Europe greenlights US audit inspections

US audit regulators will be able to inspect European firms after the European Commission cleared the way for access to confidential papers, in a move which could allow Lehman Brothers investigators to follow up leads in London.

The European Commission said it will now share internal working documents with audit watchdogs in the US and Australia. The move breaks an impasse which had emerged between US and EU authorities over the sharing of confidential internal audit inspection papers, retained by regulators when they inspect audit firms.

In the past, the European Commission barred access to US inspectors because it felt the US was blocking access to its internal inspection documents.

The passage of the US financial reform bill through the senate freed access to the inspection documents, which in turn led European authorities to green light US inspections of European based audit firms.

In a statement, the European Commission said auditing has moved beyond national borders and international co-operation was “necessary to ensure that high quality audits are carried out worldwide”.

Michel Barnier, EC internal market and services commissioner, said the decision will allow co-operation of European auditor oversight bodies and their US and Australian counterparts.

“The exchange of audit working papers is an important step in moving towards our ultimate objective of equivalent rules and mutual reliance on each other's audit oversight systems,” he said.

The US audit regulator, the Public Companies Accounting Oversight Board (PCAOB), will now be able to inspect the audits of US registrants including Vodafone, BHP Billiton, HSBC, Barclays and BT.

The move will also free up the investigators examining the audit of collapsed Bank Lehman Brothers, to inspect the UK component of the bank’s audit.

Controversy surrounding the Lehman audit centres on use of repurchase transactions, known within the bank by the slang “Repo 105s”, which attracted criticism in March when a report claimed they were used to distorted the bank’s reported financial position.

Repo 105s were channeled through Lehman’s UK arm, Lehman Brothers International Europe (LBIE), and were likely audited, in part, by the Ernst & Young’s UK arm.

E&Y has defended its audit throughout and said it stands by the work it did for the bank, and would co-operate with any investigation.

The US audit regulator, the PCAOB, has neither confirmed nor denied whether it is investigating Ernst & Young’s audit of Lehmans in line with their policy not to comment on investigations.

Further reading:

Lehman investigation blocked by US-EU regulator stand-off

Transatlantic audit row between regulators rages

Barnier: we’re not blocking US watchdog