House Passes Legislation Bringing Auditors of Brokerage Firms within Purview of PCAOB; Enhancing Foreign Regulatory Information Sharing

Closing a statutory loophole revealed by the Madoff scandal, the House has passed legislation authorizes the PCAOB to flexibly examine the auditors of broker-dealers. Thus, the Wall Street Reform and Consumer Protection Act, HR 4173, would bring auditors of broker-dealers under the PCAOB oversight regime. The Board can inspect the auditors of broker-dealer financial statements; and will have investigatory, examination and enforcement authority over the auditors of broker-dealers. In addition, brokers and dealers would be brought into the Board’s funding scheme by paying a fee allocation in proportion to their net capital compared to the total net capital of all brokers and dealers that are not issuers, in accordance with the rules of the Board. The Act also authorizes the Board to refer an investigation concerning a broker or dealer’s audit report to the relevant self-regulatory organization. Moreover, the Board is authorized to share with the SRO all information and documents received in connection with an investigation or inspection without breaching its confidential status.

In addition, the House legislation would change the name of the Public Company Accounting Oversight Board to Auditor Oversight Board. The Act would also 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 Act would also allow the PCAOB to share information with foreign regulatory and law enforcement agencies 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. The information sharing is conditioned on the foreign auditor oversight authority providing such assurances of confidentiality as the Board determines appropriate.

In addition, the legislation would enhance the PCAOB’s ability to access the audit work papers and audit documentation of foreign public accounting firms when they perform audit work or other material services upon which a registered public accounting firm relies in the conduct of an audit. This statutory change will resolve international conflicts that have impaired the Board’s ability to fulfill its statutory obligation to inspect non-US registered public accounting firms.

The Act provides that the foreign public accounting firm must be subject to the jurisdiction of the US federal courts for purposes of enforcing a Board request for audit documentation. Any foreign accounting firm that issues an audit report, performs audit work, or other material services upon which a registered accounting firm relies in the conduct of an audit must designate to the SEC or the Board a US agent upon whom may be served any papers in any action brought to enforce this section or any request by the SEC or Board under this section.

In addition, any registered accounting firm that relies on the work of a foreign accounting firm in issuing an audit report or performing audit work must produce the foreign firms audit work papers and all other audit documents related to any such work in response to a request for production by the Board. The accounting firm must also obtain the agreement of the foreign accounting firm to production of the documentation at Board request as a condition of its reliance on the work of the foreign firm.

In an effort to reduce the complexity of financial reporting in order to provide more accurate and clear financial information to investors, the legislation requires the Chairs of the PCAOB, the SEC, and the FASB to testify annually before Congress on accounting and auditing issues. The testimony must discuss the reassessment of complex and outdated accounting standards. The agency chairs must additionally discuss how to improve the understandability, consistency, and overall usability of the existing accounting and auditing literature. Congress also wants information on how the development of principles-based accounting standards is progressing. In addition, there must be a discussion of how to encourage the use and acceptance of interactive data, as well as efforts to promote disclosures in plain English

The legislation also establishes a Financial Reporting Forum composed of, among others, the Chairs of the SEC, FASB and the PCAOB, to meet at least quarterly and discuss issues critical to financial reporting. The Forum must report annually to Congress detailing any determinations or findings, including any legislative recommendations related to financial reporting. Other members of the Forum must include representatives of the auditor, investor and financial institution communities, as appointed by the SEC.

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