Public Company Accounting Oversight Board; Order Approving Proposed Rules Relating to Inspections of Registered Public Accounting Firms
SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-49787; File No. PCAOB-2003-08)
June 1, 2004
On October 15, 2003, the Public Company Accounting Oversight Board (the "Board" or the "PCAOB") filed with the Securities and Exchange Commission (the "Commission") proposed rules pursuant to Section 107 of the Sarbanes-Oxley Act of 2002 (the "Act") and Section 19(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), relating to inspections of registered public accounting firms. Notice of the proposed rules was published in the Federal Register on April 23, 2004.1 The Commission received three comment letters relating to these rules. For the reasons discussed below, the Commission is granting approval of the proposed rules.
Section 104 of the Act directs the PCAOB 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 the firm's performance of audits, issuance of audit reports and related matters involving "issuers," as defined in the Act. In furtherance of this provision, the PCAOB adopted proposed rules to establish procedures for inspections, and submitted them to the Commission for approval. Pursuant to the requirements of Section 107(b) of the Act and Section 19(b) of the Exchange Act, the Commission approved publication of the proposed rules for public comment on April 16, 2004. The proposed rules on inspections consist of PCAOB Rules 4000 through 4010 (reserving Rule 4005) and certain definitions that appear in PCAOB Rule 1001.
The proposed rules set forth the schedule for regular inspections of registered public accounting firms. Registered firms that issue audit reports to 100 or fewer issuers will be inspected at least once every three years, and all other registered firms will be inspected annually. The PCAOB also may conduct special inspections of registered firms at any time. The rules describe the procedures the Board will follow when the inspection staff detects possible violations by firms under inspection. Under certain circumstances, the Board will report possible violations to the Commission and/or appropriate state regulatory agencies. In addition, the Board may decide to initiate an investigation of suspected violations.
Each inspected firm will have an opportunity to review and comment on the draft inspection report relating to that firm before the Board issues its final inspection report. Copies of the report will be transmitted to the Commission and to the appropriate state regulatory authorities. Although not stated specifically in the inspection rules, it is our understanding and expectation that, as required by Section 104(g) of the Act, the Board also will make the findings of each inspection report available to the public. The Act provides that the portion of the report dealing with potential criticisms of or defects in the inspected firm's quality control systems will not be made public unless the firm has failed to address those criticisms or defects to the Board's satisfaction within 12 months after the date of the report. From time to time, as the Board deems appropriate, it also may publish public summaries, compilations or other general reports concerning the procedures, findings, and results of its various inspections.
The Act provides that a registered public accounting firm may seek interim review by the Commission, pursuant to such rules as the Commission shall promulgate, if the firm (1) has reviewed the PCAOB's draft inspection report and responded to the substance of particular items in that report, and disagrees with the assessments contained in any final report prepared by the Board following that response, or (2) disagrees with the Board's determination that quality control criticisms or defects identified in the inspection report have not been addressed to the Board's satisfaction within 12 months of the date of the inspection report.
The three comment letters submitted with respect to the proposed inspection rules raised a number of issues relating to implementation of the rules and requested greater specificity in certain areas. Some of the concerns the commenters noted relate to the PCAOB's exercise of its discretion in the conduct of inspections and in referring potential violations to the Commission and state regulatory authorities. Their concerns also related to the confidentiality of inspection information, particularly in the hands of the Commission and state regulatory authorities. The PCAOB considered the issues these commenters raised and declined to accept their suggestions, and the resulting rules appear to establish a reasonable operating framework for inspecting registered public accounting firms. In implementing these rules, we would encourage the appropriate and necessary sharing of information among the Board and federal and state agencies.
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 107 of the Act and Section 19(b)(2) of the Exchange Act, that the proposed rules governing inspections of registered public accounting firms (File No. PCAOB-2003-08) be and hereby are approved.
By the Commission.
Margaret H. McFarland