By James Hamilton, J.D., LL.M.
Against the backdrop of a global seminar on the cross-border regulation of audit firms, PCAOB Chair Mark Olson and European Commissioner for the Internal Market Charlie McCreevy outlined a cooperative approach to audit oversight based on the equivalence of third-country oversight systems. Chairman Olson went on to detail upcoming proposed PCAOB staff guidance on the circumstances that will allow the Board to place full reliance on audit firm inspections conducted by non-US oversight authorities. Generally, full reliance envisions an independently staffed and funded transparent audit regulator with a history of proper enforcement and appropriate sanctions.
The Statutory Audit Directive allows the European Commission to recognize the equivalence of third-country auditor oversight systems. As a result, the inspections of audit firms carried out by their home oversight bodies can be recognized as being equivalent to EC inspections. Home country oversight by the PCAOB will thus replace the oversight by a European body. As a practical matter, noted Comm. McCreevy, this will mean that both sides will have to rely on each others' inspections of audit firms. What must be avoided, he emphasized, is the costly exercise of sending European inspectors to the US or US inspectors to Europe.
While acknowledging that joint inspections may be inevitable in some cases, the commissioner said that the ultimate goal is to establish a system based on mutual trust and mutual reliance which avoids unnecessary duplication and the extraterritorial application of national audit standards.
For his part, Chairman Olson said that the Board would proceed to implement the collaborative framework by proposing guidance to its Rule 4012, which generally outlines the criteria that the Board considers when determining how to work with another regulator. The rule provides a sliding scale, so that the more independent and rigorous an oversight system, the more the PCAOB may rely on that system. The PCAOB’s requirements in this area are similar to those provided in the European Union’s Audit Directive.
The key concept of the guidance is the Board placing full reliance on the inspection programs of non-US audit regulators. Full reliance envisions the Board’s reliance on the non-U.S. oversight entity to plan and carry out the inspection, and make findings based on its fieldwork. In addition, the Board would rely on the non-U.S. regulator to assess the firm’s efforts after receipt of an inspection report to address any criticisms of, or potential defects in, its quality control system. When full reliance is employed, the Board’s role is reduced to consultation with the non-US inspection staff.
According to Chairman Olson, there will be a transition period to full reliance during which the Board and its counterparts would reach agreement on specific procedures through the execution of bilateral agreements. Moreover, in order for both parties to understand each other’s systems fully, joint inspections would be conducted as part of the transition process. The PCAOB expects to begin the move toward full reliance by 2009 with those entities with which it has been able to conclude bilateral agreements and successfully conduct joint inspections.