The Madoff fraud revealed that the Public Company Accounting Oversight Board lacked the power it needed to examine the auditors of non-public broker-dealers. House and Senate draft legislation would close this loophole and bring the auditors of non-public broker-dealers under the PCAOB oversight regime. The legislation would thus provide the Board with authority over the auditors of all brokers-dealers, not just the auditors of public broker-dealers, who would have 180 days to register with the PCAOB.
Additionally, like public companies, brokers-dealers would pay an accounting support fee in proportion to the broker-dealer’s net capital compared to the total net capital of all brokers and dealers that are not issuers. The Board would have investigatory, examination and enforcement authority over the auditors of all broker-dealers The PCAOB would also be authorized to refer investigations to FINRA or other defined self-regulatory organizations and share with them all information and documents received in connection with an investigation or inspection without breaching its confidential status.
Both drafts would also authorize the PCAOB to share information under a confidential regime with foreign regulatory authorities engaged in the investigation and prosecution of violations of applicable accounting and auditing laws without waiving any privileges the SEC may have with respect to such information. Both drafts define a foreign auditor oversight authority as any entity empowered by a foreign government to conduct inspections of public accounting firms or otherwise to administer or enforce laws related to the regulation of public accounting firms.
Both House and Senate draft legislation give the Board discretion to share information with foreign oversight authorities under an investor protection standard so long as they provide assurances of confidentiality to the Board. However, the Senate draft would also require the foreign authorities to describe their information systems and controls, as well as describe the laws and regulations of the foreign government that are relevant to information access.
The House draft, but not the Senate, would enhance the ability of the PCAOB to access the audit work of foreign public accounting firms when they perform audit work, conduct interim reviews, or perform other material services upon which a registered public accounting firm relies in the conduct of an audit or interim review. This statutory change is designed to resolve international conflicts that have impaired the PCAOB’s ability to fulfill its statutory obligation to inspect non-U.S. registered public accounting firms.
The Garrett Amendment to the House legislation would change the name of the PCAOB to Auditor Oversight Board. In addition, the Jenkins-Garrett Amendment would create an ombudsman within the Auditor Oversight Board to act as a liaison between the Board and registered accounting firms and issuers with regard to the issuance of audit reports. The ombudsman would also deal with any problem that registered firms or issuers may have in dealing with the Board resulting from the Board’s regulatory activities, particularly with respect to internal control over financial reporting and audit attestation under Section 404 of Sarbanes-Oxley. There are no comparable provisions in the Senate draft.
The Putnam Amendment to the House draft provides that nothing in the Sarbanes-Oxley Act provisions creating the PCAOB affects the Board’s obligations, if any, to provide access to records under the Right to Financial Privacy Act. The amendment also provides that nothing in those Sarbanes-Oxley provisions authorizes the Board to withhold information from Congress or prevents the Board from complying with a federal court order in an action commenced by the US or the Board. There is no comparable Senate provision.
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