[Federal Register: July 21, 2003 (Volume 68, Number 139)]
[Notices]
[Page 43242-43244]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21jy03-138]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48180; File No. PCAOB-2003-03]
Public Company Accounting Oversight Board; Order Approving
Proposed Rules Relating to Registration System
July 16, 2003.
I. Introduction
On May 8, 2003, the Public Company Accounting Oversight Board
(``Board'' or ``PCAOB'') filed with the Securities and Exchange
Commission (``Commission'') proposed rules PCAOB-2003-03 pursuant to
Section 107(b) of the Sarbanes-Oxley Act of 2002 (``Act''). Notice of
the proposal was published in the Federal Register on June 11, 2003.\1\
The Commission received sixteen comment letters. For the reasons
discussed below, the Commission is granting approval of the proposed
rules.
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\1\ Securities Exchange Act Release No. 47990 (June 5, 2003); 68
FR 35016 (June 11, 2003).
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II. Description
Section 102 of the Act prohibits any person that is not a
registered public accounting firm from preparing or issuing an audit
report with respect to any ``issuer,'' as that term is defined in the
Act, or from participating in preparation or issuance of any such
report. In order to enable public accounting firms to comply with this
registration requirement, the Board has proposed rules to establish a
registration system. The registration system consists of eight rules
(PCAOB Rules 2100 through 2106, and 2300), as well as definitions that
would appear in Rule 1001, and a registration form (PCAOB Form 1).
Under the Act, the registration requirement is effective 180 days
after the date on which the Commission makes its determination under
101(d) of the Act that the Board is capable of carrying out its
responsibilities under the Act. The Commission made this determination
on April 25, 2003, which means that domestic public accounting firms
that wish to prepare or issue, or participate in the preparation or
issuance of, audit reports with respect to any issuer must register
with the Board by October 22, 2003.\2\
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\2\ As discussed below, the Board's proposal would give foreign
public accounting firms an additional 180 days (i.e., until April
19, 2004) to register.
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The proposed registration form requires disclosure of information
concerning the applicant and its associated accountants, and about the
applicant's audit clients that file reports with the Commission.
Applicants must pay a fee to cover the costs of processing and
reviewing registration applications, the amount of which will be
announced by the Board prior to commencing acceptance of registration
applications. Within 45 days of receiving an application, the Board
must (1) approve the application, (2) issue a written notice of a
hearing, or (3) request more information from the prospective
registrant.
Although the Board has authority under the Act to exempt, with the
approval of the Commission, non-U.S. public accounting firms, in whole
or in part, from any of the Board's requirements under the Act, the
Board decided that its proposed registration rules would apply to non-
U.S. public accounting firms that prepare or furnish audit reports with
respect to ``issuers'' or that play a substantial role in the
preparation or furnishing of these reports. In response to concerns
expressed by foreign regulators, accounting firms and others about the
impact of the Board's proposed rules on non-U.S. accounting firms, the
Board made several accommodations prior to submitting its proposed
rules to the Commission.
These accommodations include (1) reducing the scope of information
required by the registration form, (2) allowing firms to withhold
certain information on the form if they can demonstrate that providing
the information would conflict with non-U.S. law (by providing an
English copy of the non-U.S. law, a legal opinion that submitting the
information would violate the law, and an explanation of the
applicant's efforts to seek consents or waivers to eliminate the
conflict), and (3) allowing non-U.S. firms an additional six months to
register with the PCAOB.\3\
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\3\ The Board held a public roundtable meeting on March 31,
2003, at which various foreign regulators, accounting firms, and
professional organizations, as well as representatives of U.S.
institutional investors, discussed the ramifications of the
registration of non-U.S. accounting firms.
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Pursuant to the Act, registered public accounting firms must file
annual reports with the Board and are subject to the Board's oversight
through its inspection, investigation and
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disciplinary programs. The proposed rules that are approved by this
order address only the Board's registration requirements for public
accounting firms, and do not address the reporting or other
requirements that will be imposed on registered firms or the manner in
which the Board will exercise its oversight authority under the Act.
III. Summary of Comment Letters
The Commission received sixteen comment letters regarding the
proposed registration system. Eight of these letters were from foreign
governments and professional groups, and their comments related
primarily to the impact of the proposal on non-U.S. accounting
firms.\4\ Seven of the letters were from major accounting firms and the
SEC Practice Section of the American Institute of Certified Public
Accountants (``AICPA/SECPS'').\5\ and one letter was from the National
Association of State Boards of Accountancy (``NASBA'')
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\4\ Letters in this group were submitted by the European
Commission, the European Federation of Accountants, the Financial
Services Agency of Japan, the Institute of Chartered Accountants in
England and Wales, the Instut der Wirtschaftspr[uuml]fer and the
Wirtschaftspr[uuml]ferkammer (jointly), the Japanese Institute of
Certified Public Accounts, the Swiss State Secretariat for Economic
Affairs, and the Swiss Institute of Certified Public Accountants and
Tax Consultants.
\5\ In addition to the letter submitted by the AICPA/SECPS,
letters in this group were submitted by BDO Seidman LLP, Deloitte &
Touche LLP, Ernst & Young LLP, Grant Thorton LLP, KPMG and
PricewaterhouseCoopers.
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Most of the letters from foreign governments and professional
groups commended the Board on its accommodations for non-U.S.
accounting firms, although they continued to express a desire for
complete exemption from registration and oversight by the PCAOB. Most
commenters in this group were of the view that registration in the
United States would be costly, duplicative and burdensome. They
expressed concern about the scope of the information requested in the
registration form, about their perception that some of the information
requested (e.g., general consents to cooperate with Board requests for
information) went beyond registration and into the realm of oversight,
and about their perception of the burden on small firms of complying
with the proposal and the resulting risk of further consolidation in
the accounting profession. Several of these commenters expressed
concern about the confidentiality of information submitted to the
Board. Many commenters in this group requested that the registration
requirement be delayed, both to permit firms to complete their
registration applications and to give the Board's foreign counterparts
time to develop or enhance their own registration and oversight regimes
and agree with the Board on ways to reduce the need for PCAOB
registration and oversight.
The letters from the AICPA/SECPS and the six largest accounting
firms operating in the United States raised concerns about the scope of
information requested by the PCAOB's proposed registration form and
requested clarification of several issues. Among other things, the
commenters in this group expressed concern about the confidentiality of
information submitted to the Board, the scope of certain definitions
such as ``associated person'' and ``associated entity,'' the manner of
obtaining the Board's proposed relief from submitting information that
would violate non-U.S. law, and the differences in SEC and Board
requirements for fee disclosure. Several of the commenters in this
group noted that the Board's broad requirement that applicants consent
to cooperate with any request of the Board for testimony or documents
should be subject to established privileges, such as the attorney-
client privilege, and constitutional protections against self-
incrimination. Commenters also objected to the Board's request for
information about legal proceedings, particularly criminal proceedings,
which were not related to audits. Many of the commenters in this group
suggested that the Board and the Commission permit ``provisional''
registration in order to avoid disruption in the delivery of audit
services. These commenters expressed concern that even if applicants
make a good faith effort to comply, they might not be able to obtain
all required information (or respond to Board requests for supplemental
information) by the October 22, 2003 deadline, and that the Board may
have difficulty in processing information by that date, even if it is
submitted in time.
The NASBA letter requested that the Board cooperate with state
boards of accountancy in their regulatory role, and suggested several
ways in which the Board and the Commission might support state
regulatory bodies.
IV. Discussion
Title I of the Act assigns the Board the formidable task of
designing and implementing a registration and oversight system within a
relatively short period of time. The investor protection goals of the
Act justify the need for prompt action, but the importance of the
Board's task and its potential impact on the public securities markets
demand that it be undertaken in a thoughtful and reasoned manner. After
careful review of the Board's proposed registration system, the
Commission finds that it is consistent with the requirements of the Act
and the securities laws and is necessary and appropriate in the public
interest and for the protection of investors.\6\
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\6\ Section 107(b)(3) of the Act.
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A. Impact on Non-U.S. Accounting Firms
The Board has taken an important step in its mandate under the Act
by proposing rules regarding registration of non-U.S. audit firms that
prepare, issue, or play a substantial role in the preparation or
issuance of, audit reports relating to U.S. public companies. This step
has raised concerns in the international community, and the Board has
made efforts to address those concerns, through its roundtable meeting
in March, through its public comment process and through meetings and
discussions with foreign regulators. In response to these concerns, the
Board made significant accommodations in its proposal, especially with
regard to non-U.S. accounting firms, including changes eliminating the
potential conflicts of law raised by the registration system, narrowing
the scope of information to be provided, and extending the deadline for
foreign firms to register. This approach is similar to the approach the
Commission has taken in implementing other provisions of the Act, by
allowing for certain accommodations.
The Board has acknowledge that it is still considering the nature
of its oversight, especially with respect to foreign public accounting
firms. The Commission encourages the Board to continue its reasoned
approach when considering its oversight role, especially with respect
to non-U.S. firms. In this regard, we applaud the Board's initiative to
work with its foreign counterparts to find ways to accomplish the goals
of the Act without subjecting foreign firms to unnecessary burdens or
conflicting requirements.
We urge the Board to continue its dialogue with oversight bodies
outside the United States in order to try to find ways to reduce
administrative burdens and coordinate in areas of common programmatic
interest, such as annual reporting, inspections and discipline. We
encourage the Board to move expeditiously to determine the nature and
scope of its oversight over foreign public accounting firms. The
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Commission is cognizant that many countries have embarked on ambitious
reforms with respect to auditor oversight, and that the International
Organization of Securities Commissions has issued a statement noting
the basics of robust and effective oversight. Given these developments,
we are confident that the Board and its foreign counterparts will make
progress in developing workable cooperative arrangements.
B. Other Aspects of the Registration System
Many of the comment letters submitted by accounting firms and
professional groups related to specific aspects of the registration
form. A continuing theme of many of the comment letters was the desire
for clarification of certain definitions, rules and registration form
line items. It is not surprising that first-time users of a
registration form and those seeking to work through a complex
registration system would find areas of ambiguity. We believe that some
of the issues raised by commenters in this group can be addressed by
the PCAOB through formal or informal interpretations and
clarifications, and, in this connection, we understand that the Board
is considering the publication of ``Frequently Asked Questions'' and
responses. We encourage the Board to use this and other means to assist
applicants in complying with the registration rules. We also encourage
the Board to review the registration form after the Board has gained
more experience with the registration process, to determine whether
amendments to the form can be made to make the registration process
more efficient.
Finally, with respect to the comments submitted by NASBA, we
appreciate the efforts of that organization and its members to work
with the PCAOB on the important task of auditor regulation and
oversight. We believe that both the Board and state regulatory bodies
will benefit from continued close cooperation.
V. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rules are consistent with the requirements of the Act and the
securities laws and are necessary and appropriate in the public
interest and for the protection of investors.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Securities Exchange Act of 1934, that the proposed rules (File No.
PCAOB-2002-03) be and hereby are approved.
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-18497 Filed 7-18-03; 8:45 am]
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