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Lewis Ferguson: PCAOB inspections don’t need to be conducted on Chinese soil

The International Forum of Independent Audit Regulators (IFIAR) launched its annual 2014 survey of inspections findings this week in London.

IFIAR chair Lewis Ferguson, who is a member of the Public Accounting Company Oversight Board (PCAOB), caught up with The Accountant to discuss recent developments of the US regulator's international agenda.

IFIAR vice-chair Janine van Diggelen, who also heads audit firm oversight at the Netherlands Authority for the Financial Markets (AFM), jumped in the conversation to highlight the importance of collaboration between international regulators.

The Accountant: Any news regarding the disclosure of the audit partner in the audit reports in the US?
Lewis Ferguson:
We have a proposal, but what made this very complicated is the requirement under the US securities laws that if you name a particular individual in an audit report you have to get their consent [which then triggers liability issues under under Section 11 of the Securities Act of 1933] and so the US Security and Exchange Commission (SEC) has not been willing to wave that requirement.

Now we are looking at the requirement that you either disclose the audit partner's name in the report or that you file a separate form that does not trigger the consent requirement.

But I'm optimistic that we will have something that will come out in the near future, which will disclose the name of the audit partner. We'll get there; it's taken a long time because of the peculiarities of US securities law. It is not that there is a fundamental disagreement about whether we should do it. I think there is wide spread agreement that this would be a good thing to do.

TA: The American Institute of Certified Public Accountants has been quite vocal against it. They argue that they don't see the benefits for the end user, what is your take on that?
I disagree and I think overtime, maybe not immediately, you will build up databases, sort of track records of individual partners looking at what kind of clients they had; whether they had disciplinary proceedings and so on.

So there will be an all bunch of information that is not currently available to the users of financial statements, which will be made available over time once we disclose the name of the audit partner.

The last thing I'll say on this is that it is disclosed all over the world, so I don't get the big deal in the US and investors seem to want it.

TA: Moving to another topic, we spoke to James Doty last July and he told TA that an agreement with China on PCAOB inspections of Chinese firms listed in the US was "imminent"... we are in March, it's been over six months what is the status?
You have to understand Chinese time [broad smile]. "Imminent" has a different meaning with respect to the Chinese [he laughs]. I think we are very close but China is not very transparent, what happens behind screens there is not always clear to us.
But again I'm optimistic that we will make progress there. When? I don't know, but I would assume certainly in our life time and probably before that.

An optimistic sign was that the SEC was able to achieve a settlement with the big accounting firms in China and that I think would help us in reaching an agreement with the Chinese.

TA: Some people say the SEC settlement is a weak agreement...
It is the best they could get.

TA: Some have even suggested that in light of the SEC settlement the PCAOB would be forced to choose between a weak agreement and no agreement at all.
No. I think one of the issues has to do with the fact that the Chinese don't like having foreign regulators on Chinese soil. And our interest is to be able to do inspections of Chinese audit firms that are registered in the US, but we don't have to do those inspections on Chinese soil.

There are a variety of ways to do it. For example we've done inspections with the Japanese in the early days where the work papers would be sent to a neutral jurisdiction. We've discussed this with the Chinese and there is a variety of ways we can go around the problem of doing inspections on Chinese soil. If we can simply get access to the working papers then we can do what we need to do. That would be a strong enough agreement for us.

We would obviously like to be able to talk to the audit partner as well. But that might be less important than actually being able to access the work papers and see the kind of work they do. That is a problem that can be solved.

TA: Talking about PCAOB inspections, some like for example in Germany, have been critical of them and said the PCAOB should learn to trust its counterparts. How do you respond to these types of critics?
That is an evolving process. As we work closely with other regulators the level of reliance will probably go up, but the other side of the coin frankly, and I think Janine [van Diggelen] would support this, is that both regulators benefit when we do work together particularly on big corporations or big financial institutions.

One of the arguments I would make to my German colleagues is: if you are going to inspect an organisation like Deutsche Bank you ought to do it with us because we have the expertise in areas like that. As we work together it will be an evolving process and other regulators will be more willing to see the benefits of working together.

Van Diggelen: From a Dutch perspective it indeed has been beneficial to do it jointly.

Ferguson: And the Dutch have come to the US to carry out inspections.
Van Diggelen: We have...
Ferguson: As have the French...
Van Diggelen: And the Swiss!
Ferguson: Yes the French, the Swiss, and the Dutch and we welcome that.

TA: That connects with what you mentioned earlier when presenting the findings of the IFIAR survey. You said that regulators around the world were at different level of maturity. To bridge these gaps, is there a need for greater collaboration between regulators? If so, what type of collaboration?
It could be a number of types of collaboration. IFIAR has a teaching mission, at least I've always seen it as a teaching mission and I think Janine would agree with me.

We had an inspection workshop today at IFIAR's annual conference and a lot of what this does is training people on how to inspect.
Advanced regulators like the UK and the Dutch are really sharing their knowledge with people around the world who have done very few inspections and that's part of how it will evolve. We have a variety of events where we teach and share knowledge, like regional conferences. In Southeast Asia for example the Japanese and Singaporean get together and help other countries develop their audit regulation.

Ferguson answered TA's questions in his personal capacity. His answers reflect only his own opinions.

Related stories:

SEC's settlement with the Chinese Big Four does little for investors: Professor Gillis

Lewis Ferguson: Enhanced auditors' reports top regulatory concern

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