The Public Company Accounting Oversight Board anticipates signing a deal by the end of the year to inspect auditing firms located in China, a long-sought goal.

During an open meeting Wednesday with Securities and Exchange Commission officials to approve the PCAOB's $258.4 million budget request for 2014, PCAOB chairman James Doty provided an update to SEC chair Mary Jo White and the other commissioners on the board's activities and plans, including overseas inspections.

“I am pleased to report that we are now able to inspect in most major European countries,” he said. “Since July, we have renewed existing cooperation agreements with EU member state regulators. And we are close to concluding accords with the remaining ones. Gaining access to audits of Chinese registered firms has been particularly challenging. But I am grateful to the Secretaries of the Treasury and State for their inviting me, with your support, to participate in the Strategic & Economic Dialogue in each of the last three years.

“These meetings proved instrumental to achieving some success,” he added. “In 2013, we were able to reach an enforcement cooperation agreement with Chinese authorities. Based on recent discussions, I am also optimistic that we will be able, during 2014, to sign a long-sought agreement to inspect the audit work of PCAOB-registered firms based in China.”

Gaining access to inspect auditing firms in China has been particularly difficult for the PCAOB. Many of the largest firms outsource at least part of their auditing work to affiliates in China, which also audit China-based companies that trade on U.S. markets through reverse mergers with U.S. shell companies. Several such companies have been questioned over their accounting practices and needed to restate their financials in recent years. One company, Longtop Financial Technologies, which had been audited by Deloitte's affiliate in Shanghai, was the subject of a long-running battle over gaining access to the firm's audit workpapers, which it was prohibited from providing under Chinese law.

The SEC finally reached a deal last month with Chinese authorities to gain access to the work papers through the China Securities Regulatory Commission, and the SEC filed a motion to dismiss its subpoena against Deloitte (see SEC Files Motion to Dismiss Deloitte Subpoena).

Other large firms have run afoul of the PCAOB and the SEC over similar issues. The SEC began administrative proceedings in December 2012 against the Chinese affiliates of Deloitte and the other Big Four firms, along with BDO, for failing to produce audit work papers and other documents related to China-based companies under investigation for potential accounting fraud against U.S. investors.

Doty also provided the SEC commissioners with an update on where it stands with its various standards and admitted that the proposal for requiring mandatory firm rotation, which had provoked widespread opposition among audit firms and lawmakers in Congress, is essentially at a standstill.

“We don’t have an active project or work going on within the board to move forward on a term limit for auditors,” he said, according to The Wall Street Journal, adding, “We nevertheless will continue to think about what impacts independence. There may be a change of focus here.”

However, the PCAOB is making progress on other fronts. Last year, the board adopted final standards for use in broker-dealer audit engagements, reproposed a new performance standard on auditing related-party and significant, unusual transactions, and proposed a reorganization of existing auditing standards to make them more usable and understandable.

“We are updating performance standards,” said Doty. “I expect that we will be in a position this year to consider adoption of the related-party standard. We also expect to propose performance standards regarding the use of other auditors and specialists, and the auditing of estimates and fair value measurements.”

In addition, Doty informed the commissioners that the PCAOB has cleared a backlog of inspection reports and made progress on dealing with a backlog of submissions from firms concerning their efforts to remediate the quality control weaknesses identified by PCAOB inspectors (see PCAOB Works to Reduce Remediation Backlog). The board is currently considering the staff's recommendation on the last of that backlog, he noted.

The PCAOB has also established a Center for Economic Analysis, he told the SEC commissioners, pointing out that the new initiative holds the promise of enhancing the board's work by deepening the understanding of the role of the audit in today's financial markets, the structure of the profession, and the effectiveness of audits in facilitating capital formation and protecting investors. One of the Center's tasks will be to develop a post-implementation review program to evaluate the effectiveness of new auditing standards.

In terms of enforcement, Doty reported that last year, the PCAOB concluded 17 disciplinary proceedings, including one against a Big Four firm, and also issued a policy on credit for extraordinary cooperation.

The SEC ultimately approved the PCAOB's budget request for $258.4 million, which represents a $12.8 million increase—roughly 5 percent—over the approved 2013 budget of $245.6 million.

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