Stay informed with free updates
Simply sign up to the US financial regulation myFT Digest — delivered directly to your inbox.
Germany’s audit regulator has weighed in on the future of its counterpart in the US, saying Republican plans to overhaul oversight of accounting firms put co-operation between the two countries at risk.
Leaders of Germany’s Apas said they were “bewildered to learn” about the proposal to scrap the US Public Company Accounting Oversight Board, which was contained in draft legislation published last month.
“We fail to understand how the intended measures would be beneficial to audit quality, the US financial market or the public interest,” they said in a letter to PCAOB chair Erica Williams, which was seen by the Financial Times. It was signed by the watchdog’s acting chief executive, Naif-Raffael Kanwan, and Julia Rendschmidt, head of its international affairs division.
Republicans plan to shut the PCAOB and hand oversight of audit firms to the Securities and Exchange Commission as part of the Trump administration’s agenda to cut red tape. Audit firms have chafed at tougher inspections and enforcement actions by the PCAOB under Williams and complained their views had not been properly considered in new audit standards.
The agency was set up in the wake of the Enron scandal two decades ago to oversee accounting firms that audit US-listed companies, including overseas firms under bilateral agreements signed with local regulators. The PCAOB has argued to lawmakers that such agreements are vital for protecting American investors by raising the quality of audits of multinational or foreign-headquartered companies that use overseas accounting firms.
PCAOB-registered firms in Germany audit US issuers with a market capitalisation of more than $400bn, the fourth highest in Europe, behind the UK, Switzerland and the Netherlands.
Apas said it would re-evaluate co-operation between Germany and the US if the PCAOB’s work was moved to another agency.
“As a counterpart authority, we are also concerned about independence issues and whether confidential information we exchange will continue to be recognised (and its onward sharing safeguarded) under a new structure,” Kanwan wrote.
Williams told the FT last month that scrapping her agency risked damaging audit quality not just in the US but around the world because of its ability to inspect international audit firms. The SEC would have to “negotiate agreements with jurisdictions around the world” to replace bilateral agreements that took years to set up, she said.
Other critics of the Republican plan have noted that the PCAOB’s status as a non-profit organisation separate from the government allowed it to pay salaries higher than government agencies can, meaning that existing inspectors may not want to transfer to the SEC.
“The PCAOB has been the model based on which many international independent audit regulators were designed,” Kanwan’s letter went on. “The power and assertiveness of the PCAOB is in no small part owed to its independence and the ability to pay competitive salaries to attract the best people for its unique and complex oversight tasks.”
The reform proposal still faces several procedural hurdles before it can become law. It has been put forward for inclusion in a forthcoming tax and spending bill by the House committee on financial services but the Republican leadership in both houses of Congress will have to agree to include it.