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Saturday, 13th April 2024
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US PCAOB extends EU co-operation Back  
The US Congress responded to the recent spate of corporate scandals with the Sarbanes-Oxley Act and by setting up the Public Company Accounting Oversight Board (PCAOB), which operates as an independent, private-sector regulator. Its chairman, William J. McDonough, outlines its mission and the need for co-operation with E.U. initiatives.
Free and open markets are the foundation of the well-being of our nations and our fellow citizens. They are the ultimate reflections of democracy: our citizens and our institutions can weigh for themselves the value of an investment and decide for themselves how much of their future well-being to stake to that investment.

And the companies that wish to tap the public markets must campaign for the public trust and convince the investors, as voters must be convinced, that investment in those companies is worth the risk.

At no time in the history of the world has this duty been more important than now. International business and finance is not a theory, it is a reality. We all shared what appeared to be the good times of the 1990s, and we have shared the bad times brought on by the corporate failures of the last three years.

For those of us who are regulators, it is our challenge to minimise the burdens of duplicative regulation at the same time that we fulfill our obligations to the investors and the public to close the gaps that the limitations of local regulation can foster.

Let me talk broadly here about the response in the United States to the corporate failures.

I believe that the goals of our system of oversight are the same goals that are contemplated in the proposed 8th Company Law Directive. The Directive proposes, for the first time, external and independent oversight of auditors in a system that is required to be transparent, well-funded, and ‘free from any possible undue influence by statutory auditors or audit firms’.

Failures in financial reporting were among the specific concerns addressed by Congress in the Sarbanes-Oxley Act.

Congress singled out the auditors of public companies for a new regime of external and independent oversight. We can debate whether the auditing profession in its entirety deserved this treatment, but two facts are indisputable: First, the law is intended to improve the financial reporting of companies that wish to participate in the U.S. securities markets. Second, it is the law. It must be obeyed by all actors in the U.S. capital markets.

For auditors, the changes brought about by this law are a seismic shift in how they do their jobs. For decades, the accounting profession was self-regulating, both in setting standards for audits and in overseeing the application of those standards. Congress and President Bush believed that the self-regulatory system was no longer working, so the Public Company Accounting Oversight Board (PCAOB) was created as an independent, private-sector regulator. Our mission is to oversee the auditors of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports. In other words, we are in business to hold auditors accountable for their work.

Under the Sarbanes-Oxley Act, no accounting firm can audit a publicly traded company if the accounting firm is not registered with the PCAOB. At this time, 1,472 firms are registered with the Board. Of those, more than 530 firms are based outside the United States in 76 countries.

We gave considerable thought to how our oversight programs should operate vis-?-vis non-U.S. firms that audit or play a substantial role in auditing U.S. public companies. We had several extremely helpful rounds of discussion with Commissioner Bolkestein, E.U. Director General Alexander Schaub, the staff of the Internal Market Directorate, and others involved in regulating financial reporting and auditing in Europe. And we are continuing our discussions with my good friend, Commissioner McCreevy.

Thanks to this ongoing dialogue, the PCAOB developed a framework for oversight of non-U.S. firms that depends, to the maximum extent possible, on cooperation among regulators. This framework became final rules of the Board in August 2004. The rules permit varying degrees of reliance on a firm’s home-country system of external quality assurance inspections. That reliance will be based on a sliding scale, in much the same way that an auditor decides on how much he or she may rely on the work of others in assessing the financial statements of a company. The more independent and rigorous the in-house or in-state system of oversight, the higher the reliance on that system can be.

While I’ve been talking about the assistance of non-U.S. regulators in the oversight of firms registered with the PCAOB, true cooperation is obviously a two-way street.
The U.S. Securities and Exchange Commission recently delayed the implementation of Section 404 of the Sarbanes-Oxley Act’s requirements for non-U.S. companies. The delay gives certain companies more time to implement the requirements, but I think you may want to know what the PCAOB will require of auditors of companies - U.S. and non-U.S. - under that section.

Under PCAOB Auditing Standard No. 2 (AS 2), auditors must examine in detail and report on whether a company’s internal control over financial reporting is designed and operating effectively. The examination of internal control helps the auditor better plan and conduct the audit of the financial statements and determine whether those statements are fairly presented.

AS 2 is no different from any other auditing standard in that it does not prescribe detailed audit programs for specific sizes of companies. For as long as the profession has established auditing standards, auditors have used those standards to tailor their own audit plans, in a manner that addresses the nature and complexity of the audit client. The first public reports on the audits of internal control are now being issued by the largest U.S. companies. The Board’s standard for audits of internal control, and the other standards we have adopted to date, were developed in an independent process designed to give the investing public confidence that its needs are addressed.

I fear that these efforts may be for naught, however, if we fail to restore the investing public’s confidence in the integrity of the auditing firms on which investors rely. High quality auditing without integrity undercuts the purpose of the audit. The appearance that some in the profession assist corporate and other privileged clients to evade the rules, whether they are tax rules or accounting rules, threatens the restoration of public confidence.

After a long and thoughtful examination of the issue of tax services, the Board voted to propose specific ethics rules that address the implications of auditors providing tax services to audit clients.

Briefly, the proposed rule includes a provision that effectively prohibits accounting firms from marketing or otherwise becoming involved in aggressive tax shelter products.

The proposed rule should help auditors stay clear of more aggressive tax work that can put them in an inappropriate position of advocating on behalf of a client at the same time they are charged with objectively passing on the fairness of the accounting and presentation of the transaction at issue.

Finally, I believe our proposal appropriately complements the Sarbanes-Oxley Act’s vision that audit committees should take responsibility for managing the relationship with the auditor by requiring the auditors to discuss with the committee the potential effects of tax services on the auditor’s independence. We have told the accountants that they must restore the faith of the investing public in their profession and that will be done sooner and better if they run their firms in a way aimed at just that: restoring public confidence.

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