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 Statement on Consideration of Proposing Release of Full Reliance Policy Statement

DATE: Dec. 5, 2007
SPEAKER: Charles D. Niemeier, Board Member
EVENT: PCAOB Open Board Meeting
LOCATION: Washington, DC

I strongly support our policy of working with regulators in the home jurisdictions of non-U.S. firms that are registered with the PCAOB. To me, this is largely a matter of common sense. We benefit immensely from the knowledge of home country regulators regarding local laws, culture and practices. Working side-by-side with local regulators, PCAOB inspectors can better appreciate how those local laws and customs affect audits within our oversight authority. And we can also gain insight into the broader environment in which auditors operate, which we might not otherwise see given our limited look solely at a firm’s audits of U.S. public companies.

But not all regulators are alike. Various factors can affect their effectiveness, as well as their ability to be useful in PCAOB inspections. Because of these differences, I have also supported our policy of evaluating the extent to which we should use the work of another regulator based on a sliding scale. This approach respects the prerogative of local jurisdictions to make their own choices about the intensity and form of enforcement of accounting and auditing regulations. At the same time, by supplementing the work of the local regulator with our own work, we are able overall to provide investors in U.S. securities consistent protection, as they are entitled to under the Sarbanes-Oxley Act. After more than two years of experience, I think this approach is working well.

I commend the untiring work of Rhonda Schnare and our small Office of International Affairs in forging appropriate relationships with regulators in other countries, and helping us judge how best to work with different regulators given their various approaches. Recently Carl Calender of our Inspections Division has joined in that effort. I want to recognize and thank you all.

As the proposal before us reflects, it is tempting to go further. That is, to envision a seamless system of mutual reliance, under which each country polices the practice of auditing within its borders in a manner, and with sufficient intensity, that protects investors in securities issued or traded in other countries, as if the audit were conducted and policed in the jurisdiction where the investors and securities are.

Actually moving to such a “full reliance” approach requires that we base decisions on facts, not hopes or illusion, though. And on the facts as we know them, I think this proposal goes too far. The fact is that few if any countries spend as much on – or devote as much intensity of effort to – enforcement of financial reporting and auditing as the U.S. does. Further, our inspections have indeed been helped by assistance from other regulators. That assistance should not go unacknowledged. But the fact is that, based on our experience to date, there are important differences between our inspections and those of other regulators, such that even the most robust of those other regulators have faced scope limitations and other challenges that we would not countenance.

When we use a sliding scale to calibrate our use of the work of other regulators, we can manage our inspections to make up for such differences. By attempting to define conditions for full reliance, the proposal risks interfering with the flexibility intended in Rule 4012, thereby potentially undermining the underlying principle of basing our judgments about reliance on a sliding scale that depends, quite naturally, on facts and circumstances. Ironically, the conditions set forth in the policy statement also necessarily establish a model for regulation that squeezes out different policy choices, although I know that’s not our intent.

Moreover, I am not comfortable with all the criteria set forth in the draft policy statement’s model for when a home country regulator should qualify for full reliance. For example, I am concerned that the proposed policy statement would in fact lower the bar for the highest reliance we would afford. That is, independence from the profession remains one of the stated principles underlying our policy. But the proposed statement (at page 13) would permit full reliance, even if only “a majority of the governing body of the non-U.S. overisght entity” were independent of the auditing profession. That is not independence. Rather, it would be a dangerous step backward, inconsistent with our failed experience in the U.S. with self-governance of the profession. Although self-governance may feel comfortable for some, history has shown that in fact it’s not good for the profession. Nor is it good for investors, whom we are charged to protect.

Finally, PCAOB inspections are intended to inspect for compliance with U.S. standards and rules, including many important reforms unique to U.S. securities, such as an internal control audit and tough independence rules. It’s not realistic to think that non-U.S. authorities will have the ability or inclination to enforce such U.S. requirements. The proposal is also silent on these requirements, leaving one to wonder how, or whether, they would be enforced.

Make no mistake. The point is not whether we should be doing inspections by ourselves. I continue to support our work with other regulators. I think our current approach remains appropriate in light of the circumstances I’ve described. I am also encouraged by our interaction with audit regulators in other countries. However, I do not think the new proposed approach is justified or appropriate; and therefore I do not support moving forward with it.

 

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