The amendment before us today would permit the Board to defer for up to three years 49 non-U.S. inspections that otherwise would occur in 2009. While I support adoption of this rule, the decision is painful. Robust and timely inspections are the cornerstone of our auditor oversight program. Delaying the first inspection of any firm on whose work investors are relying is not something that I take lightly. Deferrals undermine what Congress sought to accomplish in creating the Board and in directing it to perform regular inspections of all firms -- whether based in the U.S. or elsewhere -- that audit SEC-registered companies.
Despite these reservations, I believe that the deferral in proposed Rule 4003(g) strikes an acceptable balance between the practical difficulties of laying the groundwork for inspections in multiple jurisdictions and the Board’s statutory mandate. Those practical difficulties include grappling with thorny issues of commercial privacy, sovereignty, and cross-border information-sharing. Resolving these problems requires the Board to sit down with fellow audit oversight bodies who are often themselves new at the job. Obviously, that process, which must be repeated country-by-country, can be time-consuming.
It is important to emphasize that, while the deferral will delay some non-U.S. inspections, the bigger picture is that we have -- and will continue to have -- a very active foreign inspection program. As noted in the proposed release, the Board’s inspections of non-U.S. firms began in 2005, and the Board has now inspected 140 non-U.S. firms located in 26 jurisdictions. We recently published a list indicating that, in 2009, we intend to conduct additional inspections in 27 countries. While Rule 4003(g) permits the Board to delay some first inspections, it does not by any means suggest that we are generally unable or unwilling to fulfill our inspection obligations as to non-U.S. firms.
Further, in the case of the inspections that will be deferred under the new rule, we have tried to be mindful of the impact on U.S. investors. The Board does not intend to simply postpone these 49 inspections until 2012. On the contrary, despite the deferral, we intend to inspect this year deferrable firms whose combined issuer audit clients' U.S. market capitalization constitutes at least 35 percent of the aggregate U.S. market capitalization of the audit clients of all 49 firms. By the end of 2010, coverage will rise to at least 90 percent. The Board will not move one of the 49 inspections to a later year than called for by this distribution without publicly describing the change and the reason. Conversely, there is nothing that would prevent the Board from moving up the scheduling of an inspection, due to emerging risks or other reasons, and we will do so where appropriate.
While I would certainly prefer that no deferrals were necessary, I also believe that the process of developing Rule 4003(g) has had some positive consequences. First, the amendment is packaged with important transparency initiatives. For example, on March 31, 2009, the Board published a list of the 27 non-U.S. jurisdictions in which firms the Board intends to inspect in 2009 are located. The Board has also published a list of the 26 jurisdictions in which it has conducted inspections. Both lists will be updated periodically. In addition, the Board intends to begin publicly releasing the names of all registered firms that have not had their first Board inspection within the original four-years-after-registration deadline in the Board’s rules. These steps open a window into our international inspections program. I hope we will explore ways to provide still more information to investors and others about the inspection status of all registered firms.
The second positive consequence I see is that the stretch-out in the first inspections schedule will also give the Board a bit of latitude to step back and review its foreign inspection program and take steps to enhance it. I understand that the Division of Registration and Inspections is working closely with the Office of Research and Analysis and the Office of International Affairs to make sure that our risk-assessment, engagement selection, and inspection planning are calibrated to take into account the differences in the audit and financial reporting environments in the various jurisdictions around the world. The staff is also considering how to better evaluate the global auditing networks and the various levels of risk related to “referred work” on audits of multinational companies. If Rule 4003(g) buys us a bit of time to apply the results of these efforts to more first inspections, that is all to the good.
In short, while it is difficult to muster great enthusiasm for a rule that defers 49 first inspections, I think the recommendation before us today is appropriate under the circumstances. It is tailored to both the practical difficulties of an inspection program that must operate in multiple jurisdictions and to the Board’s statutory investor protection mandate. I also believe that, in the long run, it gives us the opportunity to improve transparency and strengthen our foreign inspections.
I want to conclude by expressing my thanks to the staff -- especially Rhonda Schnare, Karen Dietrich, Michael Stevenson, and Carl Calendar -- for their work in putting together this recommendation. These issues generate strong views among Board members, and I appreciate the skill and patience with which all of you have handled this project.
 “Referred work” is a term used to describe audit work that a non-U.S. firm performs as part of the audit of an SEC-registered company, where the non-U.S. firm is not the firm that signs the audit opinion. Auditing the local subsidiary of a U.S. multi-national, as part of an audit in which the U.S. affiliate of the accounting firm signs the audit opinion, is an example of “referred work”.