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March 31, 2010

Regulators in oversight stand-off

Audit firms are being squeezed by
regulators that cannot agree how to co-operate when overseeing
firms that audit companies listed in foreign countries.

In some cases, firms have been
asked to break the law in one country to comply with another
regulator’s demands.

The friction exists because the US
has an extraterritorial arrangement in place. The Public Company
Accounting Oversight Board (PCAOB) must personally conduct
inspections of all firms that audit companies listed on the US
capital markets at least once every three years, no matter where
the firm is based.

Major economies, such as China and
the EU, want oversight based on mutual co-operation. This means the
country an audit firm is located in has the main supervisory role
and inspects the local audit firms, sharing the information with
the regulators of other markets the firms’ audit clients are listed
in.

 

A growing
concern

Baker Tilly International chief
operating officer Paul Ginman said the lack of global acceptance of
equivalence of inspection regimes is an increasing concern to
auditors.

“The potential for every
jurisdiction to impose its own regulation regime on firms working
on foreign listed companies, or even significant subsidiaries of
such companies, means not just a permanent presence from regulators
at an audit firm, but also the chance of teams from different
regulators visiting at the same time, reviewing the same audits
with the possibility of different points being raised,” he
explained.

“This clearly has a major impact on
firms’ ability to manage their audit businesses.”

A major reason for more stringent
US regulation is the huge market capitalisation of foreign
companies listed on US capital markets.

Speaking at an EC audit and
accounting conference in February, PCAOB international director
Rhonda Schnare said there are about 2,200 non-US companies trading
on US exchanges and about 250 foreign audit firms, located in 54
jurisdictions, that audit companies listed in the US. No other
capital market has this level of foreign participation.

The oversight standoff came to a
head in 2008, when the PCAOB was not permitted to inspect a number
of firms in China, Switzerland and 10 EU countries.

The issue is still unresolved and
comments by Schnare and a representative from China’s Ministry of
Finance (MoF) at the February EC conference indicate that neither
side will budge. Yuting Liu, the director general of the MoF’s
accounting regulatory department, insists foreign regulators will
not be allowed direct entry into the Chinese market.

BDO International chief executive
Jeremy Newman said he can understand both perspectives.

“China is emerging as a global
power and is saying in a whole host of areas, ‘we don’t want a
Western, Anglo-Saxon, liberal democratic capitalist business model
imposed on us’,” he said.

“The PCAOB is under pressure from
politicians [who are saying] ‘how can you trust the Chinese
regulatory system? There is no democracy in China, how do we know
that there are checks and balances in China to make sure that the
regulators act properly?’,” Newman added.

The regulatory conflict puts
international audit firms in a tough spot.

“It is an absolute nightmare
because you are being told either you break one law or you break
another law,” Newman said, adding that some BDO firms have “been
squeezed”. In every case so far, they have managed to find a
compromised arrangement, for example, agreeing to defer visits.

Newman said that even if firms can
comply with all regulators, they end up going through the same
regulatory process multiple times.

“You get so much ridiculous
regulation. You have two or three people inspecting you at the same
time, looking at the same thing and coming up with different
issues,” Newman said.

Ginman points out that the problem
in audit regulation is normally enshrined in a country’s laws,
requiring governments to act to reduce the burden.

“I am not sure that the politicians
have the will to tackle this issue yet. Acting to reduce the
auditors’ obligations rarely wins votes from the public,” he says.
“There has to be solution, although I think it will get worse
before we see the law makers prepared to make the changes.”

Steven Maijoor, chairman of the
International Forum of International Audit regulators, said balance
is essential.

“We need to have an approach where
we are balanced. On the one hand, we should avoid duplication of
work, but on the other hand it is clear you just shouldn’t rely on
things without adequate evidence,” he said.

“It’s just like how we expect
auditors to take evidence on internal controls before they rely on
the internal controls of the clients.”

Carolyn Canham

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