PCAOB proposes greater reliance on foreign auditor inspections

07 Dec 2007

The US Public Company Accounting Oversight Board (PCAOB) has issued for comment a proposed policy statement that identifies the factors relevant to 'full reliance' by the Board on the inspections programs systems of its non-US counterparts that are sufficiently rigorous to meet the level of protection for investors that is required by the Sarbanes-Oxley Act of 2002. The proposed policy statement provides guidance on the Board's Rule 4012 Inspections of Foreign Registered Public Accounting Firms, which permits the Board to adjust its reliance on the inspections of auditor oversight entities located in the home countries of registered non-US audit firms, based upon the level of independence and rigor of those entities.

Under the proposed policy statement the PCAOB would increase its level of reliance on non-US oversight systems where possible, including in some cases full reliance, if certain essential criteria are met. The Board is seeking public comment by 4 March 2008 on the criteria and the approach described in the policy statement.

Five proposed broad principles that would guide the PCAOB in making a reliance determination:

Adequacy and integrity of the oversight system: The Board would weigh whether the non-US system effectively works in the public interest to protect investors by seeking to improve audit quality.
Independent operation of the oversight system: The Board would weigh whether the entity and the system within which it operates are free from interference or undue influence by the audit practitioners and/or audit firms under the entity's supervision.
Independence of the system's source of funding: The Board would weigh whether the non-US system has the ability to obtain and deploy the financial resources necessary to carry out its mandate without interference or undue influence by the audit practitioners and/or audit firms under its supervision.
Transparency of the system: The Board would weigh the extent to which the entity is accountable for the discharge of its duties through a transparent framework. The Board would review whether the entity publicly discloses information on its structure, governance, policies and operations.
System's historical performance: The Board would weigh whether the non-US oversight entity or the system within which it operates has a record of adequate disciplinary proceedings and appropriate sanctions.

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