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October 7, 2010

PCAOB clamps down on registration of non-US auditors

Audit firms based outside the US could be prevented from auditing US companies following an amendment to registration rules. The reform could have wide-reaching effects on how US companies and their foreign subsidiaries are audited.

The rule change will make it much harder for non-Public Company Accounting Oversight Board (PCAOB) registered audit firms to gain access to US companies if they are based in countries that do not allow US inspections to take place. The rules only affect firms applying for registration, not those already registered with the PCAOB.

The rule change could affect the global audit market because US companies will be deterred from hiring unregistered auditors in jurisdictions where PCAOB inspections are blocked. For global audit firms, this could prove a headache when pitching for cross-border.

Network leaders have previously complained about regulation barriers in the past and the extra cost it is adding to the whole audit process. In some cases, firms have been asked to break the law in one country to comply with another regulator’s demands.

It is also impractical for auditors to be inspected by two different authorities who could hand down completely different outcomes.

A question of access

Regulators in certain countries, including most of Europe and China, have so far denied the PCAOB access to inspect non-US applicants, which meant that in 2009 only 15 out of 27 planned non-US inspections were carried out.

Foreign regulators argue that these firms should be inspected by local authorities and information shared under an equivalence arrangement rather than non-US firms coming under the auspices of the PCAOB.

US legislation set up post-Enron in 2002 requires all audit firms to undergo inspections by the PCAOB at least once every three years. In the past, the PCAOB approved registration applications of non-US firms as it expected any potential obstacles to inspections would be resolved through co-operative efforts with foreign regulators.

PCAOB acting chairman Daniel Goelzer said the audit watchdog is seeking to strike deals with non-US audit regulators but ‘problems’ with some jurisdictions had forced it to re-evaluate its registration approach.

The PCAOB said it will continue to allow applications to remain as ‘pending’ while the go-ahead for an inspection is ascertained. If a US inspection is not allowed, the PCAOB will issue a notice of hearing and then consider whether approval of the application would be consistent with its responsibility under the Sarbanes-Oxley Act.

 

 

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