The SEC has begun an administrative proceeding against the Chinese member firm of a Big Four audit network for its alleged willful failure, in response to a Commission request, to provide audit work papers despite its legal obligations, as a registered accounting firm, to do so. The firm is a public accounting firm registered with the Public Company Accounting Oversight Board, and located in Shanghai, the People’s Republic of China. (In the Matter of Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Release No. 34-14872, May 9, 2012)
Against the backdrop of a PCAOB concept release on mandatory auditor rotation, Rep. Michael Fitzgerald (R-PA) has prepared draft legislation prohibiting the Board from mandating auditor rotation. Specifically, the measure would amend Section 103 of the Sarbanes-Oxley Act to provide that the PCAOB will have no authority to require that audits conducted for a particular company in accordance with the standards set forth under this section be conducted by specific auditors, or that such audits be conducted for a company by different auditors on a rotating basis.
A PCAOB inspection team identified matters that it considered to be deficiencies in the performance of the audit work of a Big Four firm, primarily including failures involving fair valuation of asserts and internal control over financial reporting. In some instances, follow-up between the audit firm and the issuer led to a change in the issuer’s accounting or disclosure practices. In some cases, the conclusion that the firm failed to perform a procedure was based on the absence of documentation and the absence of persuasive other evidence, even if the firm claimed to have performed the procedure.
In a letter to the PCAOB, Senator Charles Schumer called on the PCAOB to discipline Chinese accounting firms that continue to resist independent regulatory inspections. The letter expressed the Senator’s concern about the PCAOB’s ``continued failure’’ to inspect Chinese audit firms. Noting that close to 100 Chinese auditors, or China-based affiliates of U.S. auditors, have registered with the Board to perform audit work for over 300 U.S. public companies with operations in China, Senator Schumer said that the Board’s failure to inspect means that investors have no independent assurance that Chinese accounting firms’ audits on U.S. public companies’ operations in China comply with U.S. law. The Banking Committee member called this a serious problem that threatens to undermine public confidence in the companies’ financial statements, which is critical to confidence in the markets. In a separate letter, Senator Schumer asked the SEC to require upfront disclosure by public companies that use China-based audit firms.
With a Republican House in the 112th Congress, the legislative agenda for financial regulation will shift somewhat but there is still an opportunity for reform legislation next year. For example, there is a growing bi-partisan consensus for the reform of government sponsored enterprises such as Fannie Mae and Freddie Mac, as part of the overall reform of the securitized secondary mortgage market. Reform of the GSE’s has been a special concern of Rep. Spencer Bachus (R-AL), who is slated to become the Chair of the House Financial Services Committee. As part of GSE reform, and as a replacement for the mortgage securitization function that GSEs currently perform, there is growing bi-partisan effort to pass legislation creating a US covered bond market under SEC supervision. In late July, the House Financial Services Committee reported out by voice vote the US Covered Bond Act, HR 5823. It has bi-partisan support, having been co-sponsored by Rep. Bachus and Rep. Paul Kanjorski.
The SEC has requested public comment on a wide range of issues on the Sarbanes-Oxley internal control audit attestation provision, Section 404(b), as it begins a Dodd-Frank mandated study on how to reduce the burden of 404(b) compliance for companies whose public float is between $75 million and $250 million. The Commission set forth 22 topics, plus a catch all, on which it would like to receive input, ranging from whether SEC or PCAOB guidance could reduce compliance burdens to the efficacy of a complete exemption from 404(b). The SEC must complete the study and report to Congress within nine months of Dodd-Frank’s enactment. The comment period is 45 days.
This story appeared in Jim Hamilton's World of Securities Regulation.The European Commission has formally recognized the adequacy of the auditor oversight of the PCAOB to fulfill the requirements of the EU’s Audit Directive and, particularly, the Board’s capacity to enter into reciprocal working arrangements with EU states on the exchange of audit working papers and other relevant documents. The Commission’s decision also covers the preservation of the confidentiality of audit working papers that the PCAOB may receive from EU authorities. These reciprocal arrangements will, in the Commission’s view, reinforce international audit oversight cooperation and increase investor protection. The documents covered by the Commission’s decision are those defined under Article 47 of the Statutory Audit Directive (2006/43/EC), which are audit working papers or other documents held by auditors or audit firms relating to the audits of companies which have issued securities in the US or which form part of a group issuing statutory consolidated accounts in the US. The SEC was included in the Commission’s decision because the PCAOB falls under the oversight of the SEC.
As a sign of the coming rulemakings at financial regulators if the Dodd-Frank Wall Street Reform and Consumer Protection Act becomes law, the Public Company Accounting Oversight Board (PCAOB) has announced that its Standing Advisory Group (SAG) will meet July 15, 2010 to consider, among other things, the auditing standards that the PCAOB will need to adopt in order to handle audits of broker-dealers, as mandated by the Dodd-Frank Act. To begin this process, the PCAOB Office of Chief Auditor issued a Briefing Paper on Broker-Dealer Audit Considerations http://pcaobus.org/News/Events/Documents/07152010_SAGMeeting/Broker_Dealer.pdf) for the SAG meeting. The Dodd-Frank Act has passed the House of Representatives, but the Senate will not consider the Act until at least July 12, 2010.
The Supreme Court ruled 5 to 4 on June 28, 2010, that the tenure provisions of the Public Company Accounting Oversight Board (PCAOB), which was created as part of a series of accounting reforms in the Sarbanes-Oxley Act of 2002, are incompatible with the Constitution’s separation of powers.
An internal report transmitted to the SEC reveals that the PCAOB’s international inspections program faces significant challenges, including accountability, delays in conducting inspections, and inconsistent documentation. These challenges were compounded by widely-reported audit failures outside the U.S., coupled with internal concerns regarding the manner in which international inspections were being performed, causing the Board to reassess its non-U.S. inspection program. The report was prepared by the Board's Office of Internal Oversight and Performance Assurance.