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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION

(Release No. 34-50794; File No. PCAOB-2004-08)

December 3, 2004

Public Company Accounting Oversight Board; Notice of Filing and Order Granting Accelerated Approval of Proposed Temporary Transitional Rule Relating to PCAOB Auditing Standard No. 2, "An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements"

Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the "Act"), notice is hereby given that on December 1, 2004, the Public Company Accounting Oversight Board (the "Board" or the "PCAOB") filed with the Securities and Exchange Commission (the "Commission") the proposed rule, described in Items I and II below, which items have been prepared by the Board. The Commission is publishing this notice to solicit comments on the proposed rule from interested persons and is approving the proposal on an accelerated basis.

I. Board's Statement of the Terms of Substance of the Proposed Rule

On November 30, 2004, the Board adopted a temporary transitional provision for PCAOB Auditing Standard No. 2, "An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements." (PCAOB Rule 3201T). The proposed rule text is set out below.

SECTION 3. PROFESSIONAL STANDARDS

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Part 1 - General Requirements

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Rule 3201T.

Temporary Transitional Provision for PCAOB Auditing Standard No. 2, "An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements."

(a) Notwithstanding Auditing Standard No. 2, in connection with the audit of an issuer that does not file Management's annual report on internal control over financial reporting in reliance on SEC Release No. 34-50754, Order Under Section 36 of the Securities Exchange Act of 1934 Granting an Exemption from Specified Provisions of Exchange Act Rules 13a-1 and 15d-1 (November 30, 2004), a registered public accounting firm and its associated persons need not:

(1) Date the auditor's report on management's assessment of the effectiveness of internal control over financial reporting with the same date as the auditor's report on the issuer's financial statements, provided that the date of the auditor's report on management's assessment of the effectiveness of internal control over financial reporting is later than the date of the auditor's report on the issuer's financial statements; or

Add a paragraph to the auditor's separate report on the financial statements of an issuer that refers to a separate report on management's assessment of the effectiveness of internal control over financial reporting.

(b) This temporary rule will expire on July 15, 2005.

II. Board's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule

In its filing with the Commission, the Board included statements concerning the purpose of, and basis for, the proposed rule.

A. Board's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule

(a) Purpose

The Board adopted the proposed rule in response to an exemptive order of the Commission (the Exemptive Order).1 The Exemptive Order allows certain issuers an additional 45 days to file Management's annual report on internal control over financial reporting, required by Item 308(a) of Regulation S-K, and the related Attestation report of the registered public accounting firm, required by Item 308(b) of Regulation S-K. The proposed rule would temporarily relieve auditors, in connection with the audit of an issuer relying on the Exemptive Order, from certain provisions of PCAOB Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements ("Auditing Standard No. 2"). The proposed rule would permit eligible auditors to date a report on management's assessment of the effectiveness of internal control over financial reporting later than the date of the report on the same issuer's financial statements. The proposed rule would also permit these auditors to omit reference in the auditor's separate report on the issuer's financial statements to the auditor's report on management's assessment of the effectiveness of internal control over financial reporting.

Specifically, Rule 3201T consists of two paragraphs. Paragraph (a) provides that the proposed rule would apply to registered public accounting firms and their associated persons in connection with the audit of an issuer relying on the Exemptive Order. Such auditors are temporarily relieved from certain provisions of Auditing Standard No. 2, described in subparagraphs (a)(1) and (a)(2). Subparagraph (a)(1) permits eligible auditors to date a report on management's assessment of the effectiveness of internal control over financial reporting later than the date of the report on the same issuer's financial statements. Subparagraph (a)(2) permits these auditors to omit reference in the auditor's separate report on the issuer's financial statements to the auditor's report on management's assessment of the effectiveness of internal control over financial reporting. Paragraph (b) provides that the rule expires on July 15, 2005.

(b) Statutory Basis

The statutory basis for the proposed rule is Title I of the Act.

B. Board's Statement on Burden on Competition

The Board does not believe that the proposed rule will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The proposed rule would temporarily relieve auditors, in connection with the audit of an issuer relying on the Exemptive Order, from certain provisions of Auditing Standard No. 2.

C. Board's Statement on Comments on the Proposed Rule Received from Members, Participants or Others

The Board determined that public comment was not practicable in light of the timing of the Exemptive Order and the imminence of the filing requirements at issue.

III. 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:

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 S7-29-04. This file number should be included on the subject line if e-mail is used. To help us 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/proposed.shtml). Comments are also available for public inspection and copying in the Commission's Public Reference Room, 450 Fifth Street, NW, Washington, DC 20549. 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-2004-08. 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-2004-08 and should be submitted on or before January 10, 2005.

IV. Commission's Finding and Order Granting Accelerated Approval of Proposed Rule

The PCAOB's proposed rule is intended to address auditing issues attendant to the separate Commission Exemptive Order dated November 30, 2004. Pursuant to Commission rules adopted under the Securities Exchange Act of 1934 ("Exchange Act"), an accelerated filer is generally required to submit an annual report on Form 10-K within 75 calendar days after the end of such issuer's fiscal year. Regulation S-K under the Exchange Act requires that an accelerated filer's Form 10-K include, among other things, a management assessment on internal control over financial reporting and an attestation report on that assessment by a registered public accounting firm.2 The Commission's Exemptive Order granted an exemption from these requirements for a period of 45 days to accelerated filers with less than $700 million in common equity market value outstanding as of the end of the second quarter of 2004 whose fiscal years end on or between November 15, 2004 and February 28, 2005. The PCAOB's proposed rule would exempt registered public accounting firms from compliance with (i) the concurrent reporting date requirement of Auditing Standard No. 2 with respect to audits of issuers exempt under the Commission's Exemptive Order and (ii) the requirement to add a paragraph to the auditor's report on the financial statements that refers to the auditor's report on management's assessment of the effectiveness of internal control over financial reporting.

As noted in the Commission's Exemptive Order, the Commission had become increasingly concerned that many smaller accelerated filers may not be in a position to meet the Form 10-K deadline. Accordingly, to ensure that there is a continuing and orderly flow of annual report information to investors and the U.S. capital markets, and to ensure that certain annual report filers and their registered public accounting firms are able to file complete and accurate reports regarding the effectiveness of the filers' internal control over financial reporting, the Commission determined that the exemptions were necessary and appropriate in the public interest and consistent with the protection of investors. The PCAOB's proposed rule is consistent with the substance and purpose of the Commission's order exempting smaller accelerated filers from the Form 10-K report deadline and it will assist auditors of issuers seeking to rely on the Exemptive Order. The proposed rule is a temporary measure and does not modify the substance of Auditing Standard No. 2 as originally approved by the Commission.

On the basis of the foregoing, the Commission finds that the proposed rule is consistent with the requirements of Sections 103 and 107(b) of the Act and the securities laws and is necessary and appropriate in the public interest and for the protection of investors.

The Commission also finds good cause to approve the proposed rule on an accelerated basis.3 The Commission believes that the proposed rule is an important component of the relief provided in the Exemptive Order, and that together the proposed rule and the Exemptive Order would benefit both smaller accelerated filers and registered public accounting firms by providing the additional time necessary to produce complete, thorough and accurate audits of the internal control structure and procedures of affected filers. The Commission believes that it is in the public interest to approve the proposed rule on an accelerated basis in order to achieve the goals set forth in the Commission's Exemptive Order and to avoid any confusion resulting from inconsistencies between Auditing Standard No. 2 and the Commission's Exemptive Order.

Accordingly, the Commission finds that there is good cause, consistent with sections 103 and 107 of the Act, and section 19(b) of the Exchange Act, to approve the rule on an accelerated basis.

V. Conclusion

IT IS THEREFORE ORDERED, pursuant to Section 107 of the Act and Section 19(b)(2) of the Exchange Act that the proposed rule (File No. PCAOB-2004-08) be and hereby is approved on an accelerated basis.

By the Commission

Margaret H. McFarland
Deputy Secretary


Endnotes


http://www.sec.gov/rules/pcaob/34-50794.htm


Modified: 12/03/2004