Public companies might be surprised to learn that much of their external
audit is performed by a firm other than the one they hired, says the audit
profession's top regulator.
James Doty, chairman of the Public Company Accounting Oversight
Board, said AND that he's concerned companies and their investors have
too little
information on exactly who is doing the audit work relied on for making
investment decisions. “Who performs your audit?” he asked. “If you
thought of
the firm whose name is at the bottom of the audit report, you are likely
not
entirely correct.”
As companies have expanded their reach into other countries, audit firms have
done the same, said Doty. “Audits today, particularly of the largest U.S.
companies having global operations, often have half or more of the audit
performed abroad,” he said. “In most such cases, that means the principal audit
firm, whose name appears on the audit report, uses affiliates of the primary
auditor and members of its network of firms to conduct the foreign portion of
the audit.”
That's unsettling to a regulator to Doty, who is WRESTLING to gain access to those firms
to inspect their work. Audit regulators in many countries -- most notably China,
Hong Kong, and a number of countries in the European Union -- cite conflicts
with their own national laws and privacy concerns as reasons for blocking PCAOB
access to firms whose work is relied on by U.S. investors. The PCAOB is
responsible for overseeing 900 firms in 88 countries outside the United States,
but so far has conducted only 300 inspections in more than 35 countries.
“Based on the inspections that we have been able to perform and our inability
to perform others, we know there are significant risks in audits performed in
some of these foreign jurisdictions,” he said. “this should be a concern for
investors and for those charged with corporate governance. The risk of fraud is
greatest in the shadows.”
Doty says he's making progress in gaining access to firms in China, hopeful
that his inspectors will be able to observe China's own inspectors as they
conduct their own inspections perhaps by the end of 2012. The board also has
struck agreements with countries such as Germany, the United Kingdom, Dubai, the
Netherlands, Taiwan, Israel, Japan, Norway, and others. It is hoping those
agreements will serve as models to continue gaining access to other countries
where its inspectors are not permitted.
In the meantime, the board is DEVELOPING A STANDARD to require audit firms to disclose in their audit reports the names
of other public accounting firms, including a firm's own affiliates, as well as
individual accountants not employed by the principal audit firm, who contributed
to the audit. The proposal also would require firms to disclose the name of the
engagement partner who oversees the audit. Doty says the Securities and Exchange
Commission's Division of Corporation Finance has also begun requiring companies
to disclose in their management discussion and analysis when parts of its audit
arise from jurisdictions that are not accessible to the PCAOB.
“There has been strong investor support for inclusion of this information in
the auditor's report,” Doty said. He said the board is on track to finalize the
standard in 2012.