by Ken Rankin
Washington — The Public Company Accounting Oversight Board moved to soothe ruffled regulatory feathers throughout the international accounting community by proposing new rules that grant foreign regulatory bodies a role in inspecting and investigating non-U.S. accounting firms that are subject to the board’s registration requirements.
The board’s proposal, advanced unanimously at a December meeting in Washington, is aimed at developing a “cooperative arrangement,” under which the board would register firms outside the U.S., but rely on foreign regulators to inspect, investigate and sanction their home country accountants “to the maximum extent possible.”
But the plan would not offer all foreign oversight bodies the same authority to supplant the PCAOB’s oversight obligations.
Instead, the board’s proposal would permit “varying degrees of reliance on a firm’s home country system of inspections, based on a sliding scale: the more independent and robust a home country system, the higher the reliance on that system.”
Using this approach, the countries of the European Union and Japan — the nations that squawked the loudest at the PCAOB’s decision earlier this year to require registration of non-U.S. auditors — would likely be granted the greatest flexibility to regulate accountants in their countries who audit U.S. corporations.
Developing countries with relatively less “independent and robust” systems of regulation would be offered less opportunity to carry out the PCAOB’s inspection and investigation responsibilities.
In voting to propose the new rules for public comment, PCAOB Chairman William J. McDonough said that the framework for this “cooperative approach” was hammered out after extensive discussions with foreign accounting firms and non-U.S. regulatory agencies. The board received a “very high degree of cooperation” from representatives of the European Commission in fashioning the proposal, he said.
The board also voted unanimously to propose extending the registration for non-U.S. firms by 90 days to July 19, 2004. Both proposals require approval by the Securities and Exchange Commission.
According to McDonough, the PCAOB’s willingness to share oversight responsibilities with its foreign counterparts reflects recognition that these organizations share a “common purpose” with the board.
Sharing regulatory responsibilities “with other high-quality regulatory systems” around the world, the board said, could address “some practical problems that oversight regimes would face, such as those posed by the use of non-native languages,” the board said.
One key to the success of the PCAOB’s plan for sharing enforcement duties would be determining which countries rank at the top of the board’s “sliding scale” and which rate as less trustworthy in terms of the “independence and robustness” of their oversight system.
To make these determinations, the PCAOB plans to employ a “principles-based approach,” under which a country would be graded according to such factors as “the independence of the system’s operation from the auditing profession, the nature of the system’s source of funding,” and the system’s “integrity, transparency and track record.”
The proposal further envisions allowing non-U.S. firms to register with the PCAOB by submitting an application directly to its home country regulatory entity, and seeks to avoid “unnecessarily duplicative investigations” by relying on foreign regulators to investigate the activities of audit firms in their home countries.
But the PCAOB made it clear that it was not abdicating its responsibilities for policing auditors of U.S. companies. Under “certain circumstances,” the board said that it may conduct the investigation of a foreign accounting firm directly, and it reserves the right to “impose sanctions beyond those imposed by the non-U.S. system.”
Separately, the PCAOB said that, as of mid-December, the oversight body has approved the registration applications of about 720 firms.
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