua franca was not an explicit one, it is a natural choice: it is estimated that over 1.5 billion people around the world speak English, of which 80 per cent are a non-native speaker (Björkman, 2013; Hurn, 2009).

We define language proficiency as “one’s overall competence and ability to perform in a language” (Mojavezi, 2015, p. 32). Among non-native speakers, the differences in proficiency are very high (Ehrenreich, 2010). Common language proficiency refers to the extent to which parties are competent to communicate in one non-native language (Klitmøller et al., 2015). When this common proficiency is low, we speak of a language barrier (Tenzer & Pudelko, 2014). Language barriers have been shown to lead to misunderstandings, for instance through the loss of elements in translation (Bamer-Rasmussen & Bjorkman, 2007). Furthermore, communication can become more difficult due to errors or strong accents (Chen et al., 2006). However, the high proficiency of native speakers can also induce problems, in the sense that their use of English can be too complex for non-native speakers (Tenzer & Pudelko, 2014). The consequences of these misunderstandings can be ineffective communication, unmet expectations and ultimately dysfunction (Baba et al., 2004; Tenzer & Pudelko, 2014). Nonetheless, Lauring (2007) believes one should not only look at the direct effects of language barriers. Language barriers have an impact on both the individual and the group and can therefore also have an indirect detrimental effect on group outcomes (Lauring & Selmer, 2010).

Individuals experiencing a low language proficiency can be struck with feelings of insecurity, discomfort and anxiety (Bamer-Rasmussen & Bjorkman, 2007; Neeley et al., 2012; Tange & Lauring, 2009). The inability to understand the communication can make them feel restricted (Neeley et al., 2012). This can result in a reluctance to actively participate in communication and thus to share essential information (House, 2002; Tange & Lauring, 2009). Others can view low proficient team members as poor leaders and as having a lack of competence (SanAntonio, 1987; Tenzer & Pudelko, 2014). This can further reduce the confidence level of an individual (Tenzer & Pudelko, 2014).

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7 Secondly, language barriers impact the group process as they lead to social barriers (Vaara et al., 2003). Team members with a low common language proficiency experience more distrust and conflict (Bamer-Rasmussen & Bjorkman, 2007; Lauring & Selmer, 2010; Tenzer & Pudelko, 2014). This results in lower interpersonal attraction and group cohesiveness (Keesing, 1972; Lauring & Selmer, 2010). Group cohesiveness induces group effectiveness, and language barriers can therefore prevent effective group work (Jonsen et al., 2011; Kayworth & Leidner, 2001; Lauring & Selmer, 2010). If some team members have a higher proficiency than others, this impacts the power relationships within a team, awarding power to the more proficient (Charles, 2007; Takino, 2017). This can negatively influence performance levels (Charles, 2007).

The choice of media used for communication can help to reduce language barriers (Klitmøller et al., 2015). Face-to-face meetings are considered to be most effective for knowledge transfer, especially in multinational environments (Baba et al., 2004). In this way, one can incorporate body language in an explanation and at the same time ensure that there is an understanding of the discussion (Klitmøller & Lauring, 2013). However, in multinational engagements, face-to-face meetings consume too many resources (Wang & Haggerty, 2009). For this reason, much of the communication is done virtually (Zakaria et al., 2004). In the past decades, many forms of virtual communication have been developed, such as e-mail, phone calls and video calls (Kayworth & Leidner, 2001). Communication research shows that when individuals experience a low shared common proficiency, they may opt for written media (e.g. e-mail) instead of verbal media (e.g. phone calls) (Shachaf & Hara, 2007). Written media allow for re-reading before sending, thereby ensuring that the text is clear, complete and free of errors (DeRosa et al., 2004). Whilst transferring the semantics, these types of media do not transfer additional communication tools such as body language and tone of voice (Klitmøller & Lauring, 2013). In contrast, these are transferred when using richer media, such as phone calls of video calls. Klitmøller & Lauring (2013) have studied media richness and found that written media are especially useful when communicating about complex topics and subjects that can be interpreted in multiple ways.

Language in the audit industry

In the audit industry, English proficiency is crucial. Tenedero & Vizconde (2015) even found that English language skills are considered the most important assets of new auditors. However, research shows that universities do not incorporate English proficiency enough in their curriculum (Hodges & Burchell, 2003). Already in 1968, the poor English language skills of students were addressed (Mongan & Wolf, 1968). This also holds for the audit industry (Tenedero & Vizconde, 2015). There appears to be a mismatch between audit firms’ expectations regarding proficiency and university curricula (Gray & Murray, 2011). Accounting graduates’ incompetence does not only concern grammar and spelling, but also interview skills, technical writing and communication, which are essential for collecting audit evidence (Christensen & Rees, 2002; Gray, 2010; Tenedero & Vizconde, 2015). Proficiency problems in auditing seem to be most common for non-native English speakers (Gray & Murray, 2011). Despite

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8 a shortage of auditors, only 25 per cent of international accounting students managed to find a job in Australia, due to poor language skills (Ryan et al., 2012). These notions are problematic, as communication is considered the most important skill in auditing after technical skills (Christensen & Rees, 2002). Roy & MacNeill (1970) even go as far as to claim that those who do not have a sufficient English proficiency, should not be allowed to become an auditor, as clear communication is such an important aspect of the work.

Poor language skills can impact the audit. This is especially due to the subjective nature of audit work. An example of how low proficiency can impact the audit was identified by Doupnik & Richter (2004). They find that probability expressions, which are common in auditing, are influenced by country. Several auditing standards use terms as ‘probable’, ‘likely’ and ‘sufficient’. When translating this to a numerical probability, some countries will assign lower percentages to these expressions than others. This means that auditors from one country will conclude facts to be ‘probable’ or ‘sufficient’ at an earlier stage than auditors from others. This may be due to the fact that non-native auditors have difficulties interpreting different verbal probability expressions in English-written standards (Doupnik & Richter, 2003). Similar conclusions were reached by Bik (2010) regarding differences in interpretation of standards and instructions.

Emotional struggles as a result of language barriers can impact the audit too. Deficiencies in MGAs are found to be caused by insufficient communication, including “failure of component auditors to communicate significant issues” (Downey & Bedard, 2019, p. 126), which corroborates the findings by House (2002) that low proficient team members may be reluctant to actively participate in meetings. Furthermore, auditors are assessed to be better when they are not impacted by emotions and put firm needs before their own (Edgley et al., 2016). Therefore, auditors may not feel comfortable expressing negative feelings towards language barriers, as to not harm their professional career. Also, Downey & Westermann (2019) argue that group cohesiveness is naturally low due to the absence of social and face-to-face interaction, and that power relations in MGAs are already distorted due to the group auditors’ superior responsibilities. Both factors are stated to contribute to MGA challenges. Language barriers may further enhance these distortions.

Regarding the choice of media for communication, face-to-face communication is found to be most effective in creating a mutual understanding between audit teams (Downey & Bedard, 2019). Moreover, Brazel et al. (2004) find that face-to-face audit reviews are associated with higher quality than electronic reviews. However, time and resource constraints limit face-to-face communication in MGAs (Barrett et al., 2005). Downey & Bedard (2019) suggest synchronous methods (e.g. phone calls) to be the best method of virtual communication due to a more natural conversational flow, as they found a relation between challenging MGAs and asynchronous methods (e.g. e-mail). However, as previously stated,

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9 these asynchronous methods are considered more effective when language barriers arise. Therefore, language barriers may lead to a choice of media that is less effective for the MGA.

Following its multinational character, MGA engagements involve the cooperation of multiple teams from different countries, resulting in language differences (Sunderland & Trompeter, 2017). Most communication will take place in English, being the lingua franca in the audit industry (Tenedero & Vizconde, 2015). However, this is not the native tongue of most teams (Detzen & Loehlein, 2018). As the level of English proficiency is highly diverse, misunderstandings could arise, which can be detrimental for audit quality (Bamer-Rasmussen & Bjorkman, 2007; Pagano & Immordino, 2007). For example, Downey & Westermann (2019) showed that low language proficiency leads to misinterpretations of component auditors in the prescribed tasks and responsibilities. In addition, language differences have been found to have a negative impact on knowledge transfer (Luo & Shenkar, 2006). Furthermore, according to ISA 600, group auditors communicate the requirements to the component auditors, who in turn report back their findings (IAASB, 2018). Processes cannot be actually observed by the group auditor, making clear communication essential for MGAs (Brazel, Agoglia, & Hatfield, 2004; Downey & Bedard, 2019). Thus, language barriers in the audit industry are high, whilst effective communication – including common proficiency – is essential for performing a good MGA. Based on this information, it can be concluded that language barriers undoubtedly impact MGAs, but none have yet examined how. Given that regulators have addressed concerns about the communication during MGAs, it is essential to further explore this topic in order to be able to reduce the negative effects of language barriers.

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3. RESEARCH METHODOLOGY

Research setting

This study aims at Dutch Big Four-auditors. The Netherlands is a Western-European country with 17 million residents. Since the foundation of the Dutch East Indies Trade Company (VOC), the Netherlands have had a long history of international trade (van Hoesel & Narula, 2003). Today, the Netherlands is the second most globalized country in the world (Gygli et al., 2019). Furthermore, corporate tax regulations in the Netherlands are highly favourable, causing many parent companies to be established in the country (van Dijk et al., 2006). Although the Netherlands is a relatively small country, it is considered to be Europe’s most competitive economy, ranking fourth in the Global Competitiveness Index (World Economic Forum, 2019). Multinationals make up for 30 per cent of the country’s economy (Centraal Bureau voor de Statistiek, 2018). For these reasons, we can expect MGAs in the Netherlands to be of frequent occurrence.

Big Four-firms have a broad international network and are more regularly exposed to cross-national differences (Bik, 2010; Perera et al., 2003). Operating in 157 countries, they have a global network of employees providing a variety of financial services, with audit being their core business (Barrett et al., 2005; Detzen & Loehlein, 2018). This global network ensures consistency in group audits, as it allows to use local audit teams from within the network to conduct component audit procedures (Sunderland & Trompeter, 2017). As the Big Four dominate the audit market (Bik, 2010), it is expected that their auditors have considerable experience with MGAs.

Research design

To explore this rather underresearched topic, a qualitative research method was employed. The research and its research question are explorative in nature. In that setting, a qualitative research approach offers insights that cannot be captured in a quantitative matter (Walker, 2014). The chosen method creates a rich dataset that contributes to this study and future research (Glover et al., 2019).

The first part of the interview aimed at introducing the topic of group audits and more general questions regarding the topic, including choice of media, discussion topics and communication frequency. The second part of the interview focussed on language proficiency and language barriers. The interview script served as a guideline throughout the interviews and is therefore semi-structured in nature. The interview guide can be found in Appendix A.

For this study, 11 auditors based in the Netherlands were interviewed, who are all part of group engagements as a group auditor. Group auditors are responsible for coordinating the engagement and therefore have a great influence on the communication between teams. All participants are working for the same Big Four-firm. The participants had a minimum working experience of 5 years and an average experience of 9.6 years. Interviews were conducted until saturation occurred, i.e. no new insights were

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11 given (Houghton et al., 2013). In total, 11 interviews were conducted, in April and May 2020. The average length of the interview was 25 minutes. All interviews were conducted in English, as to eliminate potential translation errors affecting the dataset (Detzen & Loehlein, 2018).

Analysis

All interviews were recorded with the explicit permission of the interviewees. These recordings have been handled anonymously with the greatest care for privacy and confidentiality. Afterwards, the interviews were transcribed verbatim. The transcripts were checked for accuracy by an independent third person. Using the data analysis software Atlas.ti, the transcripts were coded, and thematic patterns were identified. The dataset was then organized into categories. In this way, the data was summarized and analysed to answer the research question.

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4. RESULTS

The first part of the interview introduced the topic of group audits. Multiple auditors addressed the developments of the audit industry in general and group audits specifically over the past years. These developments are partly driven by the extensions in ISA 600, and partly by local regulations and standards. In group audits, the group auditor has been awarded more responsibilities, resulting in a more intensive involvement throughout the whole year.

“You see that [..] the way you communicate with a component is much more structured throughout the year. In the past, [..] we tended to focus more on the outcome of the work of the component, waiting for the final reporting and the auditor’s report. Now, with ISA 600, we see that the communication takes place much more throughout the year, and not only at the finalization of the audit.“ [3]

“Especially in the last couple of years, you have seen that the audit in the Netherlands has substantially increased in quality. What you see now is that [..] some countries are staying behind, so to say. [..] For [those] countries, you need to be more explicit in what they need to do, you have to prescribe every procedure that they need to do.” [9]

These developments do not take effect at an equal pace, causing for a divergence in audit quality between different countries, as is also described by Avram et al. (2015). One participant pointed out that the overall audit quality in a country is also highly dependent on the role of the local regulator.

“[..] the audit quality is different. So for example, in the United States the audit quality standards are set very high by the PCAOB. So in general, the audit quality is very high over there. But if you talk about Belgium, they don't have an oversight board as we have in the Netherlands. So the quality is less high.” [6]

Group auditors can compensate for component auditors’ low audit quality and low regulation by providing them with more detailed instructions, so component auditors can exercise less discretion over procedures. After the instructions are sent, the group auditors regularly verify whether the prescribed procedures are performed correctly and timely through file reviews, as required by ISA 600 (IAASB, 2018).

“Well, in the end we need to perform a file review. Then we can verify whether they did the work that needs to be done in accordance with the instructions they received.” [6]

The second part of the interview revolved around the importance of English language skills. Similar to Tenedero & Vizconde (2015), all participants agreed that a sufficient proficiency of the English language is essential for the auditing profession, as most audit files are documented in English. Secondly, diversification within the office causes a more international environment where English is the

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13 main language. Thirdly, the communication with foreign parties such as component auditors is mostly done in English. For this reason, English language skills were considered especially important for group audits.

“[..] if there are big issues that need to be addressed in collaboration with the component team, then of course it's very important that their English is sufficient, to make that collaboration useful.” [10]

All participants estimated their own English proficiency to be sufficient to perform their work. When asked about the source of their English proficiency, many refer to both their education and professional experience with the English language. A pattern was noticed in the sense that the three participants who engaged in proficiency-enhancing activities (i.e. working/studying in native English countries) were most confident regarding their own proficiency, as opposed to those who did not have this experience. This may indicate that such activities are necessary in order to gain a proper proficiency in English. Nonetheless, most participants did not have experience with these activities. This implies that proficiency-enhancing activities may be facilitated by universities but are not a requirement within their curricula. Although previous studies have not emphasized the perceived need for extracurricular activities before, the insufficient incorporation of English language skills in education has been brought up by Roy & MacNeill (1970), Ryan et al. (2012), and Tenedero & Vizconde (2015).

Coordinating a group audit involves communication with foreign component auditors. Although English is the default language, this is generally not the native language. The English proficiency of component auditors varies to a great deal. Many of the interviewed auditors have experienced working with component auditors with a low English proficiency. A low English proficiency was mainly identified for teams in Scandinavia, Eastern Europe, and certain parts of Asia. Also, a low proficiency was attributed to senior team members.

“Older people tend to be less comfortable with the language. [..] Especially when you have the older auditors, they are really not good in English.” [9]

Junior members may have had more training in English language skills than senior members, as the inclusion of English language skills within university curricula has been gradually developing in accordance with ongoing globalization and the rise of English as lingua franca. The fact that more senior team members are experienced to have the lowest proficiency is striking, as it was pointed out that most of the communication is the responsibility of those same senior team members.

“Usually, our communication is with the more senior members of the team. So that's usually with the engagement manager and sometimes the partner. So it's on a higher level. So it's multiple persons usually, but the more senior team members.” [5]

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14 If the English proficiency of component auditors is perceived to be very low, group auditors might make use of interpreters, although this can be costly. Furthermore, auditors may opt for less verbal communication when a language barrier is identified – in line with the findings of Klitmøller et al. (2015) and Klitmøller & Lauring (2013) – considering written communication to be easier to comprehend.

“You mostly switch to communication in writing, because that is a lot more effective in those cases. So that's always an alternative. Because you have to be careful that as a group auditor, you have sufficient and appropriate understanding of the considerations made by the component auditor. So you have to look for an alternative if verbal communication is more difficult.” [8]

A pattern that was noticed during the interviews is that the more junior participants generally preferred e-mailing over calling. Despite their proficiency being higher than senior team members, they may feel more uncomfortable communicating in a second language, as described by Klitmøller et al. (2015).

“You notice that the more senior members prefer to give a call to get things done. More junior members prefer to write an e-mail and not have direct communication.” [7]

Remarkably, group auditors rarely address the low proficiency of component auditors to them. This may be due to the fact that the senior, low proficient, auditors are nonetheless confident about their proficiency. Some participants pointed out that addressing the low proficiency thus created feelings of discomfort.

“We don’t [address it]. It’s also a bit personal, I think. Maybe they think that they are good in English [..].”[2]

“We don't. No, we don't. As I said, I think they get by. They can communicate in English, it's just a little bit more difficult sometimes. I don't tell them that their English is not as great as ours, for example. So no, we don't discuss those things.” [5]

Therefore, in an attempt to act decently, component auditors will not be made aware of the impact their proficiency has on the audit, thereby not being encouraged to enhance it. This creates a vicious circle where language problems are not properly addressed – or even ignored – so that communication remains faulty and time-consuming. This illustrates the theory set forward by Lauring & Selmer (2010), who describe how low language proficiency can have detrimental effects on communication. According to Downey & Bedard (2019), audit quality is dependent on effective communication. Not addressing faulty and inefficient communication can therefore be considered as a choice to not improve MGA quality. The opinions were divided over whether the frequency of communication to discuss critical matters was impacted by the perceived proficiency of component auditors. Some participants were of the opinion that critical matters are to be discussed regardless of proficiency levels, – thus frequency would not be

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15 impacted by proficiency – whilst others mentioned that a lower proficiency would increase the amount of contact moments as to verify all procedures were performed correctly.

“I don't think it matters. Because you just need to do certain kind of things. It might be that you are looking to see if there is another way of communication, like not in English but in a different language. Using Google Translate. That kind of stuff. But you just need to contact them, so I don't think it matters.” [9]

“I wouldn't say so. I think maybe you communicate even more. When you talk to Australia, they immediately understand what you're talking about. When I have an issue going on in Poland, for example, you maybe have to call twice because you still don't understand it. So I think it's even more.” [2]

Some consider language barriers to influence audit quality. A higher proficiency leads to more in-depth discussions, where more details are discussed, whereas a lower proficiency creates the risk of missing essential audit information. These perceptions are in accordance with the earlier findings of Tange & Lauring (2009).

“Component auditors could be reluctant to highlight findings from their files [when they have a low proficiency], so they only respond very narrowly on things you ask, [..] rather than having a really proactive conversation and proactive showing of findings or views they might have during the audit. [..] I can imagine that that could result in missing out on things that are relevant for the audit.” [4]

“I think it's hard to say. I always try to ensure that some type of quality is within the audit. But I think the quality overall, it's not as good as we'd hope it would be. Because some components do not follow what we're saying. They are afraid to admit that, I think. Because they say they understand it, they confirm that they will do it and have done it. But when you trigger some other questions, you notice that they did not do it. I think it's primarily because they did not completely understand it. So the quality could become less.” [7]

However, the majority of the participants did not agree that language barriers could influence audit quality. These findings are in line with Downey & Westermann (2019), who found that auditors generally underestimate the dangers of language barriers and consequent misinterpretations, similar to how academics have underestimated it for decades (Tenzer & Pudelko, 2014).

“[When the proficiency of component auditors is low] I think you would need to do a more extensive file review. [..] It should not [impact the audit], because if that happens, then you should do more work yourself.” [1]

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16 “I don't think that it does. In the end, the message comes across. So for the audit as a whole and the audit opinion, it does not do much. For the efficiency of the audit, that's of course a different story. So for efficiency purposes it's not great, but it's not that the audit quality drops.” [5]

Those who agreed that language barriers could impact audit quality, all expressed this in a hypothetical manner. None admitted to having first-hand experience with low audit quality, due to language barriers or otherwise. It is important to point out that auditors might be reluctant to discuss these issues openly, given the poor reputation of the audit industry and the scrutiny from regulators and governments, as has been previously addressed by Barrett et al. (2005). This assumption was further substantiated by the fact that more senior members, who may be more confident about their position, were more open to discuss potential problems. Most participants did agree on the fact that a low proficiency leads to a less efficient, and thus more costly audit.

“If you [..] discuss a topic in 5 minutes with a component who speaks fluent English, [it] may sometimes take 15 minutes with a component who does not understand English that well. Often, those 15 minutes are not sufficient. That’s why I have to spend an e-mail afterwards. Looking at that, that strongly increases the time I need for communicating some topics with them. If [the level of] English decreases, that increases the communication to get where I need to be. [7]

In contrast, collaborating with native speakers is considered more efficiently, deviant from the findings of Charles (2007). Not only is the process of instructing and discussing less time-consuming, the auditors also feel a greater confidence that the component auditors understand what is expected of them and deliver according to the prescribed standards.

“It’s better, I would say. There’s no uncertainty or unclarity in terms of what they mean with certain communications.” [3]

In general, group auditors are aware of their responsibilities as formulated in ISA 600, and see themselves as a safeguard to protect audit quality. This means that when a language barrier is identified, it is their duty to compensate for it by performing more work.

“In the end, as a group auditor you are responsible for the quality of the overall group audit. So in case you identify that a component in Asia does not understand your instructions, and did not perform the workings as you required, you may want to put more emphasis on those entities, by performance of a more extensive file review. If you look into their audit files more carefully than the other components', in the end it does not affect the overall quality, but you will have to take measures as a group auditor to correct for it.” [8]

Participants therefore considered extra proceedings to reduce the impact of language barriers and its influence on audit quality. However, it is possible that a less efficient audit is also of lower quality. Many engagements are subject to strict deadlines. In addition, busy season is characterized by long

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17 working days and high degrees of stress. It is not unthinkable that under these circumstances, audit teams do not always take enough time to compensate for substandard component auditor work, and thus safeguard audit quality. Previous research has indeed shown that time pressure has a negative effect on audit quality (Lambert et al., 2017). When asked about time pressure, one auditor replied:

“Well, [time pressure] doesn’t help, of course. When you are in a hurry, you can miss things, or look over things, or even forget some things. But it depends on the situation how bad that is for the audit. But it never makes it better, no..” [11]

This indicates that, when language barriers lead to a less efficient and more time-consuming audit, it might have a negative impact on the audit. Group auditors that take the time to safeguard audit quality when experiencing language barriers, might harm the audit due to time constraints. This may result in a quicker, less accurate analysis of other audit evidence.

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5. CONCLUSION

Discussion

Building on PCAOB concerns with group audits (Downey & Bedard, 2019), this study aimed to identify how language barriers impact multinational group audits (MGAs). Academics and regulators have addressed the low English proficiency of accounting graduates and auditing professionals (Christensen & Rees, 2002; Roy & MacNeill, 1970; Ryan et al., 2012; Tenedero & Vizconde, 2015). However, up to this point, few studies have been done into how this impacts audits (e.g. Bik, 2010; Doupnik & Richter, 2004), and none focused on group audits in particular. This study finds that low proficiency amongst auditors is a common issue, resulting in language barriers when communicating with foreign audit teams. Communication with foreign audit teams is especially prevalent in MGAs (Downey & Bedard, 2019). Despite the global increase in MGAs, due to globalization, the topic has barely been studied. Therefore, several authors have suggested MGAs and language barriers as important future research topics (Downey & Bedard, 2019; Hanes, 2013; Sunderland & Trompeter, 2017).

Overall, the outcomes of the interviews show that language barriers are perceived to negatively influence MGAs. If language barriers are present, group auditors that do not fully take their responsibility in safeguarding audit quality might miss essential information which consequently leads to a lower audit quality. Hence, auditors will aim to safeguard audit quality by taking more time to reach a mutual understanding with component auditors. This may result in time pressure that leads to a less accurate audit, which can also decrease audit quality. This indicates that language barriers could negatively influence MGAs despite the group auditor’s efforts to reduce this effect.

Furthermore, the results indicated that the choice of media can play an important role in mitigating the risks caused by language barriers. In line with Klitmøller et al. (2015) and Klitmøller & Lauring (2013), this study displays how written media minimize language barriers when communicating complex information. If language barriers are perceived to be high, auditors will shift to more written media as opposed to verbal media, allowing for a more careful and correct translation and interpretation. This method is preferred over the more drastic and expensive measure of bringing an interpreter on board. These findings complement those of Downey & Bedard (2019), who found that verbal media are especially effective in the audit for coordination purposes. This provides further evidence that language barriers can be detrimental for the audit.

The study showed that in certain countries, English proficiency is perceived to be very low. Surprisingly, the results show that these problems are rarely addressed due to decorum. In combination with the prominence of English communication in the audit industry, as also indicated by Tenedero & Vizconde (2015), this calls for appropriate measures in both audit firm policies and university curricula. In light of ongoing globalization, the role of the English language is assumed to increase even further, making

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19 English language proficiency an essential asset for auditors of the future. Proficient auditors can therefore be a strategic advantage for audit firms, who operate in a highly competitive market (Hilton, 1992; Ulijn et al., 2000).

Although some findings were consistent with prior research into language barriers, other findings were not anticipated based on international business research and particularly applicable to the audit industry. Specifically, aspects regarding auditors’ exposure to litigation and the high degree of regulatory oversight increase the weight of output quality and make the audit a unique research setting for studying language barriers. For instance, the role of time pressure combined with language barriers was not found in prior research, indicating that the audit industry is faced with distinct industry-related challenges.

Contributions and implications

Prior research has identified the need to further explore the effects of language barriers on the audit. This study aimed to follow the research directions as suggested by Detzen & Loehlein (2018), Downey & Bedard (2019) and Sunderland & Trompeter (2017), thereby commencing a new line of research within auditing literature. This research shows that many aspects of MGAs are yet to be explored – and should be, given their position in the audit industry. However, the contribution is not just limited to the field of auditing, as it provides additional insights to the position of language barriers between teams in general. It provides supplementary evidence of how language barriers can be detrimental for group effectiveness, as has been previously stated by Jonsen et al. (2011). Furthermore, the outcomes of this study show that the conclusions found by Tange & Lauring (2009) regarding the reluctancy to share information by low proficient employees within teams, remain valid in a between-teams setting. Lastly, this study extends on the works done by Downey & Bedard (2019), Klitmøller et al. (2015) and Klitmøller & Lauring (2013), in exhibiting how choice of media play a role in a multinational environment.

Although this study focussed on Dutch auditors, its findings are relevant for all auditing professionals. Previous studies in the area identified that low language proficiency and language barriers are a global issue in the auditing industry (Detzen & Loehlein, 2018; Downey & Bedard, 2019; Sunderland & Trompeter, 2017; Tenedero & Vizconde, 2015). Also, inspections generally show poor results for MGAs, over which several regulators have expressed their concerns (Downey & Westermann, 2019). Thus, the issues raised in this paper can be considered as universal in the audit industry. The results of this study extend the understanding of language barriers and the risks they bring for the audit. Professionals may use this information to focus more on mitigating these risks and increase their audit quality.

The findings are also relevant for regulators, who have been critical on MGA quality (Downey & Westermann, 2019). The results from this study show that language barriers are perceived to contribute to MGA challenges. This notion aids regulators in gaining a better understanding of the communication

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20 processes that have an impact on audit quality. This can help them to not just address communication issues, but also provide auditors with relevant tools to reduce these issues. Given the powerful legal position of regulators, whose authority in the audit industry has substantially intensified following several great scandals (Pagano & Immordino, 2007), they will have a significant role in increasing MGA quality.

Standard setters can use the results to improve audit standards. Most notably, the findings indicate that the role of language should be given a more prominent and extensive role in the ISA 600 standard. Rather than mentioning its existence, the standard should illustrate the importance of language proficiency and the risks of language barriers for the audit. This emits a signal to professionals to better address these issues during the audit and be more demanding regarding the language proficiency of component auditors. Furthermore, standard setters should take account of these results in drafting the learning outcomes of auditing-related education. The interviews have shown that the English proficiency of some auditors is not at a sufficient level. Given the expanding role of the English language in the auditing industry, it is important that a proper understanding of English is encouraged, if not demanded, globally. This can be done through a better incorporation of the English language in university curricula.

Limitations

Of course, this study is not without its limitations. The sample of the research was selected on availability and willingness to cooperate. This may have impacted the data. A new study on this topic may opt for a randomly selected sample in order to verify the validity of the reached conclusions. Also, the extent to which these results can be generalized needs further exploration. A larger sample from multiple audit firms, moreover, would increase the generalisability of this research. Furthermore, the participants in this study may not have fully disclosed all issues known to them, as not to impair firm reputation, and therefore may have answered in a politically correct manner. Although this was minimized by emphasizing full anonymity, it is possible that this affected the data. Further research on this topic could therefore include a case study of a group audit, to better see how auditors cope with language barriers throughout the audit. This can reduce the extent to which correctness influences the data, as may have been the case in this study.

Future research

Now that the perceived influence of language barriers on MGAs has been shown, it is important to follow up by empirically testing how substantial this problem is. Future directions may therefore be the language proficiency of both group and component auditors; the overall audit quality of MGAs; the effectiveness of media in reducing language barriers for MGAs; and the effectiveness of audit firm language policies. This would include more comprehensive definitions of the required level of language proficiency; the extent of language barriers; and MGA quality. This can ultimately result in a large-scale, quantitative test of the effect of language barriers on MGAs.

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APPENDIX A: INTERVIEW GUIDELINE

1. Please tell me something about yourself and your background a. Please explain your function and role in the firm 2. What are your experiences as part of a group audit team? 3. How do you communicate with component auditors?

a. Mail/phone/Skype/face-to-face etc.? b. Structurally/on occasion?

c. Formal/informal? d. Individual/in teams?

4. What topics do you discuss with component auditors?

5. How does communication differ for different component auditors? a. How is communication influenced by...

i. Materiality?

ii. Auditor competence? iii. Findings?

iv. Country?

6. How important are English language skills for your profession and why? 7. How would you estimate your own English proficiency?

a. How have you obtained this English proficiency?

8. How would you generally describe the English proficiency of component auditor’s teams? a. What differences in English proficiency do you experience between different countries?

i. Can you provide examples?

9. Would you communicate less/more with a component auditor if their English proficiency were substantially lower/higher than yours?

10. How do you collaborate with component auditors with a substantially lower English proficiency than yours?

a. Can you describe this experience? b. How did this impact the communication? c. How did this impact your proceedings? d. How did this impact the outcomes of the audit?

e. How have you discussed these topics with the teams in question?

11. How do you collaborate with component auditors with a substantially higher English proficiency than yours?

a. Can you describe this experience? b. How did this impact the communication? c. How did this impact your proceedings?

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27 d. How did this impact the outcomes of the audit?