Traditional notions of auditing often don’t work in developing countries, says Javed Siddiqui.
International auditing and governance practices, generally conceived in the context of Western countries, are often not suitable for developing countries due to the distinct characteristics of their business environment.
For instance, family owners of large listed companies often have very strong political relationships with governments which leads to a culture where governance mechanisms such as auditing are generally viewed as an unnecessary deterrent.
This has resulted in the creation of a vicious cycle for audit. The corporate sector is not willing to pay for quality audit work as the market is not sufficiently sophisticated to value a good audit. And the poorly paid auditors cannot afford to perform a fair job, affecting the quality of audit.
Policymakers in developing nations are also often keen to comply with requirements set by International Development Agencies (IDAs) which historically have a strong influence over governments in these countries. This sometimes results in the ritualistic adoption of international auditing and corporate governance standards in many countries with limited efficacy.
In short, traditional notions of auditing don’t seem to work in developing countries. So the question therefore is what kind of audit would be more suitable?
The answer may partly be found in the inspection regime that was set up in Bangladesh following the Rana Plaza disaster of 2013 when more than 1,100 people died after a building comprising garment factories collapsed.
Following the disaster, as pressure mounted on global brands that used Bangladesh as a cheap outsourcing location, a new private governance regime was introduced.
The ‘Alliance’ and ‘Accord’ initiatives established an inspection regime focusing mainly on building and fire safety, in line with Bangladesh labour law. Factories failing inspections were given specific time to improve, otherwise they wouldn’t be allowed to export.
The result has been striking. As of 2020 some 93% of the ready-made garment factories in Bangladesh are now certified as safe.
Admittedly there are still concerns about the narrowness of the scope of such audits, and especially about their failure to include important issues such as worker voice. Nevertheless, the post-Rana plaza inspection regime has definitely made an impact in terms of building and fire safety.
The case demonstrates that audits can work in the context of developing countries, especially when the scope and standards dictating such audits are home-grown, rather than externally imposed.
Boundaries of audit
This also raises questions regarding the boundaries of audit. Whereas financial audit of factories involved in the Rana Plaza incident were largely irrelevant, the building and fire safety audits did manage to make a significant impact.
The lessons learnt here are important given the narrative one increasingly hears about accountants and auditors helping to ‘save the world’, a narrative largely based on the role the profession can play in terms of implementing economic, social and governance (ESG) issues which are currently outside the purview of traditional financial audits.
This also chimes with the recent independent review into the quality and effectiveness of the UK audit market led by Sir Donald Brydon which called for conceptually redefining the purpose of audit and a need to make auditing more holistic.
Looking ahead, as economies in many developing countries become stronger the role of IDAs are likely to diminish gradually. This should give regulators in developing countries the opportunity to take a step back and think innovatively about developing auditing and corporate governance regulations that are more suitable for their economies. And that taking a more holistic view of the social role of audit might just be the way forward.