by Ken Rankin

Washington — Some, but not all, foreign accounting firms that audit U.S. corporations will be inspected by their home country regulators, rather than by U.S. officials, under new rules approved by the Public Company Accounting Oversight Board last month.

The new standard is designed to soothe international concerns that the new Sarbanes-Oxley accounting reforms are unnecessarily burdensome for non-U.S. audit firms.

Although it is not yet clear how extensively the board will permit foreign authorities to conduct auditor inspections, PCAOB Chairman William McDonough said that the board expects to rely on non-U.S. regulators “to a great extent.”

Under the new guidelines, the PCAOB will decide how much reliance to place on the foreign inspections based on the “independence and rigor” of the home country’s regulation of accountants.

Because of this “sliding scale” approach, accounting firms in Canada, Japan and in many European countries will likely be granted the authority to rely on regulatory bodies in their own countries for inspections, while firms from less industrialized nations may well have to submit to U.S. inspections.

The new standard, and a parallel rule giving the PCAOB discretion to rely on foreign regulators to investigate and sanction their accountants for violations of U.S. rules, must be approved by the Securities and Exchange Commission before taking effect.

As with the inspection standard, the board’s reliance on non-U.S. regulators for investigating and sanctioning accountants will hinge on the “independence and rigor” of the foreign authority.

At least one other factor that may influence the board’s decision will be the willingness of the foreign regulatory authorities to share information about the investigations of accounting firms in their countries, PCAOB special counsel for international affairs Rhonda Schnare said in a presentation to the five-member board.

In approving the new requirements, the PCAOB abandoned plans that would have required foreign firms seeking permission to be inspected by their home country regulators to submit a detailed description of their country’s system for regulating audit firms. Instead, non-U.S. firms will be asked to provide the PCAOB with a “simple, one-time statement” asking the board to rely on a foreign inspection of the firm.

In outlining the proposal to members of the board, PCAOB staffers said that they have already engaged in discussions with regulators from Canada, France and Germany to prepare for implementation of the new U.S. requirements, and that those discussions have been “positive.”

The PCAOB’s efforts to address the concerns of foreign officials “will lay the foundation for the board to develop cooperative relationships with
its counterparts around the world,” Schnare said.

During the same meeting at which those rules were unanimously adopted by the board, the PCAOB also agreed to assist in inspections and investigations of U.S. accounting firms by foreign regulators.

In addition, the board approved new rules requiring auditors to maintain work papers and other documentation supporting the conclusions of an audit for at least seven years — a move described by PCAOB board member Charles Niemeier as “a large step toward the reestablishment of the credibility of the audit profession.”

Citing the destruction of key audit work papers by accountants at Arthur Andersen, Niemeier said, “No single issue has been more identified with the profession’s fall from grace than audit documentation.”

The board also approved a new rule spelling out the terminology that the PCAOB will use to describe the degree of responsibility that the board’s standards impose on auditors.

Under that rule, the PCAOB created three categories of auditor responsibility:


  • “Unconditional   Responsibilities” — responsibilities that auditors must assume for each audit;
  • “Presumably Mandatory Responsibilities” — procedures that an auditor should normally perform during an audit; and,
  • “Responsibilities to Consider” —  procedures that an auditor may wish to perform.

Meanwhile, the board, which expects more than 400 foreign accounting firms to register to provide audit services to U.S. companies, has agreed to continue the processing of applications beyond the July 19 deadline to encourage more non-U.S. firms to step forward.As of early June, officials at the board reported that a total of 912 accounting firms had submitted applications for registration — most of them domestic firms.
But the number of foreign firms registering is rising as non-U.S. accountants continue to flood the board with registration applications.

To facilitate registrations, the PCAOB has set up a help line at its Washington office (202-207-9329) as well as 24-hour e-mail assistance at registrationhelp@pcaobus.com.

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