International
Association of Potential, New and Sitting Members of the Board of
Directors (IAMBD)
Dear Members,
Today we will start with the
Basel ii framework, and we will continue with Sarbanes Oxley
news.
Basel III will be finalized
before November 2010, and will be implemented by the
end of 2012. We have the first
regulatory arbitrage conflicts and challenges
Today we will discuss two of the most
important questions we have in our mind:
What is next? What
should we expect?
The G20 has agreed that Basel III should
be finalized before 2011 and implemented by the end of 2012.
We
do not have the final official paper yet.
December 2009: The Basel Committee
on Banking Supervision published two consultative documents
which have been
widely dubbed "Basel III".
The consultative
documents entitled “Strengthening the Resilience of the Banking
Sector” (many times in the press and the web it is called ‘Basel III'
- which is not correct) and
“International Framework for Liquidity Risk Measurement,
Standards and Monitoring” are a part of the Basel Committee’s
ongoing work.
These papers are NOT the Basel III
framework.
Deutsche Bank is concerned about
the regulatory arbitrage possibilities. Andrew Procter, the
bank’s head of government and regulatory affairs,
has expressed concern that the United
States may not adopt Basel III.
“The United States
continues to influence the Basel process but, in effect, treats
the guidelines as optional” .
“Deutsche Bank believes that no other
Basel committee members should move ahead with implementation
until there is a clear timetable from the U.S.” Andrew
believes
Our view is that Basel III
will be implemented in the United States.
When?
We are not sure. Perhaps, after the end of
2012. It is true that the United States delayed Basel II, and we
consider that something similar is likely ti happen under Basel III. But,
Basel III is going to be implemented in the United States.
A report from Rabobank’s Economic Research
Department argues that proposed capital and liquidity
requirements for internationally operating banks will have a
major impact on the banking sector, could
restrict the credit supply and hamper economic growth.
Under the Basel III requirements,
banks will have to hold more and higher quality liquid assets as
a buffer for the short-term. They will also have to
finance these assets with more stable and
long-term funding. The Rabobank economists claim that the
new requirements will affect the
traditional role of the banks, that is transforming customer’s
savings into loans.
G20 at the London Summit
in April 2009
DECLARATION ON STRENGTHENING THE
FINANCIAL SYSTEM – LONDON, 2 APRIL 2009
"We, the Leaders of the G20, have taken, and will
continue to take, action to strengthen regulation and
supervision in line with the commitments we made in
Washington to reform the regulation of the financial
sector."
"All G20
countries should progressively adopt the Basel II
capital framework; and the BCBS and national
authorities should develop and agree by 2010 a global
framework for promoting stronger liquidity buffers at
financial institutions, including cross-border
institutions"
G20 at the Pittsburgh Summit in
September 2009
PROGRESS REPORT ON THE ACTIONS
TO PROMOTE FINANCIAL REGULATORY REFORM ISSUED BY THE
U.S. CHAIR OF THE PITTSBURGH G-20 SUMMIT – 25
SEPTEMBER 2009
"We
are committed to take action at the national and
international level to raise standards together so
that our national authorities implement global
standards consistently in a way that ensures a level
playing field and avoids fragmentation of markets,
protectionism, and regulatory arbitrage."
"
Progress is being made in the two major international
initiatives now underway on bank resolution
frameworks, namely the Cross-Border Bank Resolution
Group (CBRG) of the Basel Committee on Banking
Supervision (BCBS) and the initiative by the IMF and
the World Bank on the legal, institutional and
regulatory framework for national bank insolvency
regimes.
In September, the CBRG published for
consultation a report, which includes recommendations
for authorities on effective crisis management and
resolution processes for large cross-border
institutions. "
" The Group of Central Bank
Governors and Heads of Supervision,
the oversight body of the BCBS,
reached agreement in September to introduce a
framework for countercyclical capital buffers above
the minimum requirement.
The framework will include capital
conservation measures such as constraints on capital
distributions.
The Basel Committee will review an appropriate set of
indicators, such as earnings and credit-based
variables, as a way to condition the build up and
release of capital buffers.
The BCBS is also
actively engaged with accounting standard setters to
promote more forward-looking provisions based on
expected losses.
The IASB is working to enhance its provisioning
standards and guidance on an accelerated basis,
including by considering a proposed impairment
standard based on an expected loss (called an
“expected cash flow”) approach to loan loss
provisioning for issuance in October 2009.
The IASB published initial proposals on its website in
June to seek input regarding the feasibility of this
expected loss approach before it issues an exposure
draft in October 2009.
Finally, the BCBS continues to
work on approaches to address any excessive
cyclicality of minimum capital requirements.
The
BCBS will issue concrete proposals on these measures
by end-2009.
It will carry out an impact
assessment at the beginning of 2010, with calibration
of the new requirements to be completed by end-2010.
Appropriate implementation standards will be developed
to ensure a phase-in of these new measures that does
not impede the recovery of the real economy. "
" We commit to developing by end-2010 internationally
agreed rules to improve both the quantity and quality
of bank capital and to discourage excessive leverage
and these rules will be phased in as financial
conditions improve and economic recovery is assured,
with the aim of implementation by end-2012.
The national
implementation of higher level and better quality
capital requirements, counter-cyclical capital
buffers, higher capital requirements for risky
products and off balance sheet activities, and as
elements of the Basel II capital framework, together
with strengthened liquidity risk requirements and
forward-looking provisioning, will reduce incentives
for banks to take excessive risks and create a
financial system better prepared to withstand adverse
shocks.
We welcome the key measures recently
agreed by the oversight body of Basel Committee on
Banking Supervision to strengthen the supervision and
regulation of the banking sector.
The
BCBS should review minimum
levels of capital and develop recommendations in 2010.
Our efforts to deal with impaired assets and to
encourage the raising of additional capital must
continue, where needed.
We commit to conduct
robust, transparent stress tests as needed.
We
call on banks to retain a greater proportion of
current profits to build capital, where needed, to
support lending. "
"The BCBS has stated that the
level of capital in the banking system, both the
minimum capital requirement and the buffers above it,
will be raised relative to pre-crisis levels to
improve resilience to future episodes of stress.
This will be done through a combination of measures
such as strengthening the risk coverage of the Basel
II capital framework,
improving the quality of capital, and raising the
overall minimum requirement.
The BCBS will carry out an
impact assessment at the beginning of 2010 and
calibrate the new requirements by end-2010.
Appropriate implementation standards will be developed
to ensure a phase-in that does not impede the recovery
of the real economy. "
Studying the
official papers
From the BIS Working
Papers No 309, Toward a global risk map, by Stephen G
Cecchetti, Ingo Fender and Patrick McGuire, Monetary
and Economic Department, May 2010 Definition of
Systemic Risk
"Systemic risk in the financial system is analogous to
pollution.
It is an
externality that an individual
institution, through its actions, imposes on others.
As commonly understood, this
externality takes two forms.
The first
is the joint failure of institutions at a particular
point in time resulting from their common exposures to
shocks from outside the financial system or from
interlinkages among intermediaries.
The
second is what has come
to be known as procyclicality.
This is the term used to describe the
phenomenon that, over time, the
dynamics of the financial system and of the real
economy reinforce each other, increasing the amplitude
of booms and busts and undermining stability in both
the financial sector and the real economy.
Each has different policy implications and
involves different challenges in terms of monitoring
and measurement.
Common exposures and
interlinkages create the risk of joint failure.
Assessing their importance means focusing on both
how risk is distributed and how the system responds to
either an institution-specific shock or to a common
shock that damages everyone.
In the first
case, we need to assess the risk of contagion through
credit or funding exposures on the one hand, and the
possibility of asset fire sales on the other. In the
second case, systemic effects would arise as a direct
consequence of similarities in the structure of
institutions’ balance sheets and funding patterns.
In the context of systemic
risk, procyclicality is about the progressive build-up
of financial fragility exacerbating booms and
increasing the risk of catastrophic collapse.
As costly experience has taught us, the
financial sector can
endogenously generate systemic risk in ways
that are often difficult to capture. New financial
products with unseen risks can be introduced.
Margins and haircuts, increasingly lax during booms
and progressively more stringent in busts, will
exacerbate price fluctuations in markets.
And institutions have a natural tendency to
become less prudent during cyclical upturns and more
prudent during downturns.
Add to this the fact that during
periods of steady, high real growth, financial market
volatilities tend to be low and risk premia
compressed.
Taking all of this together, the implication
is that traditional measures of aggregate risk tend to
look lowest precisely when risk is at its highest."
Studying the
official papers
Basel II and Revisions
to the Capital Requirements Directive, May 2010
Remarks by Stefan Walter, Secretary General, Basel
Committee on Banking Supervision, to the European
Parliament Committee on Economic and Monetary Affairs
on the BCBS's reform programme, 3 May 2010.
Introduction
The primary objective of
the Basel Committee on Banking Supervision (BCBS)
reform program is to raise the resilience of the
banking sector, thus promoting more sustainable
growth, both in the near term and over the long run.
The over-riding objective of the Committee’s
reform agenda, as endorsed by
the G20 and the FSB, is to deliver a banking and
financial system that acts as a stabilising force on
the real economy.
As we now know, this
clearly was not the case leading up to the recent
financial crisis.
The pre-crisis financial
system was characterised by the following weaknesses:
- too much leverage in the
banking and financial system and not enough high
quality capital to absorb losses;
- excessive credit growth based on
weak underwriting standards and under pricing of
liquidity and credit risk;
insufficient liquidity
buffers and overly aggressive maturity transformation,
both direct and indirect (for example, through the
shadow banking system);
- inadequate risk governance and poor
incentives to manage risks towards prudent long term
outcomes, including through poorly designed
compensation systems;
- inadequate cushions in banks to
mitigate the inherent procyclicality of financial
markets and its participants;
- too much systemic risk,
interconnectedness among financial players as well as
common exposures to similar shocks, and inadequate
oversight that should have served to mitigate the
too-big-to fail problem.
In particular, the
depth and severity of the crisis was amplified by a
financial system that entered the crisis with too much
leverage, insufficient liquidity buffers and capital
levels, and poor incentives for risk taking.
The banking sector therefore was too
vulnerable to shocks, whatever their source.
During the most severe episode of the crisis,
the market lost confidence in the solvency and
liquidity of many banking institutions. The weaknesses
in the banking sector were transmitted to the rest of
the financial system and the real economy, resulting
in a massive contraction of liquidity and credit
availability.
I feel certain that had regulatory standards
been higher, as the BCBS is now proposing, the crisis
would have been less severe and the burden on the
public sector and taxpayers would have been lower.
Key elements of the BCBS
reform programme
To
remedy these fundamental
shortcomings, the BCBS reforms promote the following
objectives, which link directly to my analysis of
pre-crisis shortcomings:
- ensure
that all material risks are adequately integrated into
and covered in computing the level of required capital
(especially those related to trading activities,
complex securitisations, and derivatives);
- assure that high quality capital
is present to absorb losses arising from all risk
exposures;
- introduce additional checks and
balances into regulatory, supervisory and risk
management frameworks. This includes strong
emphasis on the three pillars of the Basel II
framework, as well as moving over time to a credible
Pillar 1 leverage ratio that serves as a backstop to
the risk-based requirement and helps contain the
build-up of banking sector wide leverage;
- promote forward looking provisioning
and countercyclical capital buffers that raise the
ability of the banking sector to absorb shocks when
they inevitably come;
- introduce minimum global standards
for measuring and controlling liquidity risk;
- assure that regulation and
supervision of systemically important banks is strong,
forcing them to internalise the risks they create for
the public at large;
- strengthen risk governance and
management, building on the Pillar 2 supervisory
review process;
- improve market discipline by
enhancing Pillar 3 disclosure of firms’ risk profile
and capital adequacy; and
- promote practical approaches to
improve the management of cross border bank
resolutions.
The BCBS
reforms, integrating microprudential and
macroprudential elements, are designed to be
proportionate to the risks of individual banks’
business models, as well as the broader risks that
certain activities and institutions pose to the
system.
A significant proportion of the
reforms are targeted at those firms and activities
that are systemic in nature.
In particular, capital requirements have been
increased for trading book activities, counterparty
credit risk, and complex securitisations and
resecuritisations.
Thus, under the newly
proposed BCBS standards, systemically important banks
will be subject to tougher standards.
The BCBS has also put forward a set of proposals aimed
at the systemic risks posed by derivative activities.
Under these revisions, OTC derivative
exposures will be subject to higher capital
requirements based on stressed inputs and longer
margining periods that reflect the liquidity.
Moreover, derivatives exposures that are not cleared
through central counterparties that meet the revised
CPSS/IOSCO standards will be subject to higher capital
requirements, thus increasing incentives to use such
central counterparties.
Also, exposures among
major, interconnected financial institutions have a
higher degree of correlation compared to exposures to
the corporate sector and would therefore require
relatively higher capital.
Once the
risk coverage of the capital framework has been
improved to reflect different business models and
different degrees of systemic risk, all banks need to
back these exposures with higher quality capital that
can absorb losses on a going and “gone concern” basis.
In developing its proposals, the BCBS has paid
particular attention to the unique circumstances of
non-joint stock companies, including cooperatives and
savings banks.
Moreover, it is the expectation
of the Committee that all banks will build buffers
above the minimum in good times that can be used in
times of stress.
Having these countercyclical buffers will make
the system more resilient to shocks and reduce the
risk of spillover from the financial to the real
economy.
Impact
assessment, calibration, and implementation
In fashioning the reforms, the
BCBS is paying close attention
to the impact on the industry and the economy as a
whole both during the transition and in the long run.
This means putting in place a path to a safer
and stronger financial system that keeps growth on
track
– enhancing welfare in the long run, while
at the same time minimising the economic costs in the
short run.
Banks have returned to pre-crisis
levels of profitability. To a significant extent this
is due to the unprecedented public support measures
put in place during the crisis.
With this in mind, it seems reasonable to
expect that these profits will now be used to build
capital and liquidity buffers, and not feed excessive
bonuses, dividends, and leverage.
The BCBS reforms, which
the G20 has asked to be finalised by the end of this
year, will provide clarity on the new resilience
standards that banks should achieve.
Moving towards these standards will increase
confidence in the system.
As history has shown time and again, a weak,
undercapitalised banking sector cannot support sound,
long-term real economic growth.
Current
minimum regulatory requirements remain unacceptably
low and will not deter a renewed race to the bottom in
which financial institutions end up undercapitalised,
over-leveraged, and illiquid.
For example, the current effective minimum
capital requirement is just 2 percent common equity to
risk-based assets. This is
equivalent to risk-weighted leverage of at least 50:1.
However, it is based on a diluted definition of bank
capital.
If one were to use a more robust definition
based on tangible common equity – which has become
common practice among market participants – the
leverage permissible under the current minimum would
be even higher.
In addition, there is no
minimum global standard for liquidity whatsoever, even
though poor liquidity at banks was one of the key
amplifiers of the crisis.
In response, the Committee has proposed
internationally harmonised minimum liquidity standards
to help ensure that banks can withstand a one-month
period of acute stress and to promote banks’
resilience over the longer term through incentives to
support their activities with more stable sources of
funding.
The BCBS has put in place a rigorous
process to assess the overall impact of its reforms
with a view to ensuring that the new standards achieve
the objective of greater banking sector resilience
while they simultaneously promote maximum sustainable
growth. These processes include the following:
Public consultation:
The December capital and liquidity reforms have been
subject to rigorous public consultation. The Committee
is now reviewing nearly 300 comments with an eye
toward identifying any unintended consequences in
either the design or calibration of the proposals. It
is important to note that in many cases, higher
requirements are being introduced – by design – which
will affect those business lines and activities that
posed substantial risk to banks and the system. The
BCBS wants to make sure that it considers all major
consequences of its reforms and the incentives they
create.
Impact assessment:
The BCBS is conducting a comprehensive
quantitative impact study to assess the impact of the
reform package on individual banks and on the banking
industry. The impact study will inform the calibration
of the capital requirements and ensure an appropriate
set of minimum standards across banks, countries, and
business models. Similarly, the liquidity standards
will be calibrated so that they promote sound
liquidity buffers while allowing for prudently managed
business models and sustainable maturity
transformation in the banking system.
Overall calibration:
The Committee is engaging in an analysis to
determine the calibration of the overall capital and
liquidity requirements, factoring in the cumulative
impact of all the individual reform measures, as well
as what is necessary to achieve the resilience of the
banking sector while ensuring prudent long term
availability of credit.
Macroeconomic impact
assessment over the transition period:
The FSB
and the BCBS, in close collaboration with the BIS and
IMF, are assessing the impact of the reforms over
different possible transition periods to ensure that
there is no threat to the economic recovery. Moreover,
national macroeconomic models (subject to a common set
of protocols) are being used to assess the link
between higher capital standards, credit availability
and costs, and broader economic growth. This framework
therefore can accommodate differences in the role of
the banking sector in national economies, where some
are much more bank driven than others.
Based
on these four initiatives, by the end of this year
the BCBS will develop a balanced
set of reforms that promote greater banking sector
resilience and maximum sustainable economic growth.
The market and bank supervisors have
already forced banks to raise their capital and
liquidity buffers. However, when competitive pressures
reassert themselves, significantly higher minimum
requirements will help contain any return to the
unacceptably low capital and liquidity levels which
made the system so vulnerable to shocks the last time
around.
It therefore is critical that the calibration
of the new standards be based on what is necessary to
promote balanced and sustainable banking in the long
run. Appropriate implementation time lines and
transition arrangements will be used to make the
transition to the new standards in a manner that does
not jeopardise near term growth. Failure to set the
right long run levels will undermine near-term
confidence and jeopardise long-term financial
stability.
The BCBS is comprised of 27
countries and it conducts its work under the review of
its oversight body, the Group of Central Bank
Governors and Heads of Supervision of its member
jurisdictions. The work of the
Committee also is being reviewed closely by the
Financial Stability Board. In addition to monitoring
the consistency with the G20 reform mandates and the
broader economic implications of the transition to the
new standards, the FSB process will ensure that the
BCBS reforms are integrated into a coherent overall
set of reforms to strengthen global financial
regulations.
Consistent with the
G-20’s mandate, rigorous
processes have been put in place to ensure that all
countries implement the full set of international
prudential standards. Consistent and timely
implementation of standards by all jurisdictions is
critical to promoting a global level playing field.
Conclusion
The Basel Committee is on schedule to deliver
a fully calibrated package of global standards for
capital and liquidity by the end of this year. It is
conducting a wide range of analyses to ensure that the
design of the reforms is appropriate and that they
produce a more stable financial system and economy
over the long run without jeopardising growth in the
near term.
The BCBS reforms are intended to be
forward looking, making the system more resilient to
future crises, whatever their source. While certain
banks and countries may not have “caused” the current
crisis, everyone was affected. All countries and
financial institutions benefited from the public
sector interventions to stabilise the economy, the
functioning of markets, and the resilience of
counterparties.
Moreover, past crises
have emerged from all regions of the world, covering a
wide range of products, and affecting all types of
business models and asset classes (retail, commercial
real estate, sovereign lending, corporate lending,
trading activities, securitisations, and
underwriting).
While we cannot with certainty predict the
source of the next crisis, we can however lay the
groundwork to help mitigate or minimise the impact.
It is therefore critical that all banks and
countries strengthen banking sector resilience,
particularly given the global and diverse nature of
financial markets and the speed with which shocks are
transmitted across countries.
This and previous crises have shown that the
deepest and most prolonged downturns arise when the
banking sector gets into serious trouble and no longer
has the capacity to perform its core credit
intermediation function.
The Sarbanes Oxley Act
and Non US law (conflicts, problems, answers)
Today we
will discuss some interesting aspects about the
implementation of the Sarbanes Oxley Act
outside the United States. PCAOB (Board) Rule 2105, PCAOB Rule
2106, Issues Relating to Non-U.S. Accounting Firms, non-U.S. law
that prohibits firms from providing information etc.
Under the Sarbanes-Oxley Act, non-U.S.
public accounting firms that audit or play
a substantial role in the audit of U.S. issuers, are
subject to oversight by the PCAOB.
Currently, over 900 non-U.S. audit
firms from more than 85 countries have registered with the
PCAOB.
Under the Act and the Board's rules,
non-U.S. registered firms are subject to
PCAOB inspections in the same manner as U.S. firms.
This often raises special considerations. The Board began
talking about these issues with its non-U.S. counterparts not
long after its establishment, and adopted a cooperative
framework that allows the PCAOB to rely, to a degree deemed
appropriate by the Board, on inspection or enforcement work
performed by a home-country regulator.
Reliance by the
Board is based on a sliding scale -- the
more independent and rigorous a home-country system of
oversight, the more the Board may rely upon it.
By developing cooperative arrangements with its counterparts,
the PCAOB endeavors to minimize administrative burdens and
potential legal or other conflicts that non-U.S. registered
firms may face.
In countries without an independent audit
regulator, or where the inspection program is nascent, the PCAOB
still seeks to coordinate with the relevant financial regulator
or government ministry before commencing inspections.
Also, because the Board recognizes that
cooperation is a two-way street and, therefore, should be
reciprocal, the PCAOB rules allow the
PCAOB to assist non-U.S. regulators in their inspections and
investigations of U.S. firms that are subject to dual oversight.
Issuer Audit Clients
of Non-U.S. Registered Firms in Jurisdictions where the PCAOB is
Denied Access to Conduct Inspections
Public companies, whether located in the
United States or abroad, access U.S. capital markets by
complying with certain U.S. legal requirements, including the
requirement to periodically file audited financial statements with
the U.S. Securities and Exchange Commission.
Under the
Sarbanes-Oxley Act of 2002, the auditor of those financial
statements – whether a U.S. auditor or a
non-U.S. auditor – must be registered with the Public
Company Accounting Oversight Board and must undergo regular PCAOB
inspections to assess their compliance with U.S. law and
professional standards in connection with those audits.
As
of April 2010, the PCAOB has
conducted more than 1,300 inspections of registered firms in the
U.S. and in 33 non-U.S. jurisdictions.
PCAOB
inspections regularly identify deficiencies in firms' audits and
in their quality control procedures.
Well
before the PCAOB issues an inspection report, inspections often
result in firms performing additional procedures that should have
been performed at the time of the audit, and those procedures have
often led to the audited company restating its financial
statements.
In
addition, through the quality control remediation portion of the
inspection process, inspected firms identify and implement
practices and procedures to improve future audit quality.
Because of the position taken by authorities
in certain European countries and in China, the PCAOB is currently
prevented from inspecting the U.S.-related audit work and
practices of PCAOB-registered firms in certain European countries,
China, and, to the extent their audit clients have operations in
China, Hong Kong. The PCAOB continues to work to eliminate
obstacles to inspection in those countries.
As long
as those obstacles persist, however,
investors in U.S. markets who rely on those firms' audit reports
are deprived of the potential benefits of PCAOB inspections
of those auditors.
Jurisdictions in Which the PCAOB has Conducted Inspections
(As of Dec. 31, 2009)
The PCAOB has conducted inspections of
one or more registered firms located in the following non-U.S.
jurisdictions:
Argentina
Australia
Belize
Bermuda
Bolivia
Brazil
Canada
Cayman Islands
Chile
Colombia
Greece
Hong Kong
India
Indonesia
Ireland
Israel
Japan
Kazakhstan
Republic of Korea
Mexico
New Zealand
Norway
Panama
Papua New Guinea
Peru
Philippines
Russian Federation
Singapore
South Africa
Taiwan
Ukraine
United Arab Emirates
United Kingdom
Jurisdictions in which there are Firms whose Inspections The PCAOB
Intends to Conduct in 2010
Australia
Canada
China
Finland
France
Germany
Greece
Hong Kong
Hungary
India
Ireland
Italy
Japan
Kazakhstan
Republic of
Korea
Luxembourg
Netherlands
New Zealand
Norway
Panama
Portugal
South Africa
Spain
Sweden
Switzerland
Taiwan
United Arab Emirates
United Kingdom
Frequently Asked Questions Regarding Issues
Relating to Non-U.S. Accounting Firms - June 1, 2010
QUESTION
"My firm is a foreign public accounting firm
intending to register with the Board, but we intend to make a
submission under PCAOB Rule 2105 explaining that a non-U.S. law
prohibits the firm from providing some of the information required
by the Board's Form 1. How will this affect consideration of the
firm's application?"
UNDERSTANDING THE QUESTION
The answer will be based
on PCAOB Rule 2105 and PCAOB Rule 2106
The PCAOB Rule 2105 - "Conflicting
Non-U.S. Laws":
(a) An
applicant may withhold information from its
application for registration when submission of such information
would cause the applicant to violate a non-U.S. law if that
information were submitted to the Board.
(b) An
applicant that claims that submitting information as part of its
application would cause it to violate non-U.S. laws must –
(1) identify, in accordance with the instructions on Form 1, the
information that it claims would cause it to violate non-U.S. laws
if submitted; and
(2)
include as an exhibit to Form 1 –
(i) a
copy of the relevant portion of the
conflicting non-U.S. law;
(ii) a
legal opinion that submitting the
information would cause the applicant to violate the conflicting
non-U.S. law; and
(iii)
an explanation of the applicant's efforts to
seek consents or waivers to eliminate the conflict, if the
withheld information could be provided to the Board with a consent
or a waiver, and a representation that the applicant was unable to
obtain such consents or waivers to eliminate the conflict.
The PCAOB Rule 2106 - "Action on
Applications for Registration"
(a) Standard for Approval.
After reviewing the application for registration, any
additional information provided by the applicant, and any other
information obtained by the Board, the Board will determine
whether approval of the application for registration is consistent
with the Board's responsibilities under the Act to protect the
interests of investors and to further the public interest in the
preparation of informative, accurate, and independent audit
reports for companies the securities of which are sold to, and
held by and for, public investors.
(b)
Action on Application.
Unless the applicant
consents otherwise, the Board will take action on an application
for registration not later than 45 days after the date of receipt
of the application by the Board.
(1) If the Board makes
the determination in paragraph (a) of this Rule, the Board will
approve the application.
(2) If
the Board is unable to determine that the standard for approval in
paragraph (a) of this Rule is met, or if the Board determines that
the application may be materially inaccurate or incomplete, the
Board will:
(i)
request more information from the applicant; or
(ii)
provide the applicant with written notice of a hearing, pursuant
to the Board's procedural rules governing disciplinary
proceedings, to determine whether to approve or disapprove the
application. Such notice will specify, in reasonable detail, the
proposed grounds for disapproval. Such notice may, at the
applicant's election, be treated as a written notice of
disapproval for purposes of Section 102(c) of the Act.
(c) Requests for More Information.
If the Board requests more information from an applicant,
and such applicant submits the requested information to the Board,
the Board will treat the application, as supplemented by the
requested information, as if it were a new application for
purposes of paragraph (b) of this Rule.
The Board
will take action on such supplemented applications as soon as
practicable, and not later than 45 days after receipt of the
supplemented application by the Board.
If such
firm declines to provide the requested information, or fails to do
so within a reasonable amount of time, the Board may deem the
application incomplete for purposes of paragraph (b)(2) of this
Rule, may deem the application not to have been received in
accordance with Rule 2102, or may take such other action as the
Board deems appropriate.
ANSWER FROM
THE PCAOB
Rule 2105(a) allows an applicant to withhold
information from its application for registration "when submission
of such information would cause the applicant to violate a
non-U.S. law if that information were submitted to the Board."
Rule
2105(b) describes the submission an applicant must make if it
claims that the Rule 2105(a) standard is satisfied with respect to
information that the applicant withholds from its application.
In reviewing a Rule 2105 submission, the staff will consider
whether the submission both conforms to the requirements of Rule
2105(b) and raises issues of non-U.S. law that are sufficient
under Rule 2105(a) to warrant treating the application as complete
even though certain information is omitted.
If, in the staff's view, both criteria are
satisfied, the staff will recommend that the Board treat the
application as complete and take action on the application,
consistent with PCAOB Rule 2106(b), within 45 days of the date the
application is received (as determined pursuant to PCAOB Rule
2102).
Any such
action by the Board would not constitute a concession that the
non-U.S. law does in fact prohibit the applicant from supplying
the information, and would not preclude the Board from contesting
that assertion in other contexts.
In
addition, a decision to treat the application as complete does not
mean that the absence of the information will be irrelevant to the
Board's consideration of the application.
The Board
could determine that the absence of particular information from a
particular application, even though sufficiently justified by
reference to non-U.S. law, leaves the Board unable to make the
determination that the Board must make under PCAOB Rule 2106(a) in
order to approve the application.
If, in
the staff's view,
(1) the submission does not conform to the
requirements of Rule 2105(b) or
(2) the
cited non-U.S. law does not satisfy the Rule 2105(a) test (i.e.,
the applicant would not violate non-U.S. law by submitting the
information to the Board as part of the registration application),
the staff
may recommend that the Board treat the application as
materially incomplete and
request additional information from the
applicant under PCAOB Rule 2106(b)(2)(i).
Three foreseeable issues warrant particular
mention.
First, Rule 2105(b)(2)(ii) requires
submission of "a legal opinion that
submitting the information would cause the applicant to violate
the conflicting non-U.S. law" (emphasis added).
Accordingly, the legal opinion must pertain to whether non-U.S.
law would be violated by the specific applicant submitting the
specific information in the specific context of registration with
the Board.
A legal
opinion that does not opine on that point does not conform to the
requirements of the rule.
If the
legal opinion included as part of a Rule 2105 submission does not
opine on that point as to each category of information that the
applicant does not provide, the staff will recommend that the
Board treat the application as materially incomplete and request
additional information under Rule 2106(b)(2)(i).
Second, professional standards are
not "laws" for purposes of Rule 2105.
Accordingly, a Rule 2105 submission that relies on professional
standards alone (i.e., without citing something in the
jurisdiction's legislated law that requires compliance with the
standard) as a basis for withholding information from an
application does not conform to the requirements of the rule.
In the
event of such a submission, the staff will recommend that the
Board treat the application as materially incomplete and request
additional information under Rule 2106(b)(2)(i).
Third, the Board staff will recommend
that the Board treat as materially incomplete, and request
additional information on, an application that
does not include the applicant's consent to
cooperate with the Board (Item 8.1) if the only basis for
not providing that consent is a non-U.S. law that prohibits a firm
from disclosing documents or information without a client's
consent.
As
described in more detail in response to question number 4 below,
the staff does not view the absence of a client's consent as
relieving a firm of its obligation to cooperate with the Board.
The three
issues discussed above are only examples and do not constitute the
only circumstances in which the Board might request additional
information under Rule 2106(b)(2)(i).
If the
Board does request additional information, then, under Rule
2106(c), a new 45-day period within which the Board must act on
the application commences when the applicant provides the
information.
Consistent
with the terms of Rule 2106(c), however, the Board and the staff
work to ensure action on such supplemented applications as soon as
practicable.
QUESTION
"If
non-U.S. law prohibits my firm from providing certain specific
identifying information required by the Board's Form 1, is the
firm nevertheless required to answer any associated yes/no
questions that do not require specific identifying information?"
ANSWER
FROM THE PCAOB
Yes.
For
example, Item 5.1(a) of Form 1 requires an applicant to
indicate, by checking "yes" or "no,"
whether the applicant or any associated person of the applicant is
a defendant or respondent in any of certain specified types of
proceedings (including, for example, an administrative or civil
action arising out of the applicant's or associated person's
conduct in connection with an audit report).
If the
correct answer to Item 5.1(a) is "yes," Item 5.1(b) requires the
applicant to supply certain identifying
information related to the matter and the individuals
involved.
An
assertion that non-U.S. law prohibits an applicant from supplying
the identifying information required by Item 5.1(b) is not by
itself sufficient to relieve the applicant of the obligation to
supply a "yes" or "no" answer in Item 5.1(a).
If an
applicant's Rule 2105 submission does not
specifically describe a legal conflict that prohibits the
applicant from supplying an answer to Item 5.1(a), then the
applicant must supply that answer even if a legal conflict
prohibits the applicant from supplying additional details in
response to Item 5.1(b).
The same
principle applies to other "yes/no" questions in the Form,
including Items 5.2(a), 6.1(a), and 6.1(b).
QUESTION
"Does a
registered firm's obligation to cooperate with the Board include
an obligation to obtain from non-U.S. clients a consent or waiver
sufficient to allow the registered firm to provide the Board with
documents and information concerning the issuer?"
ANSWER
FROM THE PCAOB
The
Sarbanes-Oxley Act requires public accounting firms to register
with the Board in order to engage in certain audit work.
The Act
imposes on registered firms an obligation to
cooperate and comply with Board requests for testimony or
documents made in furtherance of the Board's authority and
responsibilities under the Act.
The
Board's responsibilities under the Act include conducting
inspections under Section 104 of the Act and investigations under
Section 105.
To carry
out these responsibilities, the Board will
need to review documents and information in a firm's possession
concerning the firm's audit clients.
(Section
104, for example, requires that Board inspections include reviews
of individual audit engagements.)
In
addition, Section 106 of the Act provides
that any non-U.S. public accounting firm that chooses to engage in
certain work, and any registered U.S. firm that chooses to rely on
certain work by a non-U.S. firm, are each deemed to have consented
to produce the non-U.S. firm's audit workpapers to the Board or
the Commission.
A
registered firm's failure to cooperate
with Board requests in these contexts may
subject the firm to disciplinary sanctions, including substantial
civil money penalties and revocation of the firm's registration.
In the
staff's view, if a firm fails to cooperate with the Board, the
fact that the firm has not obtained a client consent that might be
necessary (under non-U.S. law) to allow the firm to cooperate is
not a defense to a disciplinary action for failure to cooperate.
As a
practical matter, therefore, a firm must
choose whether
(1) to
satisfy itself in advance that the non-U.S. client will provide
any necessary consent if and when the Board demands documents or
information concerning the client,
(2) to
proceed without such assurance and take a risk that it may later
have to choose between providing information without the client's
consent or facing a Board sanction for failing to provide the
information, or
(3) to
decline the audit engagement.
The Board
has not attempted to dictate which of these choices a firm should
make.
Accordingly, a firm might conclude that it is in the firm's
interest to obtain a non-U.S. client's advance assurance that the
client will provide its consent when necessary for the firm to
comply with a Board demand.
A firm's
compliance with its obligations to the Board, however, is
judged not by the existence, form, or
content of any such assurance from a client, but by whether the
firm provides documents and information when the Board requires
them.
Whether
and how a firm assures itself that it will be in a position to
comply with Board demands is a matter for each firm to decide and,
if necessary, to work out with its non-U.S. clients.
QUESTION
"My firm
is a registered U.S. firm, but some of my firm's "associated
persons" are non-U.S. firms that assert that their local law
prohibits them from executing the consents that the Act and PCAOB
Rules require registered firms to secure from all associated
persons. What are the consequences of my firm's failure to secure
such a consent from those associated persons?"
ANSWER
FROM THE PCAOB
If the
Board discovers that a registered firm has
failed to secure the required consent from an associated
person, the Board could take disciplinary
action against the registered firm solely on the basis of that
failure.
Where the
failure to secure such a consent is based on
an asserted conflict with non-U.S. law, however, a registered firm
may be able to obtain advance assurance that the staff will not
recommend that the Board take disciplinary action solely on the
basis of that failure.
To
seek that assurance, a registered firm should submit the same
information that PCAOB Rule 2105 would require in the context of a
registration application.
After
considering the asserted conflict, the staff
will generally provide the requested assurance if the staff
determines that the issues raised by the non-U.S. law are
sufficient to warrant doing so.
If the
staff does provide the requested assurance, the staff's position
will not constitute acknowledgement that the firm's assertions
about non-U.S. law are correct and will not preclude the Board
from contesting those assertions in any context.
If the
staff does not provide the requested assurance, the registered
firm may wish to take that into account in determining whether to
use the non-U.S. firm in an "associated person" capacity.
QUESTION
"My firm
is located in a non-U.S. jurisdiction in which PCAOB inspections
are currently prevented because of the position taken by local
authorities. Should my firm provide any additional information
because of this circumstance?"
ANSWER
FROM THE PCAOB
In light
of current obstacles to inspections, the staff intends to begin
recommending that the Board obtain certain additional information
from applicants in the relevant jurisdictions, which are listed
below.
In order
to avoid the Board seeking such information through a formal
request for additional information, which could delay Board action
on the application until 45 days after all requested additional
information is submitted, applicants located
in these jurisdictions may provide the information when they
initially submit their application on Form 1.
The
information may be provided in Exhibit 4.1 (in addition to the
required description of the firm's quality control policies) in
the form of a separate file listing:
(a)
all issuers with respect to which, during the year of or the year
preceding submission of the firm’s registration application, the
firm or any of its personnel or predecessors performed any work
used by any registered public accounting firm in its audit of the
issuer’s financial statements, including the business address of
each such issuer, the identity of the registered public accounting
firm, and the date of the registered public accounting firm’s
audit report;
(b)
all issuers with respect to which the firm currently anticipates
performing any future work to be used by another registered public
accounting firm in an audit of the issuer’s financial statements,
including the business address of each such issuer and the
identity of the other registered public accounting firm; and
(c)
all registered public accounting firms with which the firm has any
arrangement or understanding that the firm will or may perform
work to be used by that registered public accounting firm in the
audit of an issuer.
The
staff intends to recommend that the Board
request such information from applicants in the jurisdictions
listed below, and will update this list as warranted by any change
in circumstances:
China
Hong Kong
Switzerland
All countries subject to the
European Union's Directive on Statutory
Auditors (see Directive 2006/43/EC of the European Parliament and
of the Council of 17 May 2006 on statutory audits of annual
accounts and consolidated accountants (OJ EU L 157),
specifically –
Austria
Belgium
Bulgaria
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Latvia
Liechtenstein
Lithuania
Luxembourg
Malta
Netherlands
Norway
Poland
Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
United Kingdom
Dear
Potential, New or Sitting Member of the Board,
You
have the duty to prudently represent the interests of the
shareholders.
You have to understand the needs and desires
of employees, customers and regulators.
You have to do your
best to understand the risks in your organization, and to exercise
oversight.
Year after year, you have to do more, and you
have more responsibilities.
Our Mission: To help you make
informed business decisions in good faith.
Our International
Association provides networking, training, certification, alerts and
updates you can use.
Best Regards,
George
Lekatis
President of the International Association of Potential,
New and Sitting Members of the Board of Directors (IAMBD)
General
Manager, Compliance LLC
1200 G Street NW Suite 800, Washington DC
20005, USA
Tel: (202) 449-9750
Email: lekatis@members-of-the-board-association.com
Web:
www.members-of-the-board-association.com
HQ: 1220 N. Market Street
Suite 804, Wilmington DE 19801, USA
Tel: (302) 342-8828
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