U.S., EU Discuss Auditing Oversight; More

As the Securities and Exchange Commission met last week to discuss its continued plans to accept financial statements written in international accounting standards, the Public Company Accounting Oversight Board met with European regulators to discuss similar cooperation in auditing oversight.

Olson

PCAOB Chairman Mark Olson had a chat with Charlie McCreevy, commissioner of the European Union’s internal market, to discuss how they can work together to oversee the audit of public-entity financial statements without redundant or conflicting efforts. The goal is for the PCAOB and its equivalent in Europe to have “independent and rigorous oversight systems to move toward full reliance” by 2009, the PCAOB said in a statement.

Olson and McCreevy agreed to direct their staffs to work together to determine how they can collaborate, and they plan to meet again in October to review their progress. PCAOB spokeswoman Colleen Brennan says the Board can’t elaborate any further on what it means by “full reliance” at this stage. “That’s exactly what we’re going to be discussing over the next six months,” she says.

The PCAOB has 760 non-U.S. audit firms from 83 countries registered to audit financial statements filed with the SEC, 265 of them are located in the European Union. According to the PCAOB’s inspection rules, those firms must be inspected by the U.S. regulator once every three years if they audit fewer than 100 public issuers.

Under comparable European audit rules, non-European audit firms must be inspected by European audit regulators unless their home-country system is considered equivalent, according to the PCAOB. Olson and McCreevy noted that cooperation and reliance on one another’s work would conserve scarce resources and reduce overlap.

“As more countries around the world take steps to protect the integrity of their own capital markets by strengthening auditor oversight, regulators must find ways to rely reasonably on each other in accomplishing our shared objective,” Olson said. In addition, it makes sense for the Board to consider how it might cooperate with other regulators as the number and capacity of auditing oversight boards continues to grow worldwide, he said.

McCreevy

McCreevy noted that the European requirement for equivalence doesn’t mean the regulatory systems must be identical to be mutually reliable. “The goal is to move towards inspections of audit firms carried out by an independent and rigorous home-country public oversight authority by 2009,” he said in a statement. “Sending inspectors abroad is a costly and complex exercise. We need to establish a system based on mutual trust which avoids duplication.”

PCAOB Amends Six Inspection Reports Over Quality Control

True to its word, the PCAOB has begun disclosing certain deficiencies found during routine inspection that audit firms have not adequately corrected in the permitted one-year time frame.

Within its listing of inspection reports, six reports for smaller audit firms carry a double asterisk next to the date, indicating the reports have been amended to include new information. In each case, a portion of Part II of the report that was previously concealed from public view has been added to the published report.

Part II of the inspection report addresses quality control systems that may need attention within a given audit firm. Those concerns are withheld from the published report to give audit firms one year to respond to inspection criticisms, according to the PCAOB’s inspection rules. Where firms do not improve to the Board’s satisfaction, the PCAOB can then publish the criticisms.

In the case of Carter & Co., for example, the PCAOB said it questioned whether the firm’s quality control system would assure that it adheres to auditor independence rules and whether it would adequately document its communication with client audit committees. At the time of inspection in May 2005, the firm had 11 professionals and two public issuer clients. It declined to provide the optional comment letter to be included in the inspection report.

Amendments to other reports focus on equally small firms and raise questions about comparable issues, including documentation, concurring partner reviews, and monitoring of identified weaknesses.

A PCAOB spokesman said there are still portions of reports that remain nonpublic. “When the public report is expanded, the relevant quality control criticisms become public, but other nonpublic portions of the report remain nonpublic,” PCAOB spokeswoman Colleen Brennan says.

FASB, AICPA Appoint Committee On Private-Company Reporting

The Financial Accounting Standards Board and the American Institute of Certified Public Accountants have appointed the 12 members of the Private Company Financial Reporting Committee, who will serve under previously named Chairwoman Judith O’Dell. The committee will recommend changes in Generally Accepted Accounting Principles for smaller and private companies.

O'Dell

FASB and the AICPA formed the committee to take a closer look at financial reporting requirements as they apply to smaller or private entities to determine where changes might be warranted. The committee’s charge is to give private company constituents a voice in the accounting standards-setting process and to help FASB improve the standards-setting process it applies to those constituents.

The committee will consist of four certified public accountants, four financial-statement preparers, and four users of private-company financial statements. All appointments are for a one-year term, with eligibility to serve up to three terms. The group plans to convene for the first time in May.