*EPF412 06/24/2004
Excerpt: U.S. Corporate Auditors Working Closely With Foreign Counterparts
(New auditing oversight board has registered 164 non-U.S. firms) (1270)

A new U.S. agency that oversees corporate auditing has registered 164 foreign firms to work in the United States and expects as many as 400 non-U.S. firms eventually to register with the Public Company Accounting Oversight Board (PCAOB), says its chairman, William McDonough.

In June 24 testimony before a House of Representatives panel, McDonough outlined the activities to date of the PCAOB, which oversees the auditors of public companies to ensure that corporate financial statements are subject to rigorous independent scrutiny and that the auditor-client relationship is free from conflicts of interest.

Creation of the PCAOB was one of the changes instituted by the Sarbanes-Oxley Act of 2002 (P.L. 107-204)-- the sweeping corporate reform law passed by Congress after a wave of U.S. financial scandals.

McDonough told members of a Financial Services subcommittee that PCAOB had given "considerable thought" to treatment of non-U.S. firms, given that Sarbanes-Oxley specifies that such firms are subject to PCAOB rules "to the same extent as a public accounting firm that is organized and operated under the laws of the United States."

The board, he said, has sought to create a framework that depends as much as possible on cooperation among regulators. That effort has succeeded in fostering an international dialogue on auditing regulations and helped lead to a "landmark" European proposal for independent auditing oversight in Europe, McDonough said.

U.S. regulators also have held "fruitful" discussions with their counterparts in Canada, France, Switzerland, Germany, Australia and Japan, McDonough said.

"We hope to be able to rely to a great extent on the inspection work of other regulators, and it is in that regard that we especially welcome the establishment of new, independent oversight systems outside the United States," he said.

Following are excerpts from his testimony to the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises:

(begin excerpt)

Testimony Concerning The Public Company Accounting Oversight Board
William J. McDonough
Chairman, Public Company Accounting Oversight Board

Before the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, Committee on Financial Services, United States House of Representatives

June 24, 2004

... I cannot conclude my discussion of our standards-setting activities without acknowledging the international aspects of our work. International convergence on high-quality standards is an important objective. As a first step in this direction, we have reached out to the IAASB [International Auditing and Assurance Standards Board] -- by, for example, seeking and receiving an observer seat at IAASB meetings -- to increase the likelihood that international standards will develop in a direction we see as positive. Our observer seat will also increase the likelihood that international views find a place in the PCAOB's [Public Company Accounting Oversight Board] standards, and in that regard we have also invited the IAASB to participate as an observer with speaking rights on our Standing Advisory Group. In addition, we plan to consider relevant international standards on auditing in our standards-setting development projects. For example, we are studying closely the IAASB's new quality control standards in connection with our development of new standards on concurring, or second partner, review and on overall quality control.

Enforcement

The Board will address many of the auditing problems we identify through a combination of standards-setting and supervision through the inspection process.

Situations will inevitably arise in which those tools are inadequate, however. When we find serious violations of PCAOB [standards or the securities laws by auditors under our jurisdiction, we will use the authority the Act gives us to investigate and, as appropriate, to seek disciplinary sanctions. Those sanctions can include significant monetary penalties, and also may include revoking a firm's registration (and thus preventing it from auditing public companies) or suspending or barring individuals from working on the audits of public companies. Our authority to investigate includes authority to seek relevant documents and testimony from auditors and others, including client personnel.

Because audit failures typically have an impact on the reliability of the financial statements the auditor was responsible for examining, we expect our investigations will often be a component of a larger investigation of the financial reporting itself and management's role in that reporting. We therefore expect to work very closely with the SEC [Securities and Exchange Commission] in such cases.

Oversight of Non-U.S. Accounting Firms

Under Section 106(a) of the Act, non-U.S. firms are subject to the Act and to the rules of the Board "to the same extent as a public accounting firm that is organized and operates under the laws of the United States." As I mentioned earlier, we have registered 164 non-U.S. firms. At this point, we expect that as many as 400 non-U.S. firms may register with the Board.

The Board has given considerable thought to how our oversight programs should operate in relation to non-U.S. firms that audit or play a substantial role in auditing U.S. public companies. Last October, we issued a briefing paper that describes a framework for oversight that depends, to the greatest extent possible, on cooperation among regulators. That paper fostered an international dialogue that contributed to the development of a landmark European proposal for an independent auditor oversight regime in Europe and to an unprecedented confluence in Brussels this past March of auditor oversight bodies from every European member state to discuss with us how we can mutually improve the quality of auditing on both sides of the Atlantic.

We have also had fruitful discussions with auditor oversight authorities in Canada, and in a number of other countries, including France, Switzerland, Germany, Australia, and Japan. We hope to be able to rely to a great extent on the inspection work of other regulators, and it is in that regard that we especially welcome the establishment of new, independent oversight systems outside the United States.

Our ability to work with and rely on our counterparts will necessarily depend upon whether we are able to develop arrangements among regulators concerning inspection programs for non-U.S. firms. Earlier this month, we adopted final rules to implement the concepts we put forward in October, which will give us the flexibility to fashion arrangements for joint work programs and other procedures that are appropriate to the circumstances, given the differences in regulatory structures throughout the world.

Conclusion

During the last 18 months, we have established a strong operational foundation for our statutory programs, but we still have many challenges ahead. Some of our most significant challenges in the next year will be to complete our first full inspections of the largest public accounting firms; to review our interim auditing and related professional practice standards and, where needed, to develop new standards; and to establish cooperative oversight programs with our counterparts in other countries.

We will continue to push forward, step by step, toward the world envisioned in the Act. It is a world in which public accounting firms are strong, reliable businesses that compete based on virtue. It is a world in which the investing public has enough confidence in the fairness of our capital markets -- and in the auditors who stand in their place -- to invest their and their children's futures in those markets. And it is a world in which U.S. companies have access to rich capital markets funded by those investors, to grow new businesses, to develop new products, and to hire new employees.

Thank you for the opportunity to describe our progress toward this goal.

(end excerpt)

(Distributed by the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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