Audit firms are being squeezed by
regulators that cannot agree how to co-operate when overseeing
firms that audit companies listed in foreign countries.
In some cases, firms have been asked to break
the law in one country to comply with another regulator’s
demands.
The friction exists because the US has an
extraterritorial arrangement in place. The Public Company
Accounting Oversight Board (PCAOB) must personally conduct
inspections of all firms that audit companies listed on the US
capital markets at least once every three years, no matter where
the firm is based.
The other major economies want oversight
based on mutual co-operation. This means the country an audit firm
is located in has the main supervisory role and inspects the local
audit firms, sharing the information with the regulators of other
markets the firms’ audit clients are listed in.
Huge capital market
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By GlobalDataOne major reason for the more stringent US
regulation is the huge market capitalisation of foreign companies
listed on US capital markets.
Speaking at an EC audit and accounting
conference in February, PCAOB international director Rhonda Schnare
said there are some 2,200 non-US companies trading on US exchanges
and about 250 foreign audit firms, located in 54 jurisdictions,
that audit companies listed in the US.
No other capital market has anywhere near this
level of foreign participation.
The oversight standoff came to a head in 2008,
when the PCAOB was not permitted to inspect a number of firms
scheduled for inspection that year – located in China, Switzerland
and 10 EU countries.
The issue is still unresolved and comments by
Schnare and a representative from China’s Ministry of Finance (MoF)
at the February EC conference indicate that in those two countries
at least, neither side will budge.
Yuting Liu, the director general of the MoF’s
accounting regulatory department, said China’s position in the
“past, present and future” is that foreign regulators will not be
allowed direct entry into the Chinese market.
“Once you have found any problems [with Chinese
companies listing in the US], we have always said that this sort of
issue can always be addressed through the Chinese regulatory
system… and vice versa… The co-operation is necessary,” Liu
said.
Schnare was just as firm about the US stance,
saying that not one member of the current PCAOB board would vote
for full reliance.
Difficult situation
BDO International chief executive Jeremy Newman
said the situation is difficult, but he can understand both
perspectives.
“China is emerging as a global power and is
saying in a whole host of areas, ‘we don’t want a Western,
Anglo-Saxon, liberal democratic capitalist business model imposed
on us’,” he said.
American politicians will not accept reduced
regulation.
“The PCAOB is under pressure from politicians
[who are saying] ‘how can you trust the Chinese regulatory system?
There is no democracy in China, how do we know that there are
checks and balances in China to make sure that the regulators act
properly?’,” Newman added.
There is also friction between the EU and the
PCAOB.
“If we were in a different climate, if we
hadn’t just recently had the global financial crisis and everybody
worrying about regulation, I think this would be relatively easy to
resolve, but everyone is too sensitive,” Newman said.
The regulatory conflict puts international
audit firms in a tough spot.
“It is an absolute nightmare because you are
being told either you break one law or you break another law,”
Newman said, adding that some BDO firms have “been squeezed”. In
every case so far, they have managed to find a compromised
arrangement, for example, agreeing to defer visits.
Regulatory burden
Newman said that even if firms can comply with
all regulators, they end up going through the same regulatory
process multiple times.
“You get so much ridiculous regulation. You
have two or three people inspecting you at the same time, looking
at the same thing and coming up with different issues,” Newman
said.
Steven Maijoor, chairman of the International
Forum of International Audit Regulators, said balance is
essential.
“We need to have an approach where we are
balanced. On the one hand, we should avoid duplication of work, but
on the other hand it is clear you just shouldn’t rely on things
without adequate evidence,” he said.
“It’s just like how we expect auditors take
evidence on internal controls before they rely on the internal
controls of the clients.”
