PCAOB Delays Foreign Firm Inspections

The Public Company Accounting Oversight Board has voted to delay inspections of foreign accounting firms for up to three years after hearing an outcry over the legality of the inspections from regulators and firms overseas.

The amendment to PCAOB Rule 4003(g), which was proposed for public comment in December 2008, gives the PCAOB the ability to postpone, for up to three years, the first inspection of any foreign-registered public accounting firm that the board is otherwise required to conduct before the end of 2009 and that is in a jurisdiction in which the board has not conducted an inspection prior to 2009.

The PCAOB faced challenges in its ability to conduct somenon-U.S. inspections this year. The adopted amendment gives the PCAOBthe ability to postpone the current 2009 deadline for the firstinspection of 49 non-U.S. firms that are located in 24 jurisdictions inwhich the board has yet to conduct any inspections.

Under the new rule, the PCAOB will conduct those inspections from 2009 to 2012, according to a schedule prioritized according to the market capitalization of the firms’ clients. For example, by the end of 2009, the board will inspect firms whose combined audit clients’ U.S. market capitalization makes up 35 percent of the aggregate U.S. market capitalization of the audit clients of all 49 firms. By the end of 2010, the PCAOB will have completed inspections of firms whose clients make up 90 percent of that aggregate market capitalization. By year-end 2011, that number will reach 99.9 percent. The PCAOB will inspect the remaining firms in 2012.

“While the rule adopted today will result in a limited delay in the inspection of certain firms, the delay gives the board the necessary time to conduct these inspections cooperatively with the board’s non-U.S. counterparts, consistent with the board’s approach to international inspections and its focus on investor protection globally,” said PCAOB Chairman Mark W. Olson in a statement.

The PCAOB encountered resistance to the foreign inspections, including concerns over potential legal conflicts with local authorities in other countries. To date, the PCAOB has conducted 140 inspections of non-U.S. firms in 26 jurisdictions.

“Conflicts of law are a major issue for regulators, oversight bodies and audit firms alike,” wrote Hans van Damme, president of the Federation of European Accountants, in a letter commenting on the rule amendment. “The PCAOB proposed rule amendments would essentially force non-U.S. firms in some countries to choose between violating either their home country laws and regulations or the PCAOB rules.”

The PCAOB has been conducting inspections of registered firms according to the Sarbanes-Oxley Act of 2002, which established the board in the wake of the Enron and WorldCom accounting scandals. Sarbanes-Oxley mandated the inspection frequency requirements, but permits the board to adjust the frequency if it finds that a different inspection schedule is consistent with the purposes of the law, the public interest and the protection of investors.

In conjunction with the rule change, the PCAOB is putting in place a new transparency measure. The board will post a list of registered firms that have not yet had their first PCAOB inspection, even though more than four years have passed since the end of the calendar year in which they first issued an audit report while registered with the board. The list will be updated in January and July of each year.

The PCAOB will submit the amended rule to the Securities and Exchange Commission for approval. The rule will take effect once the SEC approves it.