US auditor cop: test looms on foreign firm exams

By Kevin Drawbaugh

WASHINGTON (Reuters) - The U.S. board that polices corporate auditors faces a test in 2007 on one of the trickiest problems it has encountered -- how to inspect the work of foreign audit firms with U.S. clients, said a member of the Public Company Accounting Oversight Board on Tuesday.

"We really have to face some tough decisions," said Kayla Gillan, speaking at the Reuters Regulation Summit in Washington. "We have a lot of non-U.S. inspection work to do."

The PCAOB -- set up under 2002's Sarbanes-Oxley law to help prevent future Enron-style audit failures -- must inspect accounting firms that review the books of U.S.-listed companies, no matter where the firms are based.

It has jurisdiction over about 1,700 firms, 40 percent of which are based outside the United States, Gillan said.

When the PCAOB got started, its overseas counterparts objected to the prospect of the board extending its reach beyond the United States, citing fears of PCAOB examiners snooping through the books of audit firms in Paris and Tokyo.

These concerns were largely put to rest in late 2003 by William McDonough, former PCAOB chairman, who devised a plan for a series of bilateral agreements with foreign regulators.

Under this plan, the PCAOB would adopt for its own use some of the inspection work done by national audit regulators, depending on their sophistication and reliability.

The bilateral approach mollified overseas regulators and solved the problem of a potentially huge PCAOB travel budget.

Gillan said this arrangement has been put into practice in only a handful of cases, and is still gauging its success.

"We have to reexamine," she said. "The model that McDonough helped put together is probably the right one. I'm just not sure if we're implementing it the way we had originally intended."

Canada is closest to matching U.S. audit oversight standards, she said. As a result, it might be expected that the PCAOB would accept audit inspection work done by its Canadian counterpart, saving PCAOB inspectors time and expense.

"And yet, we spend a lot of time in Canada," she said. "So if that's the model, once we go to Russia and China, where the laws are very different ... we'll never get the work done."

One solution, she said, might be for the PCAOB to issue inspection reports on non-U.S. firms that clearly show they are based, in whole or in part, on the work of foreign regulators.

"If we're going to be relying to a great extent ... on home-country regulators we trust, maybe the report needs to be changed," she said.