Plans by the Public Company Accounting Oversight Board to send teams of globetrotting U.S. audit inspectors abroad to enforce Sarbanes-Oxley are ruffling the feathers of audit firms and regulators from Stockholm to Shanghai.
Although the regulator is required by SOX to conduct inspections of certain non-U.S. audit firms, the board has been treading lightly into the international arena in response to concerns raised by foreign officials about the imposition of U.S. standards on auditors in other countries.
In a move designed to defuse foreign criticism of SOX, late last year the audit overseer announced rule changes allowing the board to postpone, for up to one year, initial inspections of non-U.S. firms that had been targeted for scrutiny by the end of 2008. The amendments also call for delaying for three years inspections of audit firms in countries that had originally been selected for visits before the end of 2009.
According to U.S. officials, those postponements are intended to avoid conflicts with the laws in other countries.
More recently, the PCAOB released a list of more than two dozen countries that have tentatively been selected for inspections this year. Those nations include: Argentina, Australia, Brazil, Canada, Chile, China, Finland, France, Germany, Greece, Hong Kong, Indonesia, Ireland, Israel, Kazakhstan, the Republic of Korea, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Portugal, the Russian Federation, Singapore, Sweden, Switzerland and the U.K.
OXLEY GO HOME
Significantly, foreign accountants and financial regulators have voiced no objections to the goals of the PCAOB, and many praised its efforts to promote higher-quality financial reporting throughout the world.
But many of those same individuals and groups have openly challenged key provisions of SOX, as well as what some consider heavy-handed attempts by the PCAOB to encroach on the jurisdiction of foreign accounting standard-setters.
One sticking point that rankles many in the foreign accounting community is the perception that the board is insensitive to the sovereignty and jurisdictional concerns of its counterparts in other countries.
The Financial Services Agency of Japan - one of the countries targeted by the board for inspections this year - warned the board that cooperation with the proposed inspections is complicated by the fact that, "Each country or jurisdiction has a different legal and regulatory framework and different thoughts on sovereignty."
The proposed rule amendment, however, would make it clear that the PCAOB "could impose disciplinary sanctions in any case" where a U.S. rule violation is found.
In a footnote amplifying that power, the PCAOB stressed that, "The board does not view non-U.S. legal restriction or the sovereignty concerns of local authorities as a sufficient defense ... for failing or refusing to provide information requested in an inspection." The board did not provide further comment by press time.
As a result of the PCAOB's perceived disregard for the rules governing accountants in other countries, "Non-U.S. audit firms will find themselves in an extremely difficult position and may not concur with the rationale for why the disciplinary sanctions are taken against them," Nobuyuki Kinoshita, secretary-general of the Japanese government's CPA and Auditing Oversight Board, told U.S. officials.
Meanwhile, representatives of auditors in Germany - another nation earmarked for inspections this year - said, "We cannot support the PCAOB's implied contention that it may be necessary for non-U.S. audit firms to be forced to either deny their cooperation or comply with requests of the PCAOB in violation of their local law, simply because adequate constructs have not (yet) been established to address legal conflicts."
In formal comments protesting the plan, the Institut der Wirtschaftspr
fer (Institute of German Public Auditors) told U.S. officials that it is "untenable to use individual non-U.S. audit firms as what would amount to 'pawns' to highlight those inconsistencies in lawmaking that become apparent in cross-border situations."
That view was echoed by officials at the 32-nation Federation of European Accountants, who argued that the PCAOB's proposed amendments would essentially force non-U.S. firms in some countries to choose between violating either their home-country laws and regulations or the PCAOB rules.
Officials from other countries affected by the PCAOB's international inspections called on the board to lobby Congress for changes in SOX to address the plight of foreign accountants who are being pressured by U.S. officials to violate their home-country accounting laws.
One possible way around these jurisdictional problems - joint inspections of non-U.S. firms by the PCAOB and foreign regulators - was given the cold shoulder by representatives from the European Commission.
The commission expressed the view that, "Joint inspections, as an ultimate objective, are not desirable." While such a joint approach might be useful "as a confidence-building measure," it is "not a sustainable concept or even a policy objective."
Instead of joint inspections, the EC suggested that the board use its existing authority to "rely on the inspections of non-U.S. audit firms made by non-U.S. regulatory authorities."
Swiss officials went even further by suggesting that the PCAOB audit inspectors might not be welcome in their country.
Citing legal as well as language and "mentality" considerations, the Swiss Federal Audit Oversight Authority told U.S. officials that, "The quality of audit services will be most efficiently improved if the inspections are conducted by the competent national oversight body. Consequently, the FAOA believes that ... no inspectors should be sent abroad and that audit oversight bodies should rely on their foreign counterparts" to conduct these activities.
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