Washington (June 10, 2004) — 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, June 9.

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.

Under the new guidelines, a non-U.S. firm would be expected to submit a “one-time statement” asking the board to rely on a foreign inspection of the firm.  The PCAOB, then, would decide how much reliance to place on the foreign inspections based on the “independence and rigor” of the home country’s regulation of accountants.

Under that standard, accounting firms in Canada, Japan, and many European countries will likely be granted authority to rely on regulatory bodies in their own countries for inspections, while firms from less industrialized nations may have to submit to U.S. inspections.

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

During the same meeting at which those rules were unanimously adopted by the five-member 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, as well as 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 distinct 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.

- Ken Rankin

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