One of the inspections challenges the Board has faced during the past five years arises from Congress’s direction, in Section 106 of the Sarbanes-Oxley Act, that registered accounting firms outside the U.S. should be subject to the Board’s oversight “in the same manner and to the same extent” as U.S. firms. The practical difficulties in conducting inspections on our own in as many as 85 countries in which there are registered firms would be formidable, to say the least. At the same time, an approach which exempted these firms from inspection, or indiscriminately deferred to home country oversight, could not honestly be defended as in harmony with Congress’s intent.
The Board began to solve this puzzle in 2004 when it adopted Rule 4012. That rule rests on the idea that Board will, in appropriate cases, rely on the work of foreign oversight bodies, but that the degree of reliance should vary, based on the characteristics of each particular body, especially its level of rigor and degree of independence from the accounting profession. This sliding scale approach permits the Board to be faithful to our Congressional mandate, but at the same time to utilize the work of non-U.S. regulatory systems when that is consistent with our mandate.
The proposed policy statement we are considering today seeks to put more meat on the Rule 4012 bones. It explains in detail how the Board will determine the degree to which it can use as its own the inspection work of one of its foreign counterparts. The concept of full reliance, articulated in the policy statement, is a logical outgrowth of the principles underlying Rule 4012: In cases where a foreign oversight body fully meets the standards of rigor and independence outlined in the statement, it makes sense that we rely on its work, rather than seek to duplicate it.
Our ability to make this approach work is largely a consequence of the fact that many countries are implementing new inspection regimes to strengthen oversight of their auditing communities. Of course, other countries may design their oversight bodies in ways that are not identical to the Board’s structure. This is particularly true regarding how independence from the auditing profession is defined. The six “essential criteria” for independence laid out in the draft policy statement are designed to assure that we do not afford full reliance to foreign oversight that is controlled by practicing auditors. The independence criteria are, however, somewhat less demanding than the framework under which the Board operates, most notably in that they would permit a minority of current auditors on the governing body -- but not the staff -- of the foreign oversight entity. In the total context of all 25 of the essential criteria that foreign systems would have to meet, and in light of the Board’s over-riding obligation to make a judgment about rigor and independence before placing full reliance on a foreign inspection program, this strikes me as a reasonable approach. If we refuse to afford reliance to foreign inspections unless they are performed by entities that are twins of the Board, the practical result is likely to be that fewer PCAOB inspection reports will be issued on foreign firms, and U.S. investors will have less, rather than, more assurance about the quality of foreign audits.
While I support the ideas behind the policy statement, I also think it is important that we expose it for comment and consider the views of investors, auditors, foreign regulators, companies, and others affected by our work. Whether of not one fully agrees with the judgments in the policy statement, issuing it for comment lets the public into the debate. I hope that commenters will consider, as they develop their views, that the goals are meaningful inspections of the SEC practices of foreign registered firms and enhancement, where needed, of quality controls. Accomplishing those goals without significant reliance on the work of our counter-parts around the globe is not feasible. The policy statement is an effort to fashion a practical approach to that reality.
In summary, I support issuing the proposed policy statement for comment. I would, however, like to ask the staff several questions aimed at bringing out some points that may not otherwise be clear.
First, however, I want to thank the staff members who have worked long and hard on this project. Rhonda Schnare heads our office of International Affairs, and has led this effort with skill and aplomb worthy of an experienced diplomat. The members of her staff, including Karen Dietrich, Michelle Wildstein and Kenny Dickhudt, have also expended countless hours of effort and miles of travel on the project, as has Bridget Neill, from the Chairman’s office, and Carl Calendar from the Division of Registration and Inspections. Finally, Chairman Olson has devoted a considerable share of his personal talent, experience, and time, including several trips abroad to meet with our non-U.S. colleagues, to laying the foundation for effective, cooperative oversight of the global accounting profession.