Auditing

Global Audit Oversight: A Matter of Trust

The PCAOB wrestles with the notion of outsourcing inspections to foreign counterparts.
Alan RappeportJune 26, 2008

Globalization may be making its way to the world of auditing and, as with the convergence of accounting standards, frayed nerves can be found everywhere. A panel of regulators, accounting firms, and investors convened Wednesday for a debate that at times grew testy over whether audit inspectors around the globe can, or should, rely on one another.

The Public Company Accounting Oversight Board organized a roundtable to focus on a proposed new policy to entrust its international counterparts to carry out inspections of non-American accounting firms that audit U.S. public companies. The proposed policy statement would give the PCAOB room to give a foreign regulator “full reliance,” meaning that regulator would be entrusted to do field work and inspections on its own, and provide the PCAOB with a report for each firm it inspects.

This would build on rules the PCAOB established three years ago to oversee public accounting firms based outside the United States. But the proposal, which could be voted upon sometime this year, comes with reservations from those who think it conflicts with the intent of Sarbanes-Oxley, cedes too much control to foreigners, or gives the PCAOB too much leverage over its international counterparts.

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“Oversight is still very much a national issue,” said Wienand Schruff, chair of KPMG International’s global regulatory group. “We would recommend that global regulatory convergence is the logical consequence” of globalization.

But the speed and substance of this convergence remain in question. As of now, the PCAOB conducts joint inspections with auditor regulators in some countries and its own inspections where there is no local oversight. Some see joint inspections as a compromise solution that allows foreign inspectors to learn U.S. standards, while critics contend it is not efficient to have multiple inspectors doing the same work.

“If you are going to have full reliance, then you should have full reliance and not some kind of halfway house with joint inspections,” said Paul George, director of the United Kingdom’s Professional Oversight Board.

Junichi Maruyama, of Japan’s Financial Services Agency, argued that joint inspections and full reliance are heavily tilted to an American perspective, and that the PCAOB should consider that other countries might want to inspect its work. Japan’s approach, he said, is more multilateral.

“You say full reliance, but you never say mutual reliance,” Maruyama said.

The sharp tone of the discussion struck Damon Silvers, an associate general counsel at the AFL-CIO trade union. He observed that everyone has a card to play in a game of “mutually assured destruction” and suggested that the PCAOB should be careful as it considers a policy that could reshape how the board, which was created out of Sarbox, fundamentally operates. However, he noted, there are gains to be made from audit regulators cooperating.

A central argument in the roundtable was whether foreign audit inspectors could quickly learn the complexity of U.S. laws and inspection standards to perform a reliable audit. Joint inspections are one way to assist in this, but some fear that a loose understanding could result in multiple audit outcomes.

“How would firms react to findings of one regulator that didn’t match with another?” asked Jeff Willemain, global managing partner of risk and regulation at Deloitte. “It’s important to consider a full reliance approach that would deal with these inconsistencies.”

Barbara Roper, director of investor protection at the Consumer Federation of America, was also skeptical that the outcomes of audits performed in different countries would be consistent. Calling the PCAOB a “toddler that is learning to walk,” she warned that regulators should proceed cautiously.

“If other bodies cannot develop an expertise in U.S. regulations, we can not ensure compliance with those standards,” Roper said. “Other countries are not going to develop the same expertise in U.S. standards and U.S. law.”

Still, everyone agreed that some action needs to be taken. Pierre Delsaux, director of Internal Markets and Services for the European Commission, said that without a consistent international approach to auditing, issuers would de-list in markets where they were held to higher standards and go to less-restrictive ones. Transparency and independence are fundamental principles that auditors everywhere should be able to work with.

“If globalization is a fact, no single organization can resolve all the problems alone,” Delsaux said.

The PCAOB is currently deliberating if and when it will hold a vote on the full reliance proposal, Colleen Brennan, a board spokeswoman, told CFO.com.

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