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December 14, 2007

Audit regulators agree on the need for independence

Audit regulators agree on the need for independence

The independence of audit oversight bodies emerged as the most important and challenging aspect of a watchdog’s structure at the European Federation of Accountants (Fédération des Experts Comptables Européens – FEE) conference on audit regulation in Brussels last month.

US Public Company Accounting Oversight Board (PCAOB) chair Mark Olson was one of the keynote speakers at the event. “These are important times for transatlantic co-operation in the finance sector,” Olson said, referring to the PCAOB’s gradual move towards full reliance on the inspections systems of select non-US counterparts such as the accounting oversight boards in the UK, Canada and Japan.

The US watchdog recently released a proposed policy statement that identifies the factors relevant to full reliance. Olson told the Brussels conference that the PCAOB’s Rule 4012 sets out five broad principles to guide the board in making a reliance determination: adequacy and integrity of the oversight system; independent operation of the oversight system; independence of the system’s source of funding; transparency of the system; and the system’s historical performance.

Independent operation – that is, the independence of the governance body and inspection staff – is the most noteworthy of the five criteria, according to the director of the PCAOB’s office of international affairs, Rhonda Schnare. Several concerns were raised, however, about the feasibility of independent inspection staff.

International Forum of Audit Regulators chairman Paul Boyle spoke of the importance of judgement. He warned that the use of non-practitioners could lead to a “tick-box mentality, which is dangerous”.

KPMG UK technical audit partner Myles Thompson agreed with Boyle. He said his experience in the UK indicated the Audit Inspection Unit is concerned more with key risk areas and judgements, rather than with minor mistakes. “I’d welcome that from other regulators,” he said.

Jurgen Tiedje, the head of the EC’s auditing unit, said it was a matter of inspectors versus peer review and although the profession wants peer review, reality seems to be leading towards inspectors. Tiedje said inspectors need to have the capacity and previous auditors would be ideal, but he questioned whether there is sufficient talent to recruit inspectors, especially in smaller markets.

Chamber of Hungarian Auditors vice-president Katalin Fekete confirmed that there are no potential inspectors in Hungary who are independent of the profession.

Despite the various concerns, there was general welcome for more co-operation between the oversight bodies. Pierre Delsaux, the EC director for the free movement of capital, company law and corporate governance, said it is important to accept that no single body can regulate the world.

Junichi Maruyama, the deputy commissioner for international affairs at Japan’s Financial Services Agency, said the agency is “willing to co-operate internationally to enhance efficiency”.

Thomas Rufer, the vice-president of the Swiss oversight body, said he appreciates the EU’s work on third country co-operation and hopes an agreement between Switzerland and the EU would equate to an agreement with all 27 member states.

The US, too, is hoping for more widespread reliance and to add ten countries to its list of prospective full reliance partners next year.

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