Thank you, Messrs. Goelzer and Gradison.
Rhonda Schnare and Michael Stevenson have provided a good overview of the package before the Board today.
Their recommendation is for the Board to adopt an amendment to the inspection frequency requirements of Rule 4003 that will give the Board the ability to postpone, for up to one year, certain inspections of foreign registered public accounting firms that the Board is otherwise required to conduct before the end of 2008.
The Board also is seeking comment on a proposed second amendment to Rule 4003 that would give the Board the ability to postpone, for up to three years, certain inspections of foreign registered public accounting firms that the Board is otherwise required to conduct before the end of 2009.
In addition, the Board is seeking public comment on other actions the Board could take to address circumstances where the PCAOB is delayed in completing, or not able to complete, inspections of non-U.S. firms.
It is important that audit firms, regulators, investors and issuers have a clear understanding of the Board’s actions today. To assist, I will briefly discuss the overall objectives of what these rules and proposed measures are meant to achieve and address concerns that may arise.
The Deferral Rules
I will first address the final rule and proposed rule that would defer for a limited time period some inspections currently due for inspection in 2008 or 2009. I will address three areas where the Board’s objectives may warrant an explanation.
First and foremost, let me be clear, today’s amendments would affect only a subset of first-time inspections. Beyond this subset, it would not affect inspection requirements concerning any other first inspections, or any second, or later, inspections of non-U.S. firms. The need to delay certain first-time inspections is a result of the PCAOB’s preferred – and practical - approach to undertaking inspections outside the United States. The approach appropriately emphasizes the need to coordinate and cooperate with local authorities. Accordingly, the Board adopted a framework in 2004 setting forth how it could work cooperatively with its counterparts to the extent possible.
I support this approach and continue to believe that it is in the long-term best interest of investors. The approach recognizes that a non-U.S. firm’s local laws can present issues. Thus, the Board seeks to work with its counterparts in an effort to resolve potential conflicts of law. The Board has had success in this area, but such discussions can be challenging and time-consuming. At the same time, the Board is required by the Sarbanes-Oxley Act of 2002 to conduct inspections of registered firms, including non-U.S. firms, and our efforts today reflect our commitment to meet that mandate.
Second, the Board’s action today reflects the need and advantage of allowing appropriate time for the PCAOB to work cooperatively with foreign regulators, and is not a negative reflection on our efforts or those of our foreign counterparts. While not without challenges, I would say that our overall approach to non-US inspections continues to be successful. To date, the PCAOB has conducted 123 inspections of non-US registered firms located in approximately 24 jurisdictions. We have undertaken joint inspections with our counterparts where possible and performed PCAOB-only inspections where counterparts did not yet exist. The program continues to grow as do our relationships with foreign audit oversight bodies.
Forging productive relationships with home country audit regulators and coordinating non-US inspections continue to be guiding principles for our inspection program. In fact, I have directed staff to reach out immediately to regulators in countries where firms could be affected by a deferral in order to coordinate the required inspections and synchronize inspection schedules to the extent possible.
Third, while we will continue to expand our resources in this area as needed, our inspections have not been forestalled due to a staffing or other resource constraint. We can meet our inspection goals with our current and projected resources.
The Board also is seeking comment on whether it should publish the identity of firms that have not been inspected by the PCAOB within the timeframe that investors could reasonably have expected. I am particularly interested in comments on this possible action, so that the Board can fully appreciate the benefits that it might offer investors as well as any unanticipated impact it could have on issuers or audit firms.
Even providing for these one-time deferrals of 2008 and 2009 inspection deadlines, it is possible that some registered firms may express reservation with the required PCAOB inspection because of a concern that doing so might violate some aspect of their local law.
Nevertheless, firms that have registered with the PCAOB need to be aware of the Board’s statutory obligation and authority to conduct those inspections, and of the firm's obligation, under the Sarbanes-Oxley Act and PCAOB rules, to cooperate in the inspection. In instances where a firm refuses to comply with, or unduly delays complying with, a Board request for information, the Board can impose various disciplinary and remedial sanctions, which Michael Stevenson has just outlined.
Because a refusal to provide information based on non-US legal restrictions involves unique circumstances, staff recommends that the Board today seek public comment on how a conflict of law should be factored into the Board’s consideration of the appropriate sanction for the PCAOB to impose.
I encourage careful consideration of this topic by commentators. I hope that it draws a wide range of comments, as it involves a number of complex issues.
Some will ask how today’s action corresponds to the statement on full reliance proposed by the Board last December. The answer is simple – they do not conflict. Today, we are considering actions involving a discrete area of the PCAOB’s non-US inspection program. The full reliance proposal – where the PCAOB set forth proposed criteria upon which it could consider relying to the fullest extent possible on the inspection work of a non-US counterpart – is a separate initiative. The Board continues to carefully consider the comments received on that proposal – including those received during its June roundtable on the subject -- which communicated a wide array of views. I hope that we will be in a position to move toward a final statement early next year.
The PCAOB is motivated to engage with its fellow audit regulators, and it will continue to do so. More than 880 non-U.S. firms are registered with the PCAOB, and currently about 255 of these firms are subject to a PCAOB inspection on a triennial basis. Since the creation of the PCAOB, we have reached out to regulators and governments in other countries to develop relationships with our counterparts in connection with those inspections. Building relationships with our counterparts – while not void of challenges - has worked well, and the PCAOB remains fully committed to working closely with our counterparts.
The PCAOB is equally motivated to meet its statutory inspection mandate, and for this reason it is considering the recommendation before the Board today.
Before I conclude, I would like to thank Michael Stevenson, Rhonda Schnare and Carl Calender and their colleagues in the Office of the General Counsel, Office of International Affairs and the Division of Registration and Inspections, for their careful and creative thinking through a series of challenging issues in order to bring this package before the Board today.
There were a number of complex issues – and spirited opinions – for staff to consider and address before reaching today’s meeting, and I thank the staff for working through these issues in such a professional manner.
I will now turn to my fellow Board members for any discussion.