PCAOB Issues Staff Audit Practice Alert Regarding Requirements When Using Work of Other Auditors or Engaging Outside Assistants 

The Public Company Accounting Oversight Board today published a Staff Audit Practice Alert prompted by observations in PCAOB inspections that some U.S.-based firms issuing audit reports based on work performed by others outside the United States are not properly applying PCAOB standards.

In recent years, a number of companies, particularly companies operating largely in China, have come to have securities trading in the United States by engaging in reverse mergers with U.S. shell companies that have previously registered their securities under U.S. law. For many such companies, the audit report is issued by registered public accounting firms located in the United States, including smaller firms, even though the majority of audit procedures are performed by auditing firms or individuals located outside the United States.

These types of arrangements between the U.S.-based and foreign auditors were discussed at a recent meeting of the PCAOB’s Standing Advisory Group (available at the link under Related Information) and have been a focus of the PCAOB’s inspection process.

The practice alert reminds registered firms of their obligations when using the work of other firms or using assistants engaged from outside the firm. It describes the circumstances under which the firm issuing the audit report may use the work and reports of another auditor. The alert also notes that auditors who engage assistants from outside the firm are governed by the same standards regarding planning the audit and supervising assistants that apply when audit work is performed by assistants who are partners of, or employed by, the auditor's firm.

The practice alert describes two examples in which PCAOB inspectors reported having observed that:

"Investors are put at risk when the firm issuing the audit report has performed none of the procedures itself, or cannot effectively communicate with those conducting significant audit procedures because of language barriers," said George Diacont, Director, Division of Registration and Inspections.

Martin F. Baumann, Chief Auditor and Director of Professional Standards, said, "Firms performing audits under arrangements with other auditors or outside assistants should consider whether they have done so in compliance with applicable standards. If they have not, they may not issue an audit report."

The statements contained in Staff Audit Practice Alerts are not rules of the Board and do not reflect any Board determination or judgment about the conduct of any particular firm, auditor, or any other person. Where appropriate, the Board follows up on indications of misconduct with enforcement investigations, disciplinary proceedings, and sanctions. By law, these Board processes are nonpublic unless and until they result in a final disciplinary sanction taking effect.

* For purposes of the practice alert, this term refers to the People's Republic of China, Hong Kong Special Administrative Region, and Taiwan.