[Federal Register: April 23, 2004 (Volume 69, Number 79)]
[Notices]
[Page 22103-22109]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23ap04-126]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49579; File No. PCAOB-2003-08]
Public Company Accounting Oversight Board; Notice of Filing of
Proposed Rule and Form Relating to Inspections of Registered Public
Accounting Firms
April 19, 2004.
Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002
(``Act''), notice is hereby given that on October 15, 2003, the Public
Company Accounting Oversight Board (``Board'' or ``PCAOB'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rules described in Items I and II below, which items have been prepared
by the Board and are presented here in the form submitted by the Board.
The Commission is publishing this notice to solicit comments on the
proposed rules from interested persons.
I. Board's Statement of the Terms of Substance of the Proposed Rules
On October 7, 2003, the Board adopted rules related to inspections.
The proposal includes ten Rules on Inspections (PCAOB Rules 4000
through 4010, reserving Rule 4005) and 2 definitions that would appear
in PCAOB Rule 1001. The text of the proposed rules and definitions is
as follows:
Section 1. General Provisions
Rule 1001. Definitions of Terms Employed in Rules
When used in Rules, unless the context otherwise requires:
(a)(xi) Appropriate State Regulatory Authority
The term ``appropriate state regulatory authority'' means the State
agency or other authority responsible for the licensure or other
regulation of the practice of accounting in the State or States having
jurisdiction over a registered public accounting firm or associated
person thereof, with respect to the matter in question.
(p)(vi) Professional Standards
The term ``professional standards'' means--
(A) accounting principles that are--
(i) Established by the standard setting body described in section
19(b) of the Securities Act of 1933, as amended by the Act, or
prescribed by the Commission under section 19(a) of the Securities Act
of 1933 or section 13(b) of the Securities Exchange Act of 1934; and
(ii) Relevant to audit reports for particular issuers, or dealt
with in the quality control system of a particular registered public
accounting firm; and
(B) Auditing standards, standards for attestation engagements,
quality control policies and procedures, ethical and competency
standards, and independence standards (including rules implementing
Title II of the Act) that the Board or the Commission determines--
(i) Relate to the preparation or issuance of audit reports for
issuers; and
(ii) Are established or adopted by the Board under section 103(a)
of the Act, or are promulgated as rules of the Commission.
Section 4. Inspections
Rule 4000. General
Every registered public accounting firm shall be subject to all
such regular and special inspections as the Board may from time-to-time
conduct in order to assess the degree of compliance of each registered
public accounting firm and associated persons of that firm with the
Act, the Board's rules, the rules of the Commission, and professional
standards, in connection with its performance of audits, issuance of
audit reports, and related matters involving issuers. Inspection steps
and procedures shall be performed by the staff of the Division of
Registration and Inspections, and by such other persons as the Board
may authorize to participate in particular inspections or categories of
inspections.
Rule 4001. Regular Inspections
In performing a regular inspection, the staff of the Division of
Registration and Inspections and any other person authorized by the
Board to participate in the inspection shall take such steps, and
perform such procedures, as the Board determines are necessary or
appropriate. Such steps and procedures must include, but need not be
limited to, those set forth in Section 104(d)(1) and (2) of the Act and
such other tests of the audit, supervisory, and quality control
procedures of the firm as the Director of the Division of Registration
and Inspections or the Board determines.
Rule 4002. Special Inspections
In performing a special inspection, the staff of the Division of
Registration and Inspections and any other person authorized by the
Board to participate in the inspection shall take such steps, and
perform such procedures, as are necessary or appropriate concerning the
issue or issues specified by the Board in connection with its
authorization of the special inspection.
Note: Under Section 104(b)(2) of the Act, the Board may
authorize a special inspection on its own initiative or at the
request of the Commission.
Rule 4003. Frequency of Inspections
During each calendar year, beginning no later than the calendar
year following the calendar year in which its application for
registration with the Board is approved, a registered public accounting
firm that, during the prior calendar year, issued audit reports with
[[Page 22104]]
respect to more than 100 issuers shall be subject to a regular
inspection.
At least once in every three calendar years, beginning with the
three-year period following the calendar year in which its application
for registration with the Board is approved, a registered public
accounting firm that, during any of the three prior calendar years,
issued an audit report with respect to at least one but no more than
100 issuers, or that played a substantial role in the preparation or
furnishing of an audit report with respect to at least one issuer,
shall be subject to a regular inspection.
With respect to a registered public accounting firm that has filed
a completed Form 1-WD under Rule 2107, the Board shall have the
discretion to forego any regular inspection that would otherwise
commence during the period beginning on the fifth day following the
filing of the completed Form 1-WD and continuing until the firm's
registration is deemed withdrawn or the firm withdraws the Form 1-WD.
Rule 4004. Procedure Regarding Possible Violations
If the Board determines that information obtained by the Board's
staff during any inspection indicates that the registered public
accounting firm subject to such inspection, any associated person
thereof, or any other person, may have engaged, or may be engaged, in
any act, practice, or omission to act that is or may be in violation of
the Act, the rules of the Board, any statute or rule administered by
the Commission, the firm's own quality control policies, or any
professional standard, the Board shall, if it determines appropriate--
Report information concerning such act, practice, or omission to--the
Commission; and each appropriate state regulatory authority; and
Commence an investigation of such act, practice, or omission in
accordance with Section 105(b) of the Act and the Board's rules
thereunder or a disciplinary proceeding in accordance with Section
105(c) of the Act and the Board's rules thereunder.
Note: The Board may, as appropriate, make referrals or report
information to regulatory and law enforcement agencies other than
those specifically described in Rule 4004.
Rule 4005. Record Retention and Availability [Reserved]
Rule 4006. Duty to Cooperate With Inspectors
Every registered public accounting firm, and every associated
person of a registered public accounting firm, shall cooperate with the
Board in the performance of any Board inspection. Cooperation shall
include, but is not limited to, cooperating and complying with any
request, made in furtherance of the Board's authority and
responsibilities under the Act, to--
(1) Provide access to, and the ability to copy, any record in the
possession, custody, or control of such firm or person, and
(2) Provide information by oral interviews, written responses, or
otherwise.
Rule 4007. Procedures Concerning Draft Inspection Reports
(a) The Director of the Division of Registration and Inspections
shall make a draft inspection report available for review by the firm
that is the subject of the report. The firm may, within the 30 days
after the draft inspection report is first made available for the
firm's review, or such longer period as the Board may order, submit to
the Board a written response to the draft report.
(b)(1) In submitting a response pursuant to paragraph (a), the firm
may indicate any portions of the response for which the firm requests
confidential treatment under Section 104(f) of the Act, and may supply
any supporting authority or other justification for according
confidential treatment to the information.
(2) The Board shall attach to, and make part of the inspection
report, any response submitted pursuant to paragraph (a), but shall
redact from the response attached to the inspection report any
information for which the firm requested confidential treatment and
which it is reasonable to characterize as confidential.
(c) After receiving and reviewing any response letter pursuant to
paragraph (a) of this rule, the Board may take such action with respect
to the draft inspection report as it considers appropriate, including
adopting the draft report as the final report, revising the draft
report, or continuing or supplementing the inspection before issuing a
final report. In the event that, prior to issuing a final report, the
Board directs the staff to continue or supplement the inspection or
revise the draft report, the Board may, in its discretion, afford the
firm the opportunity to review any revised draft inspection report.
Rule 4008. Procedures Concerning Final Inspection Reports
Promptly following the Board's issuance of a final inspection
report, the Board shall--
(a) Make the final report available for review by the firm that is
the subject of the report;
(b) Transmit to the Commission the final report, any additional
letter or comments by the Board or the Board's inspectors that the
Board deems appropriate, and any response submitted by the firm to a
draft inspection report; and
(c) Transmit to each appropriate state regulatory authority, in
appropriate detail, the final report, any additional letter or comments
by the Board or the Board's inspectors that the Board deems
appropriate, and any response submitted by the firm to a draft
inspection report.
Rule 4009. Firm Response to Quality Control Defects
(a) With respect to any final inspection report that contains
criticisms of, or potential defects in, the quality control systems of
the firm under inspection, the firm may submit evidence or otherwise
demonstrate to the Director of the Division of Registration and
Inspections that it has improved such systems, and remedied such
defects no later than 12 months after the issuance of the Board's final
inspection report. After reviewing such evidence, the Director shall
advise the firm whether he or she will recommend to the Board that the
Board determine that the firm has satisfactorily addressed the
criticisms or defects in the quality control system of the firm
identified in the final inspection report and, if not, why not.
(b) If the Board determines that the firm has satisfactorily
addressed the criticisms or defects in the quality control system, the
Board shall provide notice of that determination to the Commission and
to any appropriate state regulatory authority to which the Board had
supplied any portion of the final inspection report.
(c) The Board shall notify the firm of its final determination
concerning whether the firm has addressed the criticisms or defects in
the quality control system of the firm identified in the final
inspection report to the satisfaction of the Board.
(d) The portions of the Board's inspection report that deal with
criticisms of or potential defects in quality control systems that the
firm has not addressed to the satisfaction of the Board shall be made
public by the Board--
(1) Upon the expiration of the 12-month period described in
paragraph (a) of this rule if the firm fails to make any submission
pursuant to paragraph (a); or
[[Page 22105]]
(2) Upon the expiration of the period in which the firm may seek
Commission review of any board determination made under paragraph (b)
of this rule, if the firm does not seek Commission review of the Board
determination; or
(3) Unless otherwise directed by Commission order or rule, 30 days
after the firm formally requests Commission review pursuant to Section
104(h)(1)(B) of the Act.
Rule 4010. Board Public Reports
Notwithstanding any provision of Rules 4007, 4008, and 4009, the
Board may, at any time, publish such summaries, compilations, or other
general reports concerning the procedures, findings, and results of its
various inspections as the Board deems appropriate. Such reports may
include discussion of criticisms of, or potential defects in, quality
control systems of any firm or firms that were the subject of a Board
inspection, provided that no such published report shall identify the
firm or firms to which such criticisms relate, or at which such defects
were found, unless that information has previously been made public in
accordance with Rule 4009, by the firm or firms involved, or by other
lawful means.
II. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rules
In its filing with the Commission, the Board included statements
concerning the purpose of, and basis for, the proposed rules and
discussed any comments it received on the proposed rules. The text of
these statements may be examined at the places specified in Item IV
below. The Board has prepared summaries, set forth in sections A, B and
C below, of the most significant aspects of such statements.
A. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rules
(a) Purpose
Section 104 of the Act requires the Board to conduct a continuing
program of inspections to assess the degree of compliance of each
registered public accounting firm and associated persons of that firm
with the Act, the rules of the Board, the rules of the Commission, or
professional standards, in connection with its performance of audits,
issuance of audit reports, and related matters involving issuers. The
Board has adopted Rules 4000 through 4010, and related definitions, to
provide a procedural framework for the Board's inspection program. Each
of the rules and definitions is discussed below.
Rule 1001--Definitions of Terms Employed in Rules
Appropriate State Regulatory Authority--As discussed in more detail
below, the Board has decided to add a definition of the term
``appropriate state regulatory authority.'' The definition of that term
in Rule 1001(a)(xi) is identical to the definition of the same term in
Section 2(a)(1) of the Act.
Professional Standards--The definition of professional standards in
Rule 1001(p)(vi) references that in Section 2(a)(10) of the Act. It
should be noted that the term ``professional standards'' is broader
than ``auditing and related professional practice standards,'' which is
defined in Rule 1001(a)(viii) of the Board's rules.
Rule 4000--General
Consistent with Section 104(a) of the Act, Rule 4000 subjects every
registered public accounting firm to all such regular and special
inspections as the Board may from time-to-time conduct in order to
assess the degree of compliance of each registered public accounting
firm and associated persons of that firm with the Act, the Board's
rules, the rules of the Commission, and professional standards, in
connection with its performance of audits, issuance of audit reports,
and related matters involving issuers. The rule provides that
inspection steps and procedures will be performed by the staff of the
Division of Registration and Inspections and by such other persons
authorized by the Board. The Board anticipates that ``other persons
authorized by the Board'' to perform an inspection will include
consultants and staff of the Board, other than staff of the Board's
Division of Registration and Inspections.\1\ The Board does not
anticipate that practicing accountants associated with public
accounting firms will participate in the Board's inspections.
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\1\ The Board anticipates using some consultants to supplement
its permanent staff on certain inspections during its first cycle of
inspections. All inspections will be led by a senior staff member of
the PCAOB's Division of Registration and Inspections. Once the first
cycle of inspections is complete and the Board has further added to
its inspections staff, the Board anticipates that consultants will
be primarily used as technical specialists, as needed, on discrete
issues in the course of inspections. Non-staff that participate in
the Board's inspections will be subject to relevant provisions of
the Board's Ethics Code, including the same confidentiality
requirements to which the Board's inspection staff is subject.
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Rule 4001--Regular Inspections
Rule 4001 requires that in performing a regular inspection, the
staff of the Division of Registration and Inspections and other
authorized persons take such steps and perform such procedures as the
Board determines are necessary or appropriate. The rule requires the
inclusion of steps and procedures set forth in Sections 104(d)(1) and
(2) of the Act and such other tests of the audit, supervisory, and
quality control procedures of the firm as the Director of the Division
of Registration and Inspections or the Board determines.
Section 104(d)(1) requires the Board to ``inspect and review
engagements of the firm (which may include audit engagements that are
the subject of ongoing litigation or other controversy between the firm
and one or more third parties), performed at various offices and by
various associated persons of the firm, as selected by the Board.''
Section 104(d)(2) requires the Board to ``evaluate the sufficiency of
the quality control system of the firm, and the manner of documentation
and communication of that system by the firm.''
Rule 4002--Special Inspections
Rule 4002 requires that in performing a special inspection, the
staff of the Division of Registration and Inspections and other
authorized persons take such steps and perform such procedures, as are
necessary or appropriate concerning the issue or issues specified by
the Board in connection with its authorization of the special
inspection. A note to the rule makes clear that under Section 104(b)(2)
of the Act, the Board may authorize a special inspection on its own
initiative or at the request of the Commission. Like any other Board
action, the vote of a majority of the Board members present at a
meeting at which a quorum of Board members is present is required to
authorize a special inspection.
In order to retain flexibility and to avoid a formulaic approach to
such inspections, the Board has decided not to develop a set threshold
or list of criteria that may lead to the commencement of a special
inspection. For example, while the Board will consider the source of
information it receives, the Board may find that in certain
circumstances anonymous tips or media stories may be sufficient to
begin a special inspection. Similarly, in order to retain flexibility,
the Board has decided not to include a specific notice provision in the
rule. As a practical matter, however, the Board's staff intends to give
firms subject to special inspections reasonable notice in advance of
commencing such inspections.
Special inspections are not intended to serve the same function as
a Board
[[Page 22106]]
investigation, which will be conducted pursuant to the Board's
investigative rules and procedures. Special inspections are designed to
address issues that come to the Board's attention and, as a general
matter, will be performed in order to assess the degree of compliance
of each registered public accounting firm and associated persons of
that firm with the Act, the Board's rules, the rules of the Commission,
and professional standards, in connection with its performance of
audits, issuance of audit reports, and related matters involving
issuers. Nevertheless, any inspection--whether a regular inspection or
a special inspection--may result in a particular matter being turned
over to the Board's enforcement staff for investigation.
Rule 4003--Frequency of Inspections
Rule 4003 sets forth the schedule for regular inspections. Rule
4003(a) is consistent with the schedule for larger registered public
accounting firms set forth in Section 104(b)(1)(A) of the Act. This
rule requires that beginning no later than the year after its
registration with the Board has been approved, a registered public
accounting firm that, during the prior calendar year, issued audit
reports with respect to more than 100 issuers will be subject to a
regular inspection. Rule 4003(b) is consistent with the schedule for
smaller registered public accounting firms set forth in Section
104(b)(1)(B) of the Act. Rule 4003(b) requires that beginning with the
three-year period following the calendar year in which its registration
with the Board has been approved, a registered public accounting firm
that, during any of the three prior calendar years, issued audit
reports with respect to at least one, but no more than 100, issuers, or
that played a substantial role in the preparation or furnishing of an
audit report with respect to at least one issuer, will be subject to a
regular inspection.
In accordance with Section 104(b)(2) of the Act, the Board has
added Rule 4003(c) which adjusts the regular inspection schedule for a
registered public accounting firm that has requested to withdraw from
registration by filing a completed Form 1-WD. Specifically, the rule
provides that the Board shall have discretion not to conduct a regular
inspection that would otherwise commence during the period beginning on
the fifth day following the filing of the completed Form 1-WD and
continuing until the firm's registration is deemed withdrawn or the
firm withdraws its Form 1-WD.
The Board understands that firms that register with the Board will
also have practices relating to audits other than public company
audits, and that state regulatory requirements continue to involve a
peer review process related to those practices. The Board expects its
inspections staff to make any appropriate recommendations concerning
coordination with such reviews as the staff gains experience with
issues relating to the implementation of the Board's inspection
responsibilities.
Rule 4004--Procedure Regarding Possible Violations
Consistent with Section 104(c) of the Act, Rule 4004 sets forth
procedures which the Board is required to follow with respect to
possible violations by firms under inspection. Specifically, the rule
requires that if the Board determines that information obtained by the
Board's staff during any inspection indicates that the registered
public accounting firm subject to such inspection, any associated
person thereof, or any other person, may have engaged, or may be
engaged in any act, practice, or omission to act that is or may be in
violation of the Act, the rules of the Board, any statute or rule
administered by the Commission, the firm's own quality control
policies, or any professional standard, then the Board shall, if it
determines it appropriate, report such possible violations to the
Commission and each appropriate state regulatory authority. In
addition, under Rule 4004, if the Board determines it appropriate, the
Board shall commence an investigation of such act, practice, or
omission in accordance with Section 105(b) of the Act and the Board's
rules thereunder or commence a disciplinary proceeding in accordance
with Section 105(c) of the Act and the Board's rules thereunder.
The phrase ``if it determines appropriate'' in Rule 4004 is meant
to signal that the Board will decide which of these acts, practices and
omissions would be appropriate to refer to the Commission and to the
states or other authorities. In making this determination, depending on
the nature of the possible violation, the Board could conclude that it
may be appropriate to report information to the Commission, and not the
states or other authorities, and vice versa.
A note to the rule makes clear that the Board may, as appropriate,
report information and make referrals to agencies other than those
specifically described in Rule 4004. The Note is intended to provide
notice that Rule 4004, in implementing Section 104(c) of the Act,
should not be understood as precluding the Board from exercising the
Board's other statutory authority to make referrals or to report
information from inspections. Neither the rule nor the note are
intended to describe the limit of that authority.
Rule 4005--Record Retention and Availability
Section 104(e) of the Act provides that the ``rules of the Board
may require the retention by registered public accounting firms for
inspection purposes of records whose retention is not otherwise
required by Section 103 or the rules issued thereunder.'' The Board is
reserving this rule in anticipation of issuing standards on record
retention once it has experience with its inspection program.\2\ The
Board reminds registered public accounting firms that they should
continue to comply with all other applicable federal, state and
professional record retention requirements.
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\2\ The Board anticipates that standards concerning record
retention will continue to be codified in the standards sections of
the Board's rules. Any future Rule 4005 on record retention and
availability for inspections will supplement those standards.
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Rule 4006--Duty To Cooperate With Inspectors
Rule 4006 requires every registered public accounting firm and
every associated person of such firm to cooperate with the Board in any
Board inspection. The rule requires that such firms and persons must
cooperate and comply with any request, made in furtherance of the
Board's authority and responsibilities under the Act, for documents or
information. Like Section 102(b)(3) of the Act, the rule describes the
required cooperation in terms of cooperating and complying with any
request ``made in furtherance of the Board's authority and
responsibilities under the Act.''
Rule 4006 is intended to provide for Board access to documents and
information to the full extent authorized by the Act. Among other
things, that means that the scope of the rule is not limited to
documents and information generated in the course of audits of issuers.
Under Section 104(d) of the Act, Board inspections involve evaluations
and testing of, among other things, a firm's quality control and
supervisory procedures. Accordingly, the documents and information the
Board is likely to request as part of its authority and
responsibilities to inspect registered public accounting firms, and
that therefore a firm must cooperate by providing access to, will
involve more than documents and information generated in the course of
audits of issuers.
[[Page 22107]]
The Act provides that, in general, ``all documents and information
prepared or received by or specifically for the Board, and
deliberations of the Board and its employees and agents, in connection
with an inspection under section 104 * * * shall be confidential and
privileged as an evidentiary matter (and shall not be subject to civil
discovery or other legal process) in any proceeding in any Federal or
State court or administrative agency * * *.'' Accordingly, documents
and information received by the Board pursuant to Rule 4006 in
connection with a Section 104 inspection are entitled to this statutory
protection. In addition, as discussed in more detail in the Board's
release adopting its investigation and adjudication rules,\3\ the Board
intends to recognize certain privileges recognized elsewhere in the
law--specifically, privileges that, under prevailing law, would
constitute a valid basis for declining to comply with a Commission
subpoena. As explained in more detail in that release, however, the
Board will not honor assertions of an ``accountant-client'' privilege.
More generally, any perceived state law or professional nondisclosure
requirements or other obstacles to cooperation (other than a privilege
that would be a valid basis for resisting a Commission subpoena) are,
in the Board's view, preempted by the Act. Accordingly, a failure to
cooperate with a Board inspection on the basis of such requirements
would be a violation of Rule 4006.
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\3\ PCAOB Release No. 2003-016, at pages A2-33--A2-34 (Sept. 29,
2003).
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Rule 4007--Procedures Concerning Draft Inspection Reports
Rule 4007 describes procedures relating to a registered public
accounting firm's opportunity to review and comment on a draft
inspection report before the Board issues a final inspection report
concerning the firm. Rule 4007(a) provides that the Director of the
Division of Registration and Inspections will make a draft report
available for review by the firm that is the subject of the report.
Paragraph (a) provides that a firm then has 30 days, or such longer
period as the Board may order, in which to submit any written response
that the firm wishes to submit to the draft. A firm is not required to
submit a response, and any response that a firm chooses to submit may
include any comments, objections, recommended revisions, or other views
on the draft report.
Rule 4007(b) concerns requests that a firm may make for
confidential treatment of portions of its response to the draft. Rule
4007(b)(1) provides that a firm may request confidential treatment
under Section 104(f) of the Act for any portion of the firm's response
to the draft report and may supply any supporting authority or other
justification for according confidential treatment to the specified
information. Rule 4007(b)(2) implements Section 104(f)'s requirement
that the Board shall attach to, and make part of, the inspection
report, any response submitted by the firm. Further implementing
Section 104(f), Rule 4007(b)(2) provides that the version of the
response that becomes part of the inspection report will be redacted to
exclude any information for which the firm requested confidential
treatment and which it is reasonable to characterize as confidential.
The Section 105(b)(5)(A) confidentiality protection extends to
documents ``received by'' the Board and to documents ``prepared * * *
specifically for'' the Board. The response that a firm provides to the
Board falls into both of those categories. The Board will therefore
maintain the response as confidential except to the extent that the Act
expressly allows or requires the Board to disclose it.
The Act expressly allows or requires the Board to disclose the
firm's response in at least three ways. First, Section 104(f) of the
Act requires that the text of the firm's response must be attached to
and made part of the inspection report. As part of the inspection
report, the response will become public if and when the relevant
portion of the report becomes public. Second, Section 104(g)(1) of the
Act requires that the Board transmit the firm's response to the
Commission and to appropriate state regulatory authorities when the
Board transmits the final report to them. Third, Section 105(b)(5)(B)
allows the Board to transmit to the regulatory and law enforcement
agencies specified there any materials covered by Section 105(b)(5)(A),
which would include the firm's response to the draft.
Any confidential treatment that the Board grants pursuant to a
firm's request under Section 104(f) would restrict disclosure of the
information only in the context of the first of those three
possibilities--the inclusion of the response as part of the inspection
report. The only consequence of the confidential treatment afforded
under Section 104(f) is that the Board will redact the confidential
information from the version of the response that is attached to and
made part of the inspection report. Accordingly, if the portion of the
final report that includes the response eventually becomes public, it
will not include any information granted confidential treatment under
Section 104(f).\4\ In the second and third contexts described in the
preceding paragraph, however, nothing in Section 104(f) operates to
limit what the Board may disclose to certain regulatory and law
enforcement agencies.
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\4\ For example, if the firm's response is directed to the
portion of the report that deals with quality control defects, the
response will not be made public for as long as that portion of the
report is not made public. That portion of the report may be made
public, however, if the firm fails to address the criticisms to the
Board's satisfaction within 12 months. At that time, that portion of
the report, including the firm's response, would be made public, but
any part of the response that had received confidential treatment
under Section 104(f) would be redacted from the report that is made
public.
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Rule 4007(c) provides that after receiving the firm's response, the
Board has various options. The rule permits the Board to take such
action with respect to the draft report as it considers appropriate.
For example, the Board may adopt the draft report as the final report,
revise the draft report, or continue or supplement the inspection
before issuing a final report. If the Board directs the staff to
continue or supplement the inspection or revise the draft report, the
Board may, in its discretion, afford the firm the opportunity to review
any revised draft inspection report. Rule 4007(c) permits the Board, in
its discretion, to afford firms a second opportunity to comment on an
inspection report when the Board continues or supplements its
inspection or revises a draft report after receiving a firm response.
The Board intends to afford registered firms an opportunity to comment
on revised reports when new findings or assessments have been made or,
more generally, when significant changes have been made to the draft
report by the Board.
Rule 4008--Procedures Concerning Final Inspection Reports
Rule 4008 describes procedures related to a final inspection
report. Rule 4008(a) provides that the Board will make a final
inspection report available for review by the firm that is the subject
of the report. As is true of draft inspection reports under Rule 4007,
Rule 4008 requires that the Board make the final report available for
the firm's review, but the Board need not necessarily allow the firm to
have and maintain its own copy of the full report. Rule 4008(b)
provides that the Board will transmit the final report to the
Commission, along with any additional letter or comments by the Board
or the Board's inspectors and along with the
[[Page 22108]]
firm's response to any draft of the report. Rule 4008(c) provides that
the Board will transmit to each appropriate state regulatory authority,
in appropriate detail, the final report, any additional letter or
comments by the Board or inspectors, and the firm's response to any
draft of the report. The Act leaves to the Board's discretion the
determination of what detail is or is not appropriate for reporting to
a state regulator. The rule allows the Board the flexibility to
exercise that discretion.
Section 104(g)(1) of the Act requires that the Board transmit the
final report ``in appropriate detail, to the Commission and each
appropriate State regulatory authority, accompanied by any letter or
comments by the Board or the inspector, and any letter of response from
the registered public accounting firm.'' Rules 4008(b) and 4008(c)
implement that provision of the Act.
A final inspection report is a document prepared by the Board in
connection with an inspection, and would therefore generally be covered
by Section 105(b)(5)(A)'s confidentiality protection. A final
inspection report is also likely to contain substantial information
``received by'' the Board in connection with an inspection, and that is
independently subject to the protection of 105(b)(5)(A), as the Act
explicitly notes in Section 104(g)(2).\5\ A final inspection report is
also unique, however, in that the Act separately contemplates, in
Section 104(g)(2), that at least some portions of it will be publicly
available.
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\5\ See Section 104(g)(2) (noting that disclosure of reports to
public is ``subject to section 105(b)(5)(A)'').
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The Act plainly does not require that a state regulator maintain
the confidentiality of any portion of a final report that becomes
publicly available pursuant to Section 104(g)(2). Any other portion of
the final report, however, as well as any letter that accompanies the
transmittal and any copy of the firm's response to a draft report, are
subject to the protection of Section 105(b)(5)(A) and, as a
consequence, a state regulator receives them subject to Section
105(b)(5)(B)'s express requirement to maintain them as confidential and
privileged. Moreover, with respect to portions of the final report that
address quality control defects, state regulatory authorities are
equally bound by Section 104(g)(2)'s command that such portions of the
report shall not be made public unless the firm fails to do certain
things within 12 months of the report's issuance.\6\ Any otherwise
applicable state or local law that conflicts with this requirement or
stands as an obstacle to the accomplishment and execution of the full
purposes and objectives of Congress would be preempted.\7\
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\6\ The Act does not prohibit a firm from voluntarily disclosing
or providing a report or any portion of a report to any person.
\7\ See Crosby v. National Foreign Trade Council, 530 U.S. 363,
372-73 (2000); City of New York v. FCC, 486 U.S. 57, 64 (1988).
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Rule 4009--Firm Response to Quality Control Defects
Consistent with Section 104(g)(2) of the Act, when a final
inspection report contains any discussion of criticisms of, or
potential defects in, the firm's quality control systems, Rule 4009(a)
permits the firm to submit evidence or otherwise to demonstrate to the
Director of the Division of Registration and Inspections that it has
improved such quality control systems, and remedied such defects. This
submission or demonstration must be made no later than 12 months after
the issuance of the Board's final inspection report. The date of
issuance will be the date the final inspection report is adopted by the
Board as final. Absent extraordinary circumstances, the report will be
available for review by the firm beginning on that date. The rule
requires the Director, after reviewing the evidence, to advise the firm
whether he or she will recommend to the Board that the firm has
satisfactorily addressed the criticisms or defects in the quality
control system of the firm identified in the final inspection report
and, if not, why not.
Rule 4009(b) provides that if the Board determines that the firm
has satisfactorily addressed all quality control defects and criticisms
in the final report, the Board will promptly provide notice of that
determination to the Commission and to any appropriate state regulatory
authority to which the Board had provided any portion of the final
inspection report.
Rule 4009(c) requires the Board to notify the firm of its final
determination as to whether the firm has addressed to the satisfaction
of the Board the criticisms or defects in the firm's quality control
system.
Rule 4009(d) provides that the Board will make public those
portions of a final inspection report dealing with such criticisms and
defects if the firm fails to address those matters to the Board's
satisfaction within 12 months of the issuance of the final inspection
report. Rule 4009(d) specifically addresses the time of any such public
disclosure. Under Rule 4009(d), if a firm made no submission to the
Board under Rule 4009(a) concerning the firm's efforts to address the
criticisms or potential defects, then the Board would make those
portions of the report public upon the expiration of the 12-month
period. If the firm made a submission under Rule 4009(a), but then
failed to seek Commission review of an adverse Board determination
concerning that submission within the time allowed to seek such review,
the Board would make those portions of the report public upon the
expiration of the period allowed for seeking Commission review. If the
firm did timely seek Commission review, under Section 104(h)(1)(B) of
the Act, of an adverse Board determination, the Board would make those
portions of the report public 30 days after the firm formally requested
Commission review, unless the Commission, by rule or order, directs
otherwise. The Board is adopting a 30-day delay, subject to any
superseding Commission rule or order, to allow the Commission an
opportunity to consider whether to order a longer stay of public
disclosure in a particular case, since the Act does not operate to stay
such disclosure.
Rule 4010--Board Public Reports
Rule 4010 permits the Board, at any time, to publish public
summaries, compilations, or other general reports concerning the
procedures, findings, and results of its various inspections as the
Board deems appropriate. The rule allows for these reports to include
discussion of criticisms of, or potential defects in, quality control
systems of any firm or firms that were the subject of a Board
inspection. However, the rule prohibits these published reports from
identifying the firm or firms to which these criticisms relate, or at
which the defects were found, unless the information has previously
been made public pursuant to the Board's rules or other lawful means.
The phrase ``other lawful means'' refers to situations in which the
covered information is made public by lawful means provided for in the
Act.
(b) Statutory Basis
The statutory basis for the proposed rules is Title I of the Act.
B. Board's Statement on Burden on Competition
The Board does not believe that the proposed rules will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rules provide a
procedural framework for the program of continuing inspections that the
Act requires the Board to conduct. With respect to the firms to be
inspected, the proposed rules impose no
[[Page 22109]]
burden beyond the burdens clearly imposed and contemplated by the Act.
C. Board's Statement on Comments on the Proposed Rules Received From
Members, Participants or Others
The Board released the proposed rules for public comment in PCAOB
Release No. 2003-013 (July 28, 2003). A copy of PCAOB Release No. 2003-
013 and the comment letters received in response to the PCAOB's request
for comment are available on the PCAOB's web site at http://www.pcaobus.org.
The Board received 16 written comments. The Board has clarified and
modified certain aspects of the proposed rules in response to comments
it received, as discussed below.
To address one commenter's concern about the scope of the Board's
inspections, the Board clarified in the rule that registered public
accounting firms will be subject to regular and special inspections
``in order to assess the degree of compliance of each registered public
accounting firm and associated persons of that firm with the Act, the
Board's rules, the rules of the Commission, and professional standards,
in connection with its performance of audits, issuance of audit
reports, and related matters involving issuers.''
One commenter was confused by, and asked the Board to explain, the
provisions of the proposed rule that stated that, at the conclusion of
each inspection, the Director would submit a draft report to the Board
and then, unless the Board directed that transmittal be deferred,
transmit the draft report to the firm under review. This part of the
rule only described internal Board procedures. To eliminate any
confusion created by this provision and to preserve the Board's
flexibility to structure its internal processes, the Board deleted
these provisions from the rule.
The Board also made a change concerning the amount of time within
which the rule requires a firm to submit a response to a draft
inspection report. Commenters suggested that the proposed period, 30
days, was too short. The Board believes that, as a general matter, 30
days allows sufficient time, but the Board added a provision that would
allow the Board to grant a longer period when warranted by unusual
circumstances.
One commenter suggested that the rules should more closely track
the Act by expressly providing that a firm's response to a draft
inspection report would be attached to, and made part of, any final
report. The Board incorporated such a provision in the final rules.
One commenter noted that the Board's description of the state
authorities that would receive the final inspection report under Rule
4008, as proposed, differed slightly from the authorities described in
the Act's definition of ``appropriate state regulatory authority.'' In
response to this comment, the Board changed its rule to more closely
track the Act. Specifically, the Board added a definition of
``appropriate state regulatory authority'' based on the definition of
that term in the Act. The Board expects that, in most cases, the
appropriate state regulatory authority to receive an inspection report
will be any state, agency, board or other authority that has issued a
license or certification number authorizing the firm to engage in the
business of auditing or accounting.
Finally, one commenter suggested that the Board notify the
Commission and each appropriate state regulatory authority to which the
final inspection report was provided under Rule 4008(b) and (c) of the
Board's final determination concerning whether the firm has addressed
the criticisms or defects in the quality control system of the firm
identified in the inspection report to the satisfaction of the Board.
The Board implemented this suggestion by adding paragraph (b) to Rule
4009. Rule 4009(b) provides that if the Board determines that the firm
has satisfactorily addressed all quality control defects and criticisms
in the final report, the Board will promptly provide notice of that
determination to the Commission and to any appropriate state regulatory
authority to which the Board had provided any portion of the final
inspection report.
III. Date of Effectiveness of the Proposed Rules and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding, or (ii) as to
which the Board consents, the Commission will:
(A) By order approve such proposed rules; or
(B) Institute proceedings to determine whether the proposed rules
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
is consistent with the requirements of Title I of the Act. Comments may
be submitted by any of the following methods:
Electronic comments:
Use the Commission's Internet comment form
(http://www.sec.gov/rules/pcaob.shtml); or
Send an e-mail to rule-comments@sec.gov. Please
include File Number PCAOB-2003-08 on the subject line.
Paper comments:
Send paper comments in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW., Washington, DC 20549-0609. All submissions should refer to File
Number PCAOB-2003-08. This file number should be included on the
subject line if e-mail is used. To help the Commission process and
review your comments more efficiently, please use only one method. The
Commission will post all comments on the Commission's Internet Web site
(http://www.sec.gov/rules/pcaob.shtml). Copies of the submission, all
subsequent amendments, all written statements with respect to the
proposed rule that are filed with the Commission, and all written
communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for inspection and copying in the Commission's Public
Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies
of such filing also will be available for inspection and copying at the
principal office of PCAOB. All comments received will be posted without
change; we do not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number PCAOB-
2003-08 and should be submitted on or before May 14, 2004.
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-9194 Filed 4-22-04; 8:45 am]
BILLING CODE 8010-01-P