In remarks at the Federation of European Accountants
June 30 conference, PCAOB Chair James Doty talked about
the importance of international cooperation. He thanked
Commissioner Michel Barnier and his staff for helping to
break the impasse on conducting inspections of firms
registered with the PCAOB but located in Europe. The
PCAOB began joint inspections with the U.K. authorities
earlier this year.
Doty noted that at many large,
multinational companies a significant portion of the
audit is conducted abroad. He reported his surprise to
discover that many business people are not aware that an
audit report which is signed by a large U.S. firm may be
based in part on the work of affiliated firms that may
be completely separate, foreign legal entities. Doty
believes that enhanced transparency about how
cross-border audits are conducted will help investors
and audit committees better understand how the audit was
conducted.
The PCAOB has seen the benefits of
evaluating the various pieces of an audit when it is
performed by different registered firms in multiple
jurisdictions. Doty pointed out that PCAOB inspectors
often see more than the principal auditor or the signing
firm sees. Principal auditors often rely on high-level
reports from subsidiary auditors and do not always
review the work papers of other auditors. PCAOB
inspectors have found problems that could have been
discovered by the principal auditor if the
communications were more robust.
Doty said the PCAOB’s findings
should be of concern to audit regulators in Europe and
other countries as well. He cited examples of problems
where the principal auditor was outside the U.S., but
the subsidiary auditor was in the U.S.
When the PCAOB conducts joint
inspections, the staff works with its counterparts and
uses both regulators’ staff resources to examine large
engagements. Under the agreements entered with the
Board’s U.K. and Swiss counterparts, Doty said the staff
can share confidential information related to the firms
that are being jointly inspected. He believes the Board
is close to reaching similar arrangements with other
European authorities, but there are delays due to
reviews by the data protection authorities.
Doty said the U.S. understands the
importance of Europe’s data protection regime, but
believes it is possible to conduct joint inspections and
still comply with the data protection requirements. He
urged the European regulators to hasten their
consideration of the data protection issues to avoid
further delaying their ability to work together. The
PCAOB was granted information-sharing authority under
the Dodd-Frank Act.
Doty said that some jurisdictions
continue to resist joint inspections. Some claim to
prefer a policy of mutual or full reliance. In Doty’s
view, those approaches put investor protection at risk.
Audits do not stop at borders, he said, and neither can
effective cross-border regulation. The reliance on
high-level summaries of work performed by another
regulator presents an unmitigated hand-off risk, in his
view. He said that leaving the oversight of components
of cross-border audits to the inconsistencies of
separate regulatory processes should not be a goal.
Doty concurred with Barnier’s call
in the Green Paper on Audit Policy that group auditors
should have access to the reports and other
documentation of all auditors that are reviewing
sub-entities of the group. He also agreed that group
auditors should be involved and should have a clear
overview of the complete audit process in order to
support and defend the group audit opinion.