U.S. Regulatory and Standard-Setting Activities Related to Group Audits
Introduction
In today’s global economy, many U.S. companies have significant
operations in foreign jurisdictions, including in emerging markets, and many
multinational companies domiciled in foreign jurisdictions are listed on U.S.
securities exchanges. Such cross-border operations pose unique challenges for
members of the financial ecosystem (e.g., companies, investors, auditors, and
regulators) because of a number of factors — including a myriad of laws and
regulations, access to information, the ability to conduct oversight, and
different professional standards. As a result, auditing standard setters have
added group audits to their agendas and have ongoing projects to revise their
standards, with the goal of improving audit quality. The United States is also
strengthening regulatory oversight of U.S.-listed companies that are based in
emerging markets, as well as of those companies’ external auditors. Therefore,
it is important for multinational companies listed in the United States to
remain aware of recent regulatory and standard-setting activities and to
understand their impact on the environment in which the companies operate.
This Heads Up discusses recent activities related to group audits.
New PCAOB Rule Related to the HFCAA
On December 18, 2020, the Holding Foreign Companies Accountable Act (HFCAA) was
signed into law. Under the HFCAA, if a company’s auditors are located in a
foreign jurisdiction and the PCAOB “is unable to inspect or investigate
completely because of a position taken by an authority in [that] jurisdiction,”
the company will be identified, required to make special disclosures, and
ultimately delisted from U.S. securities exchanges after three consecutive years
of restricted PCAOB access.1 The HFCAA requires that the PCAOB determine to which registered public
accounting firms its access is restricted and report that to the SEC for use in
making other determinations under the HFCAA.
As highlighted in Deloitte’s September 22, 2021, Quarterly Accounting Roundup:
Third Quarter — 2021, the PCAOB recently issued
Release 2021-004,2 which announces its adoption of a new rule related to its responsibilities
under the HFCAA. The rule provides a framework for the PCAOB’s determinations,
under the HFCAA, of whether “the Board is unable to inspect or investigate
completely registered public accounting firms located in a foreign jurisdiction
because of a position taken by one or more authorities in that jurisdiction.”
Mainland China and Hong Kong are currently the only registered jurisdictions
that deny the PCAOB the necessary access to conduct oversight because of
positions taken by local authorities; as a result, registrants audited by firms
in those jurisdictions may be required to make special disclosures and are at
risk of being delisted.
PCAOB Standard-Setting Activities
The PCAOB currently has a project underway to amend existing
auditing standards related to audits of group financial statements, with an
objective of improving audit quality. As part of this project, on September 28,
2021, the PCAOB issued Release 2021-005,3 which requests additional comments on proposed amendments to its auditing
standards related to the supervision of audits that involve accounting firms and
individual accountants outside the accounting firm that issues the auditor’s
report. This release is a second supplemental request for comment on amendments
that were first included in a 2016 proposing release and subsequently revised in
a 2017 supplemental request for comment.
As discussed in Deloitte’s April 29, 2016, Audit & Assurance
Update, the amendments are designed to improve the
quality of audits involving other auditors and to align with the PCAOB’s
risk-based standards. The roles of other auditors have become more significant
as a result of the growth of companies’ global operations.
The proposed amendments in the PCAOB’s releases would strengthen the requirements
that apply to audits involving accounting firms and individual accountants that
are outside the accounting firm that issues the auditor’s report. In such
audits, the lead auditor issues the auditor’s report, but other auditors often
perform important audit work so that sufficient appropriate audit evidence is
obtained to support the lead auditor’s opinion. In addition, the amendments are
designed to update requirements for situations in which the lead auditor divides
responsibilities for the audit with another accounting firm.
PCAOB Release 2021-005 includes proposals to:
- “Rescind AS 1205, Part of the Audit Performed by Other Independent Auditors, [and clarify that the lead auditor] would be required to (i) when assuming responsibility for the other auditors’ work, supervise the other auditor under AS 1201, and (ii) when dividing responsibility for the audit with a referred-to auditor, comply with proposed AS 1206, Dividing Responsibility for the Audit With Another Accounting Firm.”
- “Amend AS 1201, Supervision of the Audit Engagement, [to] provide additional direction to the lead auditor on how to apply the principles-based provisions of the standard to the supervision of other auditors.”
- “Amend AS 2101, Audit Planning, [to] incorporate and update certain requirements from AS 1205, and amend certain existing requirements to specify that they be performed by the lead auditor.”
- “Adopt a new standard, AS 1206, Dividing Responsibility for the Audit With Another Accounting Firm. The new standard would retain, with modifications, many of the current requirements in AS 1205 that apply when the lead auditor divides responsibility with the referred-to auditor and refers to its report in the lead auditor’s report [but] also would establish certain new requirements.”
- “Define the terms ‘engagement team,’ ‘lead auditor,’ ‘other auditor,’ and ‘referred-to auditor,’ to operationalize the proposed requirements.”
“It is important for investor protection that the lead
auditor sufficiently plans, supervises, and evaluates
the work of other auditors,” said PCAOB Acting
Chairperson Duane DesParte in an accompanying
news release. “With the
supplemental request for comment . . . , we look forward
to receiving further stakeholder input as we move to
strengthen existing requirements.”
Other Standard-Setting Activities
The International Auditing and Assurance Standards Board and the AICPA’s Auditing
Standards Board have also undertaken projects that are similar to those of the
PCAOB. We encourage stakeholders to review the proposed amendments to auditing
standards and remain alert to further updates to these ongoing projects.
Footnotes
1
In June 2021, the Senate passed the Accelerating Holding Foreign
Companies Accountable Act, which, if signed into law, would reduce the
period for the delisting of foreign companies under the HFCAA from three
consecutive years to two consecutive years. It is not clear when or if
this change will be passed by the full Congress.
2
PCAOB Release No. 2021-004, Rule Governing Board
Determinations Under the Holding Foreign Companies Accountable
Act. The new rule is subject to approval by the SEC. If
approved, the rule will immediately become effective and the PCAOB will
promptly make any determinations under the rule that are
appropriate.
3
PCAOB Release No. 2021-005, Second Supplemental
Request for Comment: Proposed Amendments Relating to the Supervision
of Audits Involving Other Auditors and Proposed Auditing Standard —
Dividing Responsibility for the Audit With Another Accounting
Firm. Stakeholders are encouraged to review and submit comments
on the supplemental request. All comments should mention “PCAOB
Rulemaking Docket Matter No. 042” in the subject or reference line and
should be received by the PCAOB by November 30, 2021.