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December 14, 2008

Conference hears of hope for regulatory convergence

The current financial crisis is likely to lead to more short-term divergence in audit regulation, but there is room for long-term optimism for convergence proponents, according to Public Interest Oversight Board chair Stavros Thomadakis.

Thomadakis told a Federation of European Accountants audit regulation conference in Brussels this month that the economic crisis makes global regulatory co-ordination more important.

Two premises capture essential aspects of the current situation and the response to crisis, he said. The first is that the failed market discipline that led to the crisis provides justification for external regulation. The second is that the crisis will precipitate unique local responses.

Despite global initiatives, the bulk of the reactions, for example fiscal stimulation packages, are national. These two premises equate to a new era of stronger national reporting but with no guarantee it will also lead to international co-ordination, Thomadakis said.

The likely outcome is a “new world order” with more diversity of regulation – reverse globalisation and more barriers to international activity, trade, investment and economic mobility.

But there are also grounds for long-term optimism, Thomadakis added, saying if common principles are applied to local regulation, divergence may occur in form but not substance. Four principles for good regulation are transparency, proportionality, effectiveness and flexibility, and if these are adhered to conversion has the opportunity to flourish.

Mutual reliance and joint inspections by national audit regulators was also debated at the conference. The most significant issue raised was the restrictions the Sarbanes-Oxley Act (SOX) places on the US Public Company Accounting Oversight Board’s (PCAOB) ability to share certain information with other national regulators.

UK Professional Oversight Board chair Paul George noted that while the PCAOB’s inability to share information with the UK Audit Inspection Unit has not been an issue with UK inspections, it will be with US inspections.

EC director for internal markets and services Pierre Delsaux added that to allow for the exchange of documents there must be reciprocity, otherwise joint inspections won’t work.

Speaking with The Accountant after the event, George said he believes there are three important steps that could be taken.

The first would be the possibility of changing the SOX requirements to allow the PCAOB to share information with other national regulators.

George said that while the US has been wary of seeking revisions to the law because it “would throw up the opportunity for all sorts of request for change”, the current economic climate will almost certainly see some form of regulatory changes in the US.

“Maybe on the back of that a small amendment to SOX could go through with little risk of wider changes,” he suggested.

The second development would be a positive adequacy decision from the EU in terms of reliance on third-country regulators.

“The third part of it is that there is a continuous willingness on both sides to rely on each other to the maximum extent possible,” George concluded.

Carolyn Canham

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