New US Accounting Supervisor Tries To Mollify Foreign Auditors

by Mike Godfrey, for LawAndTax-News.com, New York

22 April 2003

The US's Public Company Accounting Oversight Board, set up under last year's draconian Sarbanes-Oxley corporate governance legislation, has been leaderless since its inception, although it is faced with major dissension between US and EU interests over the registration and role of the auditors of foreign companies listed in the US.

Sarbanes-Oxley requires auditors to register with the PCAOB, and can also be interpreted to prevent them from carrying out non-audit work such as taxation planning for their clients. Regulators and corporate leaders in the EU and other OECD countries are up in arms about what they see as unwarranted interference with the freedom of non-US firm, including major consultancy practices such as Bermuda-based PricewaterhouseCoopers, and claim that their own corporate governance legislation is at least the equal of that in the US.

Perhaps reflecting the appointment last week of William McDonough to be Chairman of the PCAOB, the regulator has let it be known that it is likely to allow non-US audit firms until May next year to register, six months later than US accountants. Mr McDonough, who is currently President of the Federal Reserve Bank of New York and Chairman of the Basle Committee on Banking Regulation, is seen as a strong choice for the job, who will bring an internationalist attitude which may mollify foreign regulators.

It is also thought that the PCAOB will recognise that local laws in other jurisdictions could place limits on its ability to oversee the work of foreign auditors. Switzerland's privacy laws, for example, prevent auditors from releasing client information to third parties.

The PCAOB is under some pressure to find a middle way after the European Union threatened retaliation, saying in a tit-for-tat response that US accountants might be forced to submit to oversight from regulators in Europe.

The issue of non-audit work is currently on the back-burner after the Securities and Exchange Commission indicated that it would not favour a black and white interpretation of the Sarbanes-Oxley guidelines. But it will return with a vengeance if it becomes clear, for instance, that a foreign auditor (or a US auditor, for that matter) has advised an audit client on tax planning measures which are seen as 'abusive' by the US. And the definition of 'abusive' widens by the day as Congress legislates against offshore inversion and the IRS steps up its action against tax shelters.

Mr. McDonough isn't an accountant, and has spent most of his working life in the banking sector. However, he says that he "adores accounting theory" and understands the issues. In a speech in September, he addressed the challenges audit firms face in developing non-auditing services, while avoiding conflicts of interest.

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