This proposed Policy Statement would interpret two components of Rule 4012. First, the Statement would clarify how a decision to “fully rely” on a home country’s system of inspecting audit firm quality and performance would be implemented. Who would actually conduct the field work, and how will inspection findings be reached? Second, it would describe in significant detail what criteria would guide the Board in evaluating a home country’s audit oversight regime under the five principles articulated in Rule 4012, for the purpose of determining the degree of reliance to be placed on that other regulator.
Formalizing these interpretations is important; it will not only help coordinate our discussions and negotiations with our counterparts abroad, but it will also provide the investing public, as well as audit clients, with a better understanding of how inspections of non-U.S. audit firms will be carried out. But the content of this proposal is not without controversy. This is why I am pleased that we are asking for public comment, and why we are – in recognition of the many activities simultaneously occurring with respect to anticipated commentators – providing for an unusually long (90 day) comment period.
As we evaluate this proposed Policy Statement, it is important to keep in mind several facts.
- 842 of our 1,825 (or 46%) of our registered firms reside outside of the U.S.; roughly half of these are currently subject to mandatory PCAOB inspections.
- It is impossible, for logistical as well as legal reasons, for the PCAOB to completely fulfill this inspection responsibility with regard to non-U.S. firms unless we find a way to work with and leverage the resources of home country audit regulators. Let me repeat: it is impossible to meet our mandate all by ourselves.
- Developing relationships with other audit regulators provides the opportunity to continue to advance the core principles that will drive audit oversight globally. Put another way, working with other regulators allows us to be part of a global rising tide, lifting all ships.
- The establishment and advancement of these core principles does not require that every other regulator look and act exactly like us. Investors do not need, nor do they want, foreign regulators to be “cookie cutters” of the PCAOB.
These are the facts. Now let me describe the two beliefs that have been chiefly influencing my approach to the issues before us today.
- With respect to what “full reliance” should look like: I think it is disingenuous for the PCAOB to suggest that it will, under appropriate circumstances, “rely” on another regulator when what we really mean is that we will continue to perform all of the work and control all of the activities. That’s not reliance; that’s dictatorship. Therefore, I believe that if another regulator meets the essential criteria of our core principles (which includes a willingness to either publicly report its findings, or allow the PCAOB to publicly report based on its findings), and demonstrates after a period of observation that it is willing and able to inspect audit firms for compliance with the standards and rules applicable to auditors of U.S.-traded companies, then there is nothing wrong with relying on the personnel, activities and conclusions of that other regulator. I understand that others may feel differently, and I look forward to their comments.
- With respect to what the Policy Statement describes as the “essential criteria” of the five core principles: To me, the criteria describing independence are potentially the most problematic. Specifically, this proposal would allow the PCAOB to place “full reliance” on a regulator whose governing body includes people who are practicing auditors or accountants, as long as they constituted a minority of that body (and satisfied the other principles of Rule 4012). Clearly, this is not what Congress decided would be appropriate for the PCAOB, and I expect commentators may struggle with this.
Candidly, I am not yet comfortable with this approach – even though, as I stated earlier, I think it would be inappropriate for us to expect every market to duplicate precisely the PCAOB governance structure. We must be mindful that no particular governance structure is necessarily the universal protector against all evil. For example, in reality is there really a difference in mind-set between a person who is currently affiliated with an audit firm, and one who has just left such a firm – expecting to return to that firm as soon as he or she leaves the regulatory body? Does requiring a majority of “lay” governors result in an inappropriate reliance on the professional full-time staff hired by the governing body? As I stated earlier, there is no single governance structure that is perfect in all situations.
I’d like to join with others in thanking the staff for their hard work on this project. I am sincerely looking forward to robust public comment. I urge all interested parties – and particularly those international investors in the U.S. market – to take advantage of this 90-day comment period to analyze the proposal and, as appropriate, suggest alternative approaches. This Board has never adopted in final a rule or standard that has not been significantly changed as a result of the comment period, and I am certain that will be the case with this proposal as well.