by Glenn Cheney

New York - The International Auditing and Assurance Standards Board, the world’s leading purveyor of international standards of auditing, has issued a proposed standard on the quality control of the general audit process and of specific audits. The proposal comes just as the Public Company Accounting Oversight Board begins to move toward setting standards of similar intent.

To what extent, if any, the two organizations will cooperate is still unknown.

“I can’t speak for the PCAOB as to how it’s going to set standards, but we believe that the right way would be to consider adopting international standards on auditing,” said James Sylph, technical director at the International Federation of Accountants.

Seventy countries have adopted the IAASB’s international standards either verbatim or in a modified version to meet national regulations, and the European Commission has decided to adopt IAASB standards as of 2005. The standards have also been adopted by the Forum of Firms, a global organization of firms that handle transnational audits.

Ninety-five percent of the world’s audit firms adhere to the decisions of the FOF, which, like the IAASB, works under the auspices of the International Federation of Accountants. Consequently, almost half of the world’s public company financial statements are audited under international standards.

The big question, then, is whether the PCAOB might simply recognize IAASB standards and, in the spirit of globalization, allow American auditors to audit in the same way as most of the rest of the world. The alternative is a U.S.-versus-the-world split along the same lines as the split between the accounting standards of the Financial Accounting Standards Board and the International Accounting Standards Board.

But Sylph would like to avoid that schism. “We are very hopeful that we can come to some kind of accommodation with the PCAOB over the next month,” Sylph said. “I can’t speak for the PCAOB, but they obviously have significant pressures to accommodate politicians, and they have to respond very quickly in a way that is seen to be appropriate for the U.S. marketplace.”

Sylph sees no reason that the PCAOB could not simply adopt international standards outright. They would fall short of fulfilling all the mandates of the Sarbanes-Oxley Act of 2002, but would not conflict in any significant way. Sarbanes-Oxley requires a standard on reporting on internal control, which the IAASB still lacks.

The PCAOB has just formed itself and has just barely hammered out the process by which it will set auditing standards. This month, the board will begin to form appropriate advisory groups, then begin the due process of developing, exposing and issuing auditing standards.

Meanwhile, IFAC and the board haven’t been strangers. “We are exploring the best ways that we can work together,” said PCAOB member Charles D. Niemeier, though he declined to elaborate.

The PCAOB’s mission is mandated by the Sarbanes-Oxley Act. The board replaces the American Institute of CPAs’ Auditing Standards Board and the Public Oversight Board, which set auditing standards and attempted to oversee the quality of the country’s audits and auditors, respectively. The ASB continues to set standards for non-public companies.

IFAC and the ASB have traditionally cooperated as they wrote their separate standards. In fact, the institute was among those organizations that founded IFAC.

“We’ve been supportive of IFAC from the very beginning,” said Susan S. Jones, AICPA director for international. “We have always had a representative on the IAASB and been supportive of their standard-setting process, and over the past five years, we’ve been working with them fairly aggressively to converge the U.S. and international standards into one set of high-quality global standards.”

In a joint project, they rewrote the existing standard on auditing risk and issued identical proposals, which are currently being exposed for public comment. Final standards are expected to be issued in October. After the IAASB issued a standard on auditing fair value, the ASB took the same standard and issued an almost identical document as an exposure draft.

“Our relationship with the Auditing Standards Board has been very good indeed,” Sylph explained. “In fact, before the ASB’s recent debates with the PCAOB, discussions had begun to move toward international standards in a short period of time. There was a lot of commonality.”

Given Congress’s dissatisfaction with the results of the ASB standards, the PCAOB may be reluctant to accept similar IAASB standards wholesale. Jones noted that IAASB standards have generally been written to cover public and private companies, while the PCAOB will write standards strictly for public companies. The international standards, therefore, may not be ideally suited for the mission of the PCAOB.

The IAASB’s newest exposure draft includes a proposed International Standard on Quality Control 1, “Quality Control for Audit, Assurance and Related Services Practices,” and a proposed revision of International Standard on Auditing 220, “Quality Control for Audit Engagements.”

ISQC 1 would require an audit firm to establish a quality control system that provides assurances that the firm and its personnel comply with legal requirements and professional standards in such areas as ethics, partner rotation, acceptance of client relationships, engagement quality control and monitoring. The standard would include basic principles and procedures regarding leadership and responsibilities within the firm. A firm’s chief executive officer would hold ultimate responsibility for the quality control system.

The revision to ISA 220 establishes principles and procedures and provides guidance quality control procedures for audit engagements.

Comments on both documents are requested by Aug. 31, 2003. The documents are available at the IFAC Web site, www.ifac.org/eds.

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