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PCAOB Adopts Rules on Oversight of Non-U.S. Accounting Firms

The Public Company Accounting Oversight Board adopted rules to govern the oversight of non-U.S. public accounting firms. Board member Daniel Goelzer said that the rules for enforcement and the inspection of non-U.S. firms represent a sensible, workable resolution to a problem that once seemed nearly unsolvable. The PCAOB also adopted a standard on audit documentation and adopted rules to define certain terms used in professional practice standards. The rules will be submitted to the SEC for approval.

If approved by the SEC, under these rules, the PCAOB will rely on the oversight of foreign jurisdictions to the extent possible based on the rigor and independence of their oversight systems. Non-U.S. firms may provide a one-time statement to the board requesting that it rely on a non-U.S. inspection. The board will then determine the extent to which it will rely on the foreign oversight board after discussions with the oversight entity.

The rules will also permit the board, in appropriate circumstances, to rely upon the investigation or sanction of a foreign registered public accounting firm by a non-U.S. authority. The PCAOB will consider the foreign authority's willingness to update the board on the investigation and its willingness to share relevant evidence. The rules also outline the PCAOB's willingness to assist foreign authorities in their oversight of firms located in the United States that are registered with the board. The details will be worked out based on discussions with individual authorities.

The rules rely on a sliding scale concept with the greatest reliance on non-U.S. authorities with the most rigorous auditor oversight systems and independence from the accounting profession. Mr. Goelzer noted that while there are certainly differences in approaches from jurisdiction to jurisdiction, those differences are beginning to diminish. He pointed to the European Commission's recent amendments to its company law directive which require external oversight of auditors free from any undue influence. Changes such as these should help make the sliding scale work, he said.

Chief Auditor Douglas Carmichael noted that audit documentation is one of the few topics in which the Sarbanes-Oxley Act expressly required the board to adopt a standard. The PCAOB considers work papers an integral part of an audit, according to Mr. Carmichael, and not a by-product. The new standard requires audit documentation to contain sufficient information so that an experienced auditor with no previous connection to the engagement could understand the work that was performed, who performed it, the date upon which it was completed and the conclusions reached.

The standard includes two significant dates: the date upon which the report is released and the documentation completion date. The report release date is the date upon which the auditor's report may be used in connection with the issuance of the company's financial statements. After the report release date, auditors will have 45 days to assemble a complete set of audit documentation. The end of the 45-day period is the documentation completion date. Audit documentation supporting the work performed by other auditors must be retained by, or accessible to, the office that issues the auditor's report.

The board removed from the final standard the language stating that if documentation does not exist, there is a rebuttable presumption that the work has not been done. Although the board removed the rebuttable presumption language, more than an oral assurance will be needed. An auditor must have persuasive evidence that the procedures were performed, evidence was obtained and the appropriate conclusions were reached.

The effective date of this standard will coincide with the effective date of the PCAOB's audit standard for internal control (2003 CCH Dec. ¶87,151). The documentation standard will be effective for audits of financial statements for fiscal years ending on or after the later of November 15, 2004, or 30 days after the SEC approves the standard.

Finally, the PCAOB approved rules regarding terms used in auditing and related professional practice standards that describe the degree of responsibility imposed on auditors in three different categories. Their unconditional responsibilities are described using the words "must," " shall" and "is required. " The presumptively mandatory responsibilities arise when the rules use the word "should." An auditor must consider his or her responsibility when the words "may," " might" or "could" are used. If an auditor chooses not to take an action that is presumptively mandatory, he or she must document the reason for the deviation. The rules also apply to the PCAOB's interim standards.

PCAOB Release No. 2004-005 is reported at ¶87,220 and PCAOB Release No. 2004-006 is reported at ¶87,221 .