Public Company Accounting Oversight Board chairman James Doty said Monday the board plans to issue a proposed standard on changes in the auditor’s reporting model in the third quarter, with other standards making progress this year as well.

During a speech at the Compliance Week 2012 conference in Washington, D.C., on Monday, Doty said he hopes to issue another standard on disclosing the use of other public accounting firms, including foreign affiliates, and individual accountants not employed by the principal auditor, later this year.

He noted that that so far the PCAOB has conducted more than 300 inspections of non-U.S. affiliate firms in more than 35 jurisdictions. “Based on those inspections, the PCAOB knows that the challenges of managing a multi-national audit are great,” he said. “It is important for you to know that, through this process, our inspectors have identified considerable room for improvement.

“Of greater concern to the PCAOB is our inability to inspect firms located in certain jurisdictions in Europe, China and Hong Kong,” he added. “The SEC’s Division of Corporation Finance has begun to require this fact to be disclosed in an issuer's Management Discussion and Analysis Risk Factors. Some of these jurisdictions have experienced increased occurrences of financial reporting errors and fraud. I remain hopeful that we will be able to resolve concerns raised by authorities in these jurisdictions that prevent our inspections of firms based there.”

Doty noted that the PCAOB has made progress on inspection agreements with several countries. “This is not to say that we haven’t made progress,” he said. “We have in the last year reached agreements to perform inspections in the U.K., Norway and Switzerland and recently conducted our initial inspections in Germany.”

Doty hopes to have a reproposed standard on communications with audit committees issued this year. He also discussed the PCAOB’s progress on proposed standards on related-party transactions and significant unusual transactions.

“These types of transactions were at the heart of many of the most infamous financial frauds, including Enron, WorldCom and Refco,” he said. “According to allegations in recent SEC complaints, today these names have been replaced with emerging market enterprises.”

Another proposal, a concept release on mandatory audit firm rotation, has generated more friction, however. The release, issued last August, asked whether rotation of audit firms should be considered for companies that had been audited by the same firm for more than 10 years or for the largest issuer audits, and whether there are other measures that could meaningfully enhance auditor independence.

“More than 630 comment letters have been received, with both preparers and auditors predominantly opposing firm rotation,” Doty acknowledged. “The PCAOB is not alone in examining the issue of audit firm tenure and its effect on financial reporting for the use of investors. Audit and market regulators in Europe are considering regulation in this area. Those of you who work for multi-national companies may be aware of these initiatives.

“This is not an easy subject,” he added. “Some form of term limits may or may not provide more independence, but I believe we must explore the range of approaches available to free the auditor to think and act independently, to fulfill the high calling and perform the challenging role charted more than a century ago by Theodore Roosevelt in his vision of administration of the law. The relevance, credibility and transparency of the financial audit are rooted in the core values of independence, objectivity and skepticism. These core values must be monitored, protected and enhanced in order to serve the public interest and protect investors in an ever more complex global business environment.”

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