With accounting standards well on their way to globalization, pressure is growing on the Public Company Accounting Oversight Board to follow suit with its standards for auditing U.S. public companies.
In a recent speech to the American Accounting Association, PCAOB Board member Bill Gradison said the Board will move the issue of multiple auditing standards “to the front burner” this year. And in its 2008 strategic plan, the PCAOB said the time has come to “examine the implications for the PCAOB’s mission of multiple auditing standards and varying audit environments across global capital markets and consider how the Board should respond.”
Indeed, the PCAOB is something of an island in the world of auditing standards, because it does not base its standards on the work of the International Auditing and Assurance Standards Board, as many other national bodies do. In contrast, the Auditing Standards Board of the American Institute of Certified Public Accountants—which oversees auditing of private companies in the United States—starts any new standard by opening the IAASB rulebook, according to Charles Landes of the AICPA.
“We believe that the most efficient and effective way for national standard setters to work is to begin with the international standard,” Landes says. “We’ve been doing this now for a number of years. Today, all of our recent standards are based on the international counterpart.”
The IAASB is an arm of the International Federation of Accountants, which is a professional association of national accounting associations (including the AICPA) covering 123 countries. The national governments in most of the 123 countries begin with the IAASB’s International Standards on Auditing, and then adopt national variations as needed. The AICPA does much the same for private-company audits in the United States.
Sylph
Jim Sylph, executive director of professional standards for the IAASB, says the PCAOB and the European Union are the most notable exceptions. “We’re anxious to work with both of those groups of regulators to enable global convergence of International Standards on Auditing,” he says.
In Europe, the EU has already said it wants to adopt a common set of auditing standards for all member countries, using ISAs as the starting point, Sylph says. That leaves the PCAOB as the last major auditing standard setter not using ISAs as a base for national standards.
Gradison said in his speech that he believes the PCAOB must reconsider that approach. “I am not suggesting international standards be adopted as is here at home, but rather that we move toward convergence or, if you prefer, harmonization,” he said.
As a Board, the PCAOB has not stated a particular view on whether it should or should not align its standards with international ones. It does closely follow the IAASB’s standard-setting process, but does not routinely begin new work by starting with an international standard as its base. Instead, much of the Board’s attention has gone to auditing standards for Sarbanes-Oxley compliance and its requirement for an audit of internal control over financial reporting. Such requirements don’t exist outside the United States.
Thinking Globally
More recently, the PCAOB began considering its role among global audit regulators when it began looking for more practical ways to meet its requirement to inspect all firms that audit companies listed on U.S. exchanges, even if the audit firm is located overseas. The Board published some preliminary ideas on how it might rely on other country regulators to meet that inspection obligation.
PLAN OF ATTACK
Below are some of the PCAOB’s goals for coordinating auditing oversight globally, as laid out in the Board’s 2008 strategic plan.
A. Coordinate effectively with the SEC, the Financial Accounting Standards Board
(FASB), state regulators, and other appropriate U.S. organizations to improve auditor
oversight
Maintain complementary working relationships and collaborate with the SEC, FASB,
state regulators, and other appropriate U.S. organizations, and participate with such
groups in certain efforts related to the PCAOB’s mission, such as efforts to address
improvements in financial reporting and to create a more sustainable and transparent
auditing profession
Coordinate investigations and share inspections and other appropriate information with
other regulators as permitted by the Act, the Board’s rules, and as appropriate
Communicate with appropriate regulatory agencies and professional bodies in matters
related to standards setting
B. Work effectively with international audit regulators to facilitate inspections of non-
U.S. registered public accounting firms and to strengthen global oversight of
auditors of U.S. public companies
Develop and maintain effective bilateral and multilateral relationships with appropriate
non-U.S. authorities
Finalize policy for reliance and cooperation with non-U.S. regulators
Work with appropriate non-U.S. regulators to implement policy for reliance and
cooperation
C. Play a leadership role in international efforts to improve auditor oversight and
auditing practices worldwide and reduce duplication of effort
Participate in international regulatory bodies and forums, such as the International
Forum of Independent Audit Regulators, to improve coordination and oversight
Host educational/technical assistance conferences for non-U.S. auditor regulators and
government representatives
Participate in the work of, and engage with, other auditing standards-setting bodies to
benefit from, and as appropriate incorporate, new developments and techniques to
promote high-quality audits worldwide
Examine the implications for the PCAOB’s mission of multiple auditing standards and
varying audit environments across global capital markets and consider how the Board
should respond
Source
The PCAOB’s Strategic Plan (March 31, 2008).
Gradison
Gradison tells Compliance Week he’s not sure when the Board may act on the original proposal and the comments it drew, but he noted at least one significant obstacle raised in the comment process: It could be impractical for regulators to find local expertise independent of local audit firms to conduct inspections in accordance with U.S. law. And even if that were possible, how could a budget-constrained PCAOB deploy the same expertise to provide reciprocal regulation to 80 or so other countries?
Gradison also worries about the effect of expecting audit firms to comply with different sets of standards. “I’m concerned from the point of view of the smaller and medium audit firms,” he says. “How do they find their way through training and supervising their engagement teams when doing private versus public audits under different auditing standards? This causes me to be concerned about the ability of small and medium firms to continue auditing public companies.”
Jones
Susan Jones, national partner in charge of auditing standards at Grant Thornton, says different standards create complexities. “We build our methodology on the international standards, and then we add in audit procedures for the United States, other countries, private versus public, etc.,” she says. Not only is the U.S. requirement for an audit of internal control different than for other audit standards, but standards on risk assessment vary as well.
For example, the ASB recently adopted a suite of standards on how auditors should assess risk and plan the audit based on the risk assessment, following the IAASB’s lead. The PCAOB, however, has no comparable requirement in place, although the 2008 strategic plan says the Board will propose such a standard before the year is over.
Rick Ueltschy, head of the financial services audit practice for Crowe Chizek, says companies would welcome converged auditing standards, especially when they require audits in different jurisdictions for different purposes. “Companies with international operations would prefer things that take complexity out,” he says.
Lee
Jim Lee, global chief auditor for PricewaterhouseCoopers, says converged auditing standards would have obvious benefits for investors as well. Still, he does foresee some challenges in moving in that direction. Some regulators like a more prescriptive approach to the writing of auditing rules, for example, while others prefer a more principled approach, he says.
There are differences in inspection processes that would come into play, and there’s a significant amount of redrafting that would have to occur, which is a tedious process. “This is not something that would happen overnight,” he says. “It would be several years into the future before they would be able to pull this off.”
Gradison believes it’s time for the PCAOB to make it a priority. “At times I have thought that I was a voice in the wilderness on convergence of auditing standards, but I find that is not the case,” he says.
Websites
We are not responsible for the content of external siteshttp://pcaob.com/News_and_Events/Events/2008/Speech/04-11_Gradison.aspx
http://pcaob.com/Inspections/Other/2007/12-05_Release_2007-011.pdf
http://www.pcaobus.org/Inspections/Other/2008/PCAOB_Rule_Comments.pdf
http://www.pcaobus.org/About_the_PCAOB/Strategic_Plan.pdf
http://www.ifac.org/iaasb/
http://www.aicpa.org/Professional+Resources/Accounting+and+Auditing/Audit+and+Attest+Standards/Auditing+Standards+Board/
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