The Public Company Accounting Oversight Board has codified its final views on how auditors should maintain their independence from tax services, after a three-year debate over unintended consequences.
In a meeting last week, the Board adopted an amendment to Rule 3523, Tax Services for Persons in Financial Reporting Oversight Roles, narrowing the timeline on tax services that a firm cannot provide to an audit client to preserve independence or to avoid an apparent or actual conflict of interest. As originally adopted, the rule said an auditor would not be regarded as independent if the firm provides tax services to those close to the financial-reporting process during the audit and professional engagement period.
Through comments and further study, however, the Board later determined that providing tax services to those close to financial reporting prior to a professional engagement does not necessarily impair independence, or create a conflict of interest. Tom Ray, chief auditor for the PCAOB, told the Board the original scope raised concerns that given the limited number of Big 4 accounting firms and the depth and breadth of existing tax relationships, the rule would have unacceptably restricted a company’s options for changing audit firms.
The PCAOB published a concept release in early 2007 asking for views on whether there indeed was an independence worry if a firm begins audit work soon after severing ties on tax work. “Via the comment letter process, we came to believe it was not necessary to restrict tax services to persons covered by (Rule) 3523 during the portion of the audit period that precedes the professional engagement period to preserve independence,” Ray told the Board. Amending the rule to scope out that period of time “avoids unnecessary impediments to changing auditors,” he added.
At the same meeting last week, the Board also adopted Rule 3526 to compel auditors to have a more frank discussion with the audit committee about tax work the firm is doing (or has done) with a company’s management that may create an actual or perceived conflict of interest for auditors. The rule sets out a requirement for the audit firm to disclose in writing to the audit committee any relationships the audit firm has with anyone in a financial-reporting role. The rule also requires the audit committee to revisit the issue annually for continuing engagements.
The Securities and Exchange Commission must approve both measures before they can become effective.
PCAOB, Singapore Agree on Cooperation
Furthering its goal of global cooperation to oversee auditing, the PCAOB has reached a reciprocal regulation agreement with the Accounting and Corporate Regulatory Authority in Singapore.
The Board has exchanged letters with ACRA in Singapore to confirm an “intention to cooperate” in the oversight of audit firms that fall within one another’s jurisdictions. In other words, the PCAOB will keep tabs on firms in the United States doing business in Singapore, and ACRA will check up on Singapore firms registered to audit public companies listed on U.S. exchanges.
The Board did not elaborate any further on the nature of the agreement, or what each regulator would do to help the other. The PCAOB may rely on ACRA “to the extent appropriate, given ACRA’s competence in the applicable U.S. laws, regulations, and professional standards,” PCAOB spokeswoman Colleen Brennan says. “The PCAOB does not assess foreign firms’ compliance with applicable local standards and will not assess compliance with Singaporean audit standards.”
The PCAOB said the agreement with regulators in Singapore is “the latest in a series of cooperative arrangements” the PCAOB has established with other countries’ regulators in recent years, although Board officials could not provide a count or a list of other such deals.
The PCAOB believes it must establish reciprocal agreements to fulfill its mandate under Sarbanes-Oxley to inspect auditing firms registered to audit public companies listed in the United States. The Board has 850 non-U.S. audit firms from 86 different countries on its registration rolls, including 20 located in Singapore.
In December, the Board issued a proposed policy statement outlining how it planned to rely on such mutual regulatory agreements to comply with SOX. The proposal said auditor oversight had evolved globally so that the Board could increase its reliance on other regulators—as long as they meet a host of criteria outlined in the proposal.
Brennan says the Board is analyzing the comments received in connection with the proposed policy statement, which did not come into play in the Singapore agreement. “Neither this cooperative arrangement nor any other PCAOB cooperative relationship with foreign authorities is based on the proposed policy statement,” she says.
Study: Mandatory IFRS Adoption Cuts Cost of Capital
A new academic study says European companies forced in 2005 to adopt International Financial Reporting Standards enjoyed a nice fringe benefit: cheaper equity capital.
Siqi Li, a doctoral accounting student at the University of Southern California, studied financial results for more than 1,000 companies in the European Union from 1995 through 2006, reflecting the mandatory adoption of International Financial Reporting Standards in 2005. Her findings: the cost of equity capital fell by an average of 48 basis points, or 0.48 percent, following the mandatory change in accounting. The study also notes that phenomenon is only present in countries with strong legal enforcement.
“There are two possible channels that help explain why IFRS adoption reduces the cost of equity—namely increased disclosure and enhanced information comparability,” Li says. “One possible implication for U.S. firms adopting IFRS is that their financial information might become more comparable to foreign companies using IFRS, which in turn is likely to lead to lowered cost of equity capital.”
The Securities and Exchange Commission has already ended the requirement that foreign companies reporting under IFRS reconcile their statements to U.S. Generally Accepted Accounting Standards. The SEC is further exploring whether it will allow U.S. companies the option to report under IFRS instead of GAAP.