July 2, 2003
Mr. Jonathan G. Katz
Re: Release No. 34-47990 - Public Company Accounting Oversight Board; Proposed Rules Relating to Registration System
File No. PCAOB-2003-03
Dear Mr. Katz:
We are pleased to provide our comments on the above captioned matter. BDO Seidman, LLP is a member of BDO International, a global network of independent professional accounting firms in 100 countries worldwide. This letter only addresses the concerns of BDO Seidman, LLP and does not necessarily represent the comments or concerns of other BDO Member Firms.
Let us first say that we strongly support the goals of the Sarbanes-Oxley Act of 2002 (the Act) to restore public confidence in financial reporting and in capital markets and agree that the establishment of the Public Company Accounting Oversight Board (PCAOB) is an important step in this process. We previously commented on the PCAOB's proposed rules and are pleased that many of our concerns were addressed in its final rulemaking. As such, we believe that the proposed PCAOB registration system reasonably tracks the legislative mandate set forth in the Act. However, we believe the PCAOB's rule should be clarified and improved in several respects to minimize the burdens imposed on accounting firms while still allowing the PCAOB to carry out its responsibilities under Section 101 (a) of the Act. This letter addresses only our most significant concerns.
Associated Entities and the Practice of Public Accounting
Part I of Form 1, Item 1.6, requires an applicant to "state the name ... of all associated entities that engage in the practice of public accounting or preparing or issuing audit reports or comparable reports prepared for clients that are not issuers" (emphasis added). However, the proposed rule does not provide a definition of the "practice of public accounting." If the term is interpreted broadly, it could apply to many related entities (especially in foreign countries) that do not perform services in connection with audits. In our view, the names and addresses of those entities do not provide information relevant to the PCAOB objectives of registering firms or overseeing the quality of audits of issuers. In coming to this view, we note that Section 104 (a) of the Act requires the PCAOB to conduct inspections designed "...to assess the degree of compliance of each registered public accounting firm and associated person of that firm with th[e] Act, the rules of the Board, the rules of the Commission, or professional standards, in connection with its performance of audits, issuance of audit reports, and related matters involving issuers." Nothing in this Section requires the PCAOB to extend its inspections, and we understand that the PCAOB does not intend to extend its inspections, to services a firm provides to non-issuers.
Accordingly, we recommend that the Commission clarify the definition of "public accounting" by limiting that definition to entities that perform audit services for SEC issuers.
We further recommend that the list of associated entities be limited to those entities that the applicant believes will not register with the PCAOB. Providing information about other registered firms seems to be excessive and unnecessarily duplicative. We note that the PCAOB took a similar approach when it excluded from the definition of persons associated with a public accounting firm "...persons whom the public accounting firm reasonably believes is a person primarily associated with another registered accounting firm."
Rule 1001(p)(i) defines "Person Associated With a Public Accounting Firm (and Related Terms)." The proposed definition includes any "individual proprietor, partner, shareholder, principal, accountant, or professional employee" of the applicant, and any "independent contractor that, in connection with the preparation or issuance of any audit report" receives profits or compensation or participates as an agent unless the person is engaged only in clerical or ministerial tasks or is a person whom the public accounting firm reasonably believes is a person primarily associated with another registered public accounting firm. Further, the analysis states that "an employment or an independent contractor relationship with a public accounting firm is not required for a person to be covered by the definition." The definition of "person associated with a public accounting firm" impacts the requirement to disclose information about legal proceedings under Part V of Form 1 and to obtain consents from all present and future associated persons of the applicant under Part VIII.
We believe the definition of "Person Associated With a Public Accounting Firm" is not clear and could result in unintended difficulties for applicants. In our opinion, the definition should extend only so far as is necessary for the PCAOB to accomplish its oversight objectives set forth in the Act. We recommend that the Commission clarify and narrow the definition in three respects.
Proceedings Against the Applicant and Associated Persons
Section 102(b)(2)(F) of the Act requires that applicants provide "information relating to criminal, civil, or administrative actions or disciplinary proceedings pending against the firm or any associated person of the firm in connection with any audit report" (emphasis added). However, certain disclosures required by Part V of Form 1 go beyond those of the Act by requiring information about past proceedings and about matters unrelated to audits of issuers. We recommend that the required disclosures more closely track those required by the Act. This would avoid unnecessary disclosures and would facilitate the registration process, while still being consistent with the public interest. In that regard:
As noted above, we strongly support the goals of the Sarbanes-Oxley Act of 2002 and the creation of the PCAOB. We have every intention of using our best efforts to comply with the registration process on a timely basis and to cooperate fully with the PCAOB in achieving its goals. However, the issues and uncertainties discussed above, and the short period of time applicants will have to prepare their registration forms once the final rules are released may present insurmountable difficulties for some applicants to fully comply by October 22, which could have a significant adverse impact on the capital markets. This is particularly true for larger firms. Therefore, we urge the Commission to permit provisional registration for those firms that use and demonstrate their best efforts to comply with the rules on a timely basis, provided they submit delayed information on a reasonably prompt basis.
We appreciate this opportunity to express our views to the Commission. We would be pleased to answer any questions the Commission or its staff might have about our comments. Please contact Wayne Kolins (at (212) 885-8595 or via electronic mail at firstname.lastname@example.org).