PCAOB to conduct audits of U.S. accounting firms operating in the UK

The Public Company Accounting Oversight Board (PCAOB) and the Professional Oversight Board (POB) in the United Kingdom have signed an agreement that will allow the PCAOB, working in cooperation with the POB, to resume audits of accounting firms registered in the UK.

The EU halted PCAOB audits of U.S. companies in 2008, ruling that only national firms could take that responsibility. Under the Sarbanes-Oxley Act of 2002, the PCAOB was not permitted to share audit information with foreign regulators, but when this provision was amended by the Dodd Frank Act, the EU voted to allow members to sign bilateral agreements with the PCAOB that would allow the audits to resume.
 
The agreement, announced on January 12, could potentially lead to an audit of Ernst & Young's London office and shed some light on its role in Lehman Brother's controversial Repo 105 transactions. All of the Repo 105 transactions were conducted by Lehman's London branch.
 
The Repo 105 was Lehman's version of a repurchase agreement, normally a form of short-term borrowing. Assets (loans) were transferred between the United States and the UK just before and just after filing dates. The assets would be classified as sales for the brief period. Lehman did not receive approval from any U.S. law firm for the agreements, but, in 2006, one UK law firm said they were acceptable under local law.
 
The U.S. bankruptcy court examiner charged in a March 2010 report that Lehman used "materially misleading" accounting for its repurchase agreements, and that E&Y was aware of the transactions. A civil suit has been filed in New York charging E&Y with fraud in its accounting for Lehman.
 
E&Y did not file an audit of Lehman in 2008 and stands by its footnote disclosures in previous audits.
 
Lehman's collapse in September 2008 was a factor in the global financial crisis.
 
"I am pleased that we have overcome the obstacles that have prevented PCAOB inspections in the United Kingdom since 2008," said PCAOB Acting Chairman Daniel L. Goelzer. "Investors in U.S.-listed companies increasingly rely on audit work performed outside the borders of the United States. Agreements like this one open the door for us to inspect that work and are essential to the Board's investor protection mission."
 
The POB and the PCAOB are committed to investor protection and to having a strong working relationship with each other, according to Goelzer.
 
"We look forward to resuming our work with the POB in the United Kingdom and to assisting the POB should it conduct inspections in the United States," said Rhonda Schnare, PCAOB director of international affairs. "We are currently working with other oversight bodies in several non-U.S. jurisdictions to establish similar cooperative arrangements."
 
In June, Britain's accountancy regulator, the Accountancy and Actuarial Discipline Board (AADB) announced that it would conduct an investigation into E&Y's role as auditor of the European branch of Lehman.
 

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