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

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.

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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

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