By James Hamilton, J.D., LL.M.
The SEC’s elimination of the need for foreign private issuers to reconcile financial statements prepared under IFRS to US GAAP has raised some questions about one of the PCAOB’s interim quality control standards, known as Appendix K, according to Chief Auditor Tom Ray.
Appendix K seeks to enhance the quality of SEC filings by SEC registrants whose financial statements are audited by foreign associated firms. It does this by setting out procedures to be performed by persons knowledgeable in U.S. accounting, auditing, and independence requirements on certain SEC filings, the filing review, and annually in connection with internal inspection programs.
With respect to an SEC filing that includes financial statements prepared in accordance with IFRS, and for which the U.S. GAAP reconciliation is not required, noted the Chief Auditor, there are several provisions of Appendix K that are affected.
Among other things, the filing reviewer is directed to discuss with the partner-in-charge of the engagement the engagement team’s understanding of U.S. accounting and financial reporting standards and the significant differences between the accounting and financial reporting standards used in the filing and those applicable in the U.S. These provisions, noted Mr. Ray, which are specific to U.S. GAAP, are not applicable to a filing that contains no U.S. GAAP or U.S. GAAP reconciliation.
Other filing review procedures address reading the document to be filed with the SEC, discussing with the partner-in-charge of the engagement the team's understanding of applicable U.S. auditing and independence standards, and significant differences between these applicable U.S. standards and the auditing and independence standards of the foreign associated firm's domicile country; and discussing with the partner-in-charge of the engagement significant auditing, accounting, financial reporting, and independence matters that come to the attention of the filing reviewer when performing the filing review procedures. According to the Chief Auditor, these filing review procedures remain applicable even after the termination of the need to reconcile IFRS-driven financial statements to US GAAP. Similarly, the documentation and resolution of differences provisions of Appendix K remain applicable.
Finally, the Chief Auditor related that the PCAOB staff is evaluating whether changes should be made to Appendix K, including whether it should be replaced with something else or eliminated. More broadly, the Board is also looking at other possible changes to its standards and rules that may be necessary to clarify how PCAOB standards apply when financial statements are prepared according to IFRS.