Tuesday, February 28, 2012

PCAOB and IAASB Members Disagree at DC Bar Event on Benefits of Int'l Auditing Standards to US Investors

A panel that included SEC and PCAOB officials, as well as an IAASB Member, examined issues surrounding the adoption of international accounting and auditing standards at a recent DC Bar event. Jeff Mahoney, General Counsel, Council of Institutional Investors, moderated the panel discussion. He began by stating that the CII generally supports single sets of high quality global accounting and auditing standards, but does not support replacing US accounting and auditing standards until there are assurances that international accounting and auditing standards and standard setters would be comparable.

PCAOB Member Dan Goelzer noted the Sarbanes-Oxley Act authorized the Board to set auditing standards for public companies. While Sarbanes-Oxley gave the Board to ability to delegate that authority to a private body, he continued, a fundamental and bedrock principle of the Board is that the Board itself would set the auditing standards. The SEC must approve the standards. The PCAOB is accountable to the SEC and, through the SEC, ultimately accountable to investors.

The PCAOB interacts with the IAASB, said Member Goelzer, and seeks to avoid needless inconsistency between IAASB standards and PCAOB standards. But there are times when PCAOB standards and international auditing standards adopted by the IAASB need to be different.

PCAOB staff meets regularly with IAASB staff to discuss standard setting agendas. When adopting standards, the PCAOB staff examines international auditing standards and the Board publishes an appendix in the adopting release comparing the PCAOB standards with IAASB standards.

Member Goelzer said that for the foreseeable future US investors would not benefit from a single set of international auditing standards. While acknowledging that conceptually it would be beneficial if audit meant the same thing cross-border, he noted that the US has a much different legal and securities regulatory system with a higher rate of retail investor participation in the capital markets than other jurisdictions, along with a sophisticated investors protection regime that is supported by PCAOB auditing standards.

Global standards would not necessarily be focused on US securities and regulatory regimes. He noted that international auditing standards are divided into requirements and application material, including non-mandatory guidance. The PCAOB does not draft its standards in that way, he noted, adding that Board standards are drafted in light of internal controls and an integrated audit. In addition, PCAOB audits must be performed with due professional care, said the Member, while international auditing standards do not have a comparable standard of due professional care. Moreover, auditor interaction with audit committees is a key component of the US regime, but is not as important in some jurisdictions using international auditing standards.

Not surprisingly, IAASB Member John ``Arch’’ Archambault said that the adoption of international auditing standards would benefit US investors, adding that the globalization of capital markets means global auditing standards. Investors rely on audited financial information, he noted, and need relevant and comparable information to measure performance. The need for consistent and comparable standards dictates the need for international auditing standards. The quality and rigor of the audit of financial statements should be the same no matter where the audit is conducted.

Mr. Archambault, who is also a member of the PCAOB’s Standing Advisory Group, said that the IAASB is an independent standard setting body that serves the public interest and facilitates the global convergence of auditing standards. It has 18 members and a full time Chair. Each member must annually sign a document that they will act in the public interest. The IAASB standard setting process involves extensive consultation efforts. The Board’s Consultative Advisory Group has a key role in setting auditing standards, providing significant input. The CAG is composed of, among others, the European Commission, IOSCO, and the Basel Committee. The PCAOB is an observer at CAG meetings.

The IAASB’s oversight body, the Public Interest Oversight Board, provides independent oversight of the IAASB to ensure transparency and accountability. The IAASB engages in a rigorous standard setting process, said the Member, with significant input from the CAG. The PIOB reviews the entire process to ensure that due process was followed.

It takes a 2/3 vote of the IAASB to adopt a standard. The IAASB has high credibility with both investors and regulators, he noted, and works closely with the PCAOB.

With regard to the adoption of global accounting standards, Teresa Polley, President and CEO of the Financial Accounting Foundation, FASB’s oversight body, said that the Foundation has had a longstanding joint relationship with the IASB’s oversight body. The end goal of both the FASB and IASB is comparable financial information for investors to facilitate the capital markets and ensure investor protection. She mentioned that some main areas to still be dealt with are revenue recognition, financial instruments, and lease accounting.

Ms. Polley referenced a letter that the Foundation sent to the SEC last year that set forth the appropriate criteria for the good faith evaluation of international standards and the IASB’s standard-setting process in determining whether to incorporate an international standard into U.S. GAAP. The criteria include investor primacy, independent standard setting, a robust and participatory due process, and the clarity and adequacy of guidance. In addition, critical to evaluating whether to issue a new standard is determining that the expected benefit of effecting the proposed changes are cost beneficial and will enhance the body of standards already in place.

SEC Chief Accountant James Kroeker said that the SEC staff is developing a draft proposal for the SEC on US adoption of IFRS. While the staff found strong support for uniformity of accounting standards, the staff also found concern that US interests must be protected. More specifically, the US should have a strong voice in the process of adopting global standards. The Chief Accountant mentioned that the Financial Accounting Foundation and others have raised concerns around the US having a voice up front. The SEC official also said that any framework must deal with existing differences in IFRS and US GAAP, some of which are ingrained, like LIFO accounting. US GAAP allows LIFO accounting, primarily due to US tax code considerations, but the IASB does not.

The Chief Accountant also noted that the IASB and FASB share common objectives of what financial reporting should be about. He added that most jurisdictions adopting IFRS are doing so through an endorsement process. With regard to IASB funding, he observed that the IASB has no ability to levy fees or taxes for its funding. The IASB makes allocations based on the economies largely involved in IFRS and suggests a contribution based on the allocation, but with no enforcement capability. He noted that of the more than 100 countries using IFRS, 30 provide funding to the IASB.