Deloitte & Touche LLP
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July 17, 2003

Office of the Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: Securities and Exchange Commission (Release No. 34-48075; File No. PCAOB -2003-02); Public Company Accounting Oversight Board; Notice of Filing of Proposed Rule on Funding

Deloitte & Touche LLP is pleased to respond to the request for comments from the United States Securities and Exchange Commission (the "Commission" or the "SEC") regarding the filing by the Public Company Accounting Oversight Board (the "PCAOB" or the "Board") of its proposed rule on funding for the Board.


We support the goals of the Sarbanes-Oxley Act of 2002 (the "Act") in restoring investor confidence as well as the PCAOB's and the Commission's efforts to implement faithfully the Act. The Act requires that funds to cover the Board's annual budget are to be collected from "issuers."1 The Board's proposal to implement § 109 of the Act, Board Funding Establishment of Accounting Support Fee, PCAOB Rulemaking Docket Matter No. 002, Release No. 2003-3 (April 18, 2003) (the "PCAOB Proposed Rule"), sets forth the manner in which these fees from issuers, the "accounting support fees," are to be calculated and collected.2 We believe it is vital that the Board is successful in developing and executing its programs, and appropriate funding of the PCAOB is clearly critical to the Board's success.

We submitted a comment letter to the Board on its initial proposal for Board funding on April 4, 2003.3 During that comment process, we raised concerns regarding proposed Rule 7103(b), which states that "no registered public accounting firm shall sign an unqualified audit opinion with respect to an issuer's financial statements, or issue a consent to include an audit opinion issued previously, unless the registered public accounting firm has ascertained that the issuer has outstanding no past-due share of the accounting support fee...."4 Our concerns turned primarily upon the Board's view that public accounting firms should play a role in policing the support fee system. We recognize that in a note to Rule 7103(b), the Board clarified that public accounting firms may confirm payment by obtaining a representation from management and further clarified that if an issuer has filed a written petition for a correction of its share of the accounting support fee, it will not be deemed to have a past-due share outstanding. However, these modifications did not address the fundamental issues we raised with respect to this aspect of the Board's funding proposal.

In summary, we believe (1) this requirement is not necessary given that several other provisions in the proposal serve to ensure that issuers will pay the accounting support fee in a timely manner, (2) it is not in the best interest of public investors to prevent the issuance of timely audit reports, (3) the Board is in the best position to ascertain payment of the accounting support fee, and (4) this additional mechanism would place an inappropriate burden on the registered public accounting firm to police the collection of accounting support fees. Therefore, we respectfully submit this comment letter to reiterate our fundamental concerns with the proposed rule. We urge the Commission to consider these comments as explained below and to act swiftly in issuing the final rule.

I. The Proposal Contains Other Appropriate Mechanisms to Ensure Payment by Issuers

The release accompanying the Board's proposal suggests that proposed Rule 7103(b) has been included "to serve as a reliable and cost-effective means of maintaining integrity in the assessment and collection process."5 The proposal, however, already includes several other mechanisms to ensure the reliability and integrity of the assessment and collection process.

Specifically, the proposal provides that the Board will send notice to issuers of payments due with respect to the accounting support fee, and issuers will be required to pay the fee within thirty days thereafter.6 If the issuer has not paid the accounting support fee within sixty days after the notice was sent, the Board can send a second notice demanding payment.7 Thereafter, in the event an issuer is more than ninety days past due in paying its accounting support fee, the Board would be able to report the delinquency to the Commission, and the failure to pay would be deemed a violation of Section 13(b)(2) of the Securities Exchange Act of 1934 and could result in administrative, civil, or criminal sanctions.8 While the SEC has stated that "the uncertainty, given the Commission's limited resources and other priorities, that the Commission would bring civil actions against such issuers makes a referral alone an unreliable collections mechanism," 9 we continue to believe that it would be unlikely that any issuer would risk a securities law violation by failing to pay its accounting support fee in a timely fashion. Moreover, if an issuer is more than thirty days past due in paying its accounting support fee, interest will accrue at a rate of 6% per annum.10 We believe the threat of potential administrative, civil, or criminal sanctions by the Commission in addition to the fines associated with late payments create ample incentive for issuers to pay their accounting support fee in a timely manner.

II. To Prevent Timely Reporting is not in the Best Interest of Public Investors

We believe it is counterproductive to the interests of investors to prevent timely reporting on the financial statements of an issuer due to lack of payment to the PCAOB. We recognize that the proposed rule distinguishes unqualified opinions from qualified, adverse, and disclaimed opinions, and states that only the issuance of unqualified opinions would be restricted due to non-payment; yet, it is not clear in the rule whether the issuance of unqualified opinions with an explanatory paragraph would be delayed. We believe that all audit opinions - whether they be unqualified, unqualified with an explanatory paragraph, qualified, adverse, or disclaimed - should be issued in a timely manner. Prohibiting the issuance of an audit opinion due to non-payment of the accounting support fee would prevent investors from receiving the useful information contained in annual financial statements and may inhibit their ability to make informed investment decisions. Additionally, investors may misinterpret the lack of issuance or delay in issuance of the audit report to mean significant material issues exist with respect to the financial statements, as this is frequently the case when an issuer does not meet a filing deadline. Therefore, to delay or prevent the issuance of an audit report for non-payment of the accounting support fee is inconsistent with the SEC's mission to protect investors and maintain the integrity of the securities markets.

III. The Board Itself Should Monitor the Assessment and Collection of Fees

As proposed, Rule 7103(b) would obligate the registered accounting firm to "ascertain" that the issuer has no past-due accounting support fee outstanding. As discussed above, after the initial comment process, the Board clarified its proposal to state "a registered public accounting firm may ascertain that an issuer has no outstanding past-due share of the accounting support fee by obtaining a representation from the issuer or a confirmation from the Board that no past-due share of the accounting support fee is outstanding." 11 Despite this modification, many firms may feel compelled to obtain statements from both the issuer and the Board and may request written confirmation from the Board of the amount of the accounting support fee, the period covered, and the related payments made by the issuer.

Statement on Auditing Standards (SAS) No. 85, Management Representations ("SAS 85"), provides the following with regard to management representations:

During an audit, management makes many representations to the auditor, both oral and written, in response to specific inquiries or through the financial statements. Such representations from management are part of the evidential matter the independent auditor obtains, but they are not a substitute for the application of those auditing procedures necessary to afford a reasonable basis for an opinion regarding the financial statements under audit. 12

While the release accompanying the Board's proposal states that the Board "plans to build systems to enable auditors quickly and easily to ascertain whether their issuer audit clients have any outstanding past-due shares of the accounting support fee," the text of proposed Rule 7103(b) contains no reference to such systems.13 Even if such a system becomes available, based on the above reference to SAS 85 and based upon the need for registered public accounting firms to protect themselves from potential damage claims resulting from inappropriately holding or delaying the issuance of an unqualified audit report, we believe registered accounting firms will send requests for confirmation of the accounting support fee, the period covered, and the related payments made by the issuer directly to the PCAOB. It would be extremely time-consuming for the PCAOB to respond to thousands of confirmation requests. Indeed, it would be much more efficient for the Board to notify automatically the auditor of record of each issuer (as identified in the registration process) of the accounting support fee charged, the period covered, and the payments received.

Overall, we believe that with the Board's proposed system in place, the Board itself, rather than registered accounting firms, should use this additional mechanism to monitor assessment and collection of the fee system. If the Board develops this system, the Board will be in the best position to design and operate the system so that it can oversee assessment and collection of the fee in the most efficient and comprehensive manner. We do not think it would be in the Board's interest to become dependent on the registered accounting firms - the entities they regulate - to help preserve the financial viability of the Board. For these reasons, the Board itself should monitor assessment and collection of the fees without reliance on the registered accounting firms.

IV. Requiring Private Accounting Firms to Enforce a Federal Statute is Not Appropriate and May Create Additional Risks for Firms

Finally, the accounting support fee is a fee that will be set by an SEC-approved regulation and is imposed by federal statute.14 Accordingly, we believe it is inappropriate to commandeer private accounting firms as agents for the assessment and collection of this federally mandated fee, as contemplated by proposed Rule 7103(b). Unlike private accounting firms, the Board has complete control over the fee system and the information generated thereby, and is charged by statute with the "assessment . . . and collection" of the fee.15

We also are concerned that by its terms, the proposed rule would expose registered accounting firms to additional risk. As proposed, Rule 7103(b) would prevent the registered accounting firm from signing an unqualified audit opinion or issuing a consent if the issuer has not paid the accounting support fee to the PCAOB. Such a rule poses the threat that issuers may miss critical deadlines related to the issuance of the audit opinion on the financial statements - such as those related to completing vital financing agreements or meeting essential debt covenant requirements. The consequences of precluding firms from signing unqualified opinions, solely for non-payment to the PCAOB, could be severe for such issuers and may in turn create additional risk for the firms.

In addition, the Board states in its release that its rules governing the accounting support fees will be used as the basis for the rules governing fees to be collected by any standard-setting body designated by the Board.16 In light of this statement, our concerns are multiplied because the problems identified above could be carried through to fee collection schemes for various standard-setting bodies. We therefore urge that at a minimum, the Commission refrain from extending to registered accounting firms any obligation to oversee the collection process for fees established to support any standard-setting body designated by the Board.


For the reasons discussed above, requiring the accounting firm to police an issuer's payment of the accounting support fee is needlessly duplicative of the proposal's other enforcement mechanisms and will raise needless policy concerns. Accordingly, we recommend that the Commission delete in its entirety proposed Rule 7103(b).

We appreciate the opportunity to comment, and would be pleased to discuss these issues with you further. If you have any questions or would like to discuss these issues further, please contact Robert J. Kueppers at (203) 761-3579.

Very truly yours,

/s/ Deloitte & Touche LLP

cc: Hon. William H. Donaldson, Chairman of the SEC
Hon. Paul S. Atkins, Commissioner
Hon. Roel C. Campos, Commissioner
Hon. Cynthia A. Glassman, Commissioner
Hon. Harvey J. Goldschmid, Commissioner
William J. McDonough, Chairman of the PCAOB
Kayla J. Gillan, Member
Daniel L. Goelzer, Member
Willis D. Gradison, Jr., Member
Charles D. Niemeier, Member

1 See Act, § 109; see also Act, § 2(a)(7) (defining "issuer").
2 PCAOB Proposed Rule 1001(a)(1) (defining "accounting support fee").
3 Comment letter on behalf of Deloitte & Touche LLP on the PCAOB Proposal For Establishment of Accounting Support Fee (April 4, 2003).
4 PCAOB Proposed Rule 7103(b).
5 PCAOB Release No. 2003-3, at 10.
6 PCAOB Proposed Rule 7103(a).
7 PCAOB Proposed Rule 7103(c).
8 Id.
9 SEC Release PCAOB Rulemaking: Public Company Accounting Oversight Board; Notice of Filing of Proposed Rule on Funding (No. 34-48075).
10 PCAOB Proposed Rule 7103(a).
11 PCAOB Proposed Rule 7103(b).
12 Statement on Auditing Standards (SAS) No. 85, Management Representations (AICPA, Professional Standards, vol. 1, AU sec. 333.02) (emphasis added).
13 PCAOB Release No. 2003-3, at 10.
14 See Act, § 109(d).
15 See Act, § 109(d)(2). Indeed, the reference in § 109(d)(2) to "agent[s] appointed by the Board" to collect the fees further suggests that Congress did not intend that accounting firms be entangled in the collection process or they would have so stated or specifically required it. An "agency" relationship is one that is created through mutual acceptance and the Act gives the Board the authority to employ such an agent.
16 See PCAOB Release No. 2003-3, at 11.