After shaking up U.S. markets with talk of new audit reports and mandatory rotation, James Doty, chairman of the Public Company Accounting Oversight Board says the board will soon consider another proposal that will require auditors to tell public companies how their audit work is parceled out to affiliate firms, sometimes overseas.

In an address to the to the Federation of European Accountants' conference on audit policy, Doty said management and investors should know when U.S. audit firms are sending significant portions of audit work abroad. He's been surprised, he said, by how often he encounters savvy business people and senior policy makers who are unaware that much of the work behind their audit report was conducted offshore by affiliates of the Big 4 firm that signed the report. “Such firms are often completely separate legal entities in other countries,” he said. Investors should know that so they can better understand how an audit was conducted and how to use the report.

It ties in closely with Doty's frustration over a lack of cooperation among audit regulators in various countries. The PCAOB has been trying to work through legal obstacles to inspect U.S. audit work that takes place overseas. Doty used the podium at the Brussels-based conference to appeal to his European counterparts to get more cooperative and work toward a greater good.

Doty called on European audit regulators to wrap up their analyses of how joint inspection processes might affect their constituents and begin working with the PCAOB to better regulate cross-border audit work. Where countries are still resisting joint inspections, instead pushing the idea of each regulator agreeing to rely on the other's work, Doty appealed to those regulators to consider the risks. “Leaving the oversight of the components of cross-border audits to the inconsistencies of separate regulatory processes should not be a goal,” he said.

Doty tantalized European regulators with a promise that it soon plans to begin an inspection in the United States of the U.S. audit work of a company based in the United Kingdom. Based on the agreement the PCAOB has reached with U.K. regulators, the U.K. Audit Inspection Unit will know if PCAOB inspectors find problems. “I expect this model to expand,” he said.

He offered other examples where PCAOB inspectors have uncovered concerns that could be better investigated if regulators were cooperating.  Principal auditors often don't review the work papers of their affiliates or subsidiaries, often don't pick up on unresolved audit issues between affiliates, and often fail to notice when affiliates blow critical audit procedures. “To best protect investors, inspections of cross-border audits need to be as seamless as the audits are supposed to be,” he said.

Doty shook the audit profession earlier with suggestions that the board will consider setting term limits for auditors, forcing a kind of mandatory rotation, to make auditors more independent of the public companies they audit. The board also has published a concept release exploring ways to draw more information out of auditors about risks and weak spots they detect in a company's financial statements.