By James Hamilton, J.D., LL.M.
In the view of Senator Carl Levin, the PCAOB’s proposed guidance to rely on non-US audit oversight bodies to conduct inspections of foreign audit firms registered with the Board is antithetical to its mandate under Sarbanes-Oxley. In a letter to the Board, the chair of the Senate Investigations Subcommittee said that moving to full reliance on foreign inspections is ill-advised because it would weaken Sarbanes-Oxley oversight requirements, consume significant Board resources without improving audit oversight, and potentially place US firms at a disadvantage.
The Board’s proposal would undermine the Sarbanes-Oxley requirement that foreign firms auditing US companies receive the same oversight as US audit firms. Section 106 of the Act states that foreign audit firms must be subject to the Act and to PCAOB and SEC rules issued under the Act to the same extent as US audit firms. According to Sen. Levin, this means that Congress wants US and foreign audit firms to receive equal treatment from the PCAOB, subject to the same inspections and reports.
By plain statutory language, said the senator, the Board is not authorized to delegate its inspection duties to a foreign body, no matter how trustworthy that body may be. While acknowledging that working with foreign audit regulators to conduct joint inspections is useful, Sen. Levin said that actually delegating the Board’s inspection duties to a foreign regulator would be a bridge too far under Sarbanes-Oxley. He urged the Board to continue its current policy of partially relying on foreign audit regulators, which he said is working well.
The proposal would also weaken Sarbanes-Oxley by allowing foreign audit regulators to decide how to apply US rules to non-US audit firms. Similarly, the proposal would reduce the oversight role of the SEC, which has no authority over foreign regulators. In the chair’s opinion, the result would be inconsistent legal interpretations and divergent oversight practices in multiple countries.
The senator cited a letter from the German Auditor Oversight Commission (AOC) as evidence that the Board’s adoption of full reliance would open a ``Pandora’s Box of problems.’’ The German audit overseer said that, while the Federal Republic would allow joint PCAOB-AOC inspections of German audit firms for a limited period of time, it would forbid joint inspections once a decision on full reliance had been made.
At that point, the PCAOB would have to fully rely on German oversight. In the senator’s view, the German regulator is saying that, once accorded full reliance from the Board, it would object to any independent inspection of a German audit firm by the PCAOB even if that firm were to consent and even if concerns about the firm’s operations or the quality of German oversight were raised by investors, the Board or the SEC.
Even more, German law does not allow the German audit authority to publish individual inspection reports, as required by Sarbanes-Oxley, unless the audit firm agrees to publication. While the PCAOB might be able to execute a bilateral agreement with German authorities over constraints on the Board’s reporting duties, noted the senator, the PCAOB is not authorized to bargain away its statutory obligation to inspect foreign audit firms under the same oversight rules as those imposed on US audit firms.