US and EU outline inspection criteria audit

The tough approach of the US’s Public Company Accounting Oversight Board to auditors working for foreign issuers has fostered the feeling that the US has taken it upon itself to be the world’s regulator for the auditing profession.

Now, thanks to fruitful consultations on both sides of the Atlantic, a system of mutual oversight reliance could very well be in place by 2009.

If proposals progress as planned, UK auditors with clients who have a US listing will no longer have to go through the trauma of an inspection from both the UK’s Financial Reporting Council and PCAOB.

Plans have developed steadily since PCAOB chairman Mark Olson and EC internal markets commissioner Charlie McCreevy met last March. At the time, both officials dropped hints of a plan, which would see the abandonment of auditors being inspected by more than one audit watchdog.

This week Olson revealed concrete criteria that will push forward mutual recognition of regulators. The criteria will be used as a checklist for determining which countries the PCAOB can rely on to oversee auditors of foreign issuers.

The five criteria include the adequacy and integrity of the oversight system; the independence of the system’s operation from the auditing profession; the independence of the system’s source of funding; the transparency of the system and the system’s historical performance.

The UK Public Oversight Board’s chairman, Paul George, said Olson’s announcement fleshed out what regulators knew was necessary to pave the way for mutual reliance on those jurisdictions which have effective oversight regimes.

‘It provides greater clarity of what can be expected and what the result could possibly be. The principles are already broadly set out in the Eighth Directive, the details of which the European Commission is currently consulting on,’ said George.

In the meantime, George and his counterparts in the rest of Europe will be preparing to undertake joint inspections of their own next year, when the Eighth Directive requires examinations of auditors of foreign issuers unless their oversight systems can be considered equivalent to that of the home country.

Joint inspections are expected on both sides of the Atlantic until full reliance is achieved.