Order Approving Proposed Rules Relating to Registration System
SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-48180; File No. PCAOB-2003-03)
July 16, 2003
Public Company Accounting Oversight Board; Order Approving Proposed Rules Relating to Registration System
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.
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
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
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 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").
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.
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
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 acknowledged 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 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.
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 THEREFOR 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.
Margaret H. McFarland
|1|| Securities Exchange Act Release No. 47990 (June 5, 2003); 68 FR 35016 (June 11, 2003).
|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.
|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.
|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 Institut der Wirtschaftsprüfer and the Wirtschaftsprüferkammer (jointly), the Japanese Institute of Certified Public Accountants, 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 Thornton LLP, KPMG and PricewaterhouseCoopers.
|6|| Section 107(b)(3) of the Act.