
[Federal Register: August 19, 2009 (Volume 74, Number 159)]
[Notices]               
[Page 41950-41953]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19au09-99]                         


[[Page 41950]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60497; File No. PCAOB-2008-04]

 
Public Company Accounting Oversight Board; Order Approving 
Proposed Rules on Annual and Special Reporting by Registered Public 
Accounting Firms

August 13, 2009.

I. Introduction

    On June 10, 2008, the Public Company Accounting Oversight Board 
(the ``Board'' or the ``PCAOB'') filed with the Securities and Exchange 
Commission (the ``Commission'' or ``SEC'') proposed rules (File No. 
PCAOB-2008-04) on annual and special reporting by registered public 
accounting firms, pursuant to Section 107 of the Sarbanes-Oxley Act of 
2002 (the ``Act''). Notice of the proposed rules was published in the 
Federal Register on June 18, 2009.\1\ The Commission received four 
comment letters relating to this rule proposal. For the reasons 
discussed below, the Commission is granting approval of the proposed 
rules.
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    \1\ See Release No. 34-60107 (June 12, 2009); 74 FR 29091 (June 
18, 2009).
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II. Description

    On June 10, 2008, the Board adopted rules and submitted to the 
Commission a rule proposal consisting of eight new rules (PCAOB Rules 
2200-2207) concerning annual and special reporting by registered public 
accounting firms, instructions to two forms to be used for such 
reporting (Form 2 and Form 3), and related amendments to existing Board 
rules. The proposed rules would establish the foundation of a reporting 
and disclosure system for registered public accounting firms pursuant 
to Section 102(d) of the Act, specify the details of certain reporting 
obligations, and provide forms for such reporting. To the extent that 
the Board identifies additional reporting requirements that are 
necessary or appropriate in the public interest or for the protection 
of investors, the Board may propose and adopt them in the future.
    According to the Board, the proposed reporting requirements serve 
three fundamental purposes. First, firms will report information to 
keep the Board's records current about such basic matters as the firm's 
name, location, contact information, and licenses. Second, firms will 
report information reflecting the extent and nature of the firm's audit 
practice related to issuers in order to facilitate analysis and 
planning related to the Board's inspection responsibilities and to 
inform other Board functions, as well as for the value the information 
may have to the public. Third, firms will report circumstances or 
events that could merit follow-up through the Board's inspection 
process or its enforcement process, and that also may otherwise warrant 
being brought to the public's attention (such as a firm's withdrawal of 
an audit report in circumstances where the information is not otherwise 
publicly available).
    The reporting framework includes two types of reporting 
obligations. First, it requires each registered firm to provide basic 
information once a year about the firm and the firm's issuer-related 
practice over the most recent 12-month period. The firm must do so by 
filing an annual report on Form 2. Second, upon the occurrence of 
specified events, a firm must report certain information by filing a 
special report on Form 3.
    Proposed Rule 2201 sets June 30 as the deadline for the annual 
filing of Form 2. The reporting period covered by the report would be 
April 1 to March 31, leaving each firm with three months to prepare and 
file a Form 2 reflecting information from that 12-month period. Any 
firm that was registered as of March 31 of a particular year would be 
required to file Form 2 by June 30 of that year, but any firm that 
became registered in the period between and including April 1 and June 
30 would not be required to file a Form 2 until June 30 of the 
following year.
    Under the proposed rules, the occurrence of specified events 
triggers an obligation to file a special report on Form 3. The proposed 
rules provide that special reports must be filed within 30 days of the 
triggering event or a firm's awareness of a triggering event.
    The Board expects annual and special reports to be complete and 
accurate, and inaccuracies or omissions could form the basis for 
disciplinary sanctions for failing to comply with the reporting 
requirements reflected in Rules 2200 and 2203 and the instructions to 
Forms 2 and 3. Proposed Rule 2205 provides for the filing of amendments 
to previously filed annual or special reports if the originally filed 
report included information that was incorrect at the time of the 
filing, or if the originally filed form omitted any information or 
affirmation that was, at the time of such filing, required to be 
included in that report.
    Annual and special reports will be made public on the Board's Web 
site promptly upon being filed by a firm, subject to exceptions for 
information for which a firm requests confidential treatment. The Board 
intends that as much reported information as possible be publicly 
available as soon as possible after filing.
    The proposed forms identify certain categories of information for 
which a firm may request confidential treatment. The proposed rules 
include new requirements effected through amendments to PCAOB Rule 2300 
concerning the support that a firm must supply to support a 
confidential treatment request. The proposed amendments require that a 
firm support a request with both a representation that the information 
has not otherwise been publicly disclosed and either (1) a detailed 
explanation of the grounds on which the information is considered 
proprietary, or (2) a detailed explanation of the basis for asserting 
that the information is protected by law from public disclosure and a 
copy of the specific provision of law. The proposed amendments also 
provide that the firm's failure to supply the required support 
constitutes sufficient grounds for denial of the request.
    Under proposed Rule 2207, a non-U.S. firm may withhold required 
information from Form 2 or Form 3 if the firm cannot provide the 
information without violating non-U.S. law. If the firm withholds 
information on that ground, it must have certain supporting materials, 
including (1) a copy of the relevant provisions of non-U.S. law, (2) a 
legal opinion concluding that the firm would violate non-U.S. law by 
submitting the information to the Board, and (3) a written explanation 
of the firm's efforts to seek consents or waivers that would be 
sufficient to overcome the conflict with respect to the information. 
The firm must certify on the form that it has the supporting materials 
in its possession. The rule reserves to the Board, and to the Director 
of the Division of Registration and Inspections, the discretion to 
require that a firm submit any of those supporting materials in a 
particular case. The rule also reserves to the Board the discretion to 
require that the firm provide any of the withheld information in a 
particular case.
    The proposed rules include an amendment to the Board's inspection 
rules that makes clear that the Board may require a firm to provide 
additional information. Specifically, existing Rule 4000 provides that 
registered firms shall be subject to such regular and special 
inspections as the Board chooses to conduct. The proposed amendment 
adds a paragraph providing that the Board, in the exercise of its 
inspection authority, may at any time request that a registered firm 
provide additional

[[Page 41951]]

information or documents relating to information provided on Form 2 or 
Form 3, or relating to information that has otherwise come to the 
Board's attention. The amendment provides that the request and response 
are considered to be in connection with the firm's next regular or 
special inspection. Accordingly, the cooperation requirements of Rule 
4006 apply, and the request and response are subject to the 
confidentiality restrictions of Section 105(b)(5) of the Act.
    The proposed amendments to Rule 2300(b)-(c), concerning the 
required support, would also apply prospectively to confidential 
treatment requests on applications for registration on Form 1.
    Existing Rule 2107 governs the process by which a firm may seek to 
withdraw from registration with the Board. Under Rule 2107, a firm 
cannot withdraw at will, but must request the Board's permission to 
withdraw, and the Board may withhold that permission under certain 
conditions. The proposed rules include an amendment to Rule 2107 to 
change the way it addresses the reporting obligations of a firm that 
has filed Form 1-WD seeking leave to withdraw. Existing Rule 
2107(c)(2)(i) provides that, beginning on the fifth day after the Board 
receives a completed Form 1-WD, the firm can satisfy any annual 
reporting requirement by submitting a report stating that a completed 
Form 1-WD has been filed and is pending. Under the proposed amendment, 
the firm's reporting obligation, including both annual and special 
reporting, would simply be suspended while Form 1-WD was pending. If a 
firm withdraws its Form 1-WD and continues as a registered firm, 
however, Rule 2107 would require the filing of any annual or special 
reports, and the payment of any annual fee, that otherwise would have 
been required while the Form 1-WD was pending. The Board is also 
eliminating from Rule 2107 the five-day delay between receipt of a 
completed Form 1-WD and the effect of that filing on a firm's reporting 
obligation. Suspension of that obligation would occur immediately upon 
the Board's receipt of the completed Form 1-WD.
    The Board also proposed to delete from definitions in PCAOB Rule 
1001 certain provisions that ceased to apply after December 15, 2003. 
Specifically, the Board proposes to amend Rules 1001(a)(vii) 
(definition of ``audit services''), 1001(o)(i) (definition of ``other 
accounting services''), and 1001(n)(ii) (definition of ``tax 
services'') by deleting the paragraph denominated ``(1)'' from each 
rule.
    The proposed rules would take effect 60 days after Securities and 
Exchange Commission approval.

III. Discussion

A. Comments Received

    The Commission received four comment letters relating to the rule 
proposal. All four of the comment letters came from registered public 
accounting firms.\2\
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    \2\ See comments of Deloitte and Touche LLP (``Deloitte''), 
Ernst & Young LLP (``E&Y''), KPMG International (``KPMG''), and 
PricewaterhouseCoopers LLP (``PwC'').
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    Each of the commenters expressed support for the overall purpose of 
the Board's rules. However, similar to the comments made to the PCAOB 
during its comment period, the commenters raised several main concerns 
related to: (1) Provisions of proposed PCAOB Rule 2107 that relate to 
assertions of conflicts with non-U.S. laws; (2) Form 3 triggering 
events that depend on the firm's awareness; (3) the requirement that 
registered public accounting firms file with the PCAOB a Form 3 for 
withdrawn audit reports; (4) the reporting on Form 3 of the dates of 
registered public accounting firms' consents to the use of previously 
issued audit reports; and (5) the Board's differing approach in Forms 2 
and 3 for reporting the engagement of consultants or professionals 
subject to PCAOB/SEC discipline.
1. Assertions of Conflicts With Non-U.S. Laws
    Some commenters expressed concerns about the proposed requirement 
for non-U.S. firms to gather and maintain certain information. Proposed 
Rule 2207(c)(1) would require non-U.S. firms to gather and maintain, 
for a period of seven years, the information required by Forms 2 and 3 
that the non-U.S. firm asserts is unable to submit because of a 
conflicting local law. Some commenters observed that this requirement 
may cause problems for non-U.S. firms because in some jurisdictions 
there may be privacy or other laws that would preclude registered firms 
from gathering the information necessary to complete Form 3.\3\
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    \3\ See comments of Deloitte, E&Y, and KPMG.
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    All of the commenters expressed concerns about the discretion 
afforded the Board in proposed Rule 2207(e) that would allow the Board 
to request a non-U.S. firm to file information withheld under proposed 
Rule 2207(c)(1) based on an asserted conflict with non-U.S. law. Each 
commenter recognized that although the Board stated in its adopting 
release that it does not foresee invoking proposed Rule 2207(e) with 
any regularity, the commenters believe that where applied, it could be 
of significant concern to non-U.S. firms. According to the commenters, 
the concern rests on the fact that if the Board invoked Rule 2207(e), a 
non-U.S. firm could be put in an untenable situation where it would 
have to choose between breaching its reporting obligations under the 
PCAOB's rules and violating its home jurisdiction's laws.
    The Board addressed these concerns in its adopting release. In that 
release, the Board asserted that the requirement for a firm to have in 
its possession a version of Form 2 or Form 3 that includes the 
information that the firm would be required to report in absence of a 
legal conflict imposes no greater burden on a non-U.S. firm than on a 
U.S. firm that actually reports the information. The Board further 
stated that the opportunity to assert a legal conflict is an 
accommodation in light of the possibility that a firm may believe it is 
caught stuck between competing legal requirements.
    The Board also stated that a firm should not assume that its mere 
assertion of a conflict resolves the matter, and that there is no 
reason for the Board to provide that a firm need not even have 
assembled the information, in the form in which any other firm would 
have to assemble it, before asserting that non-U.S. law precludes it 
from disclosing the particular information it is withholding. Lastly, 
and as one of the commenters pointed out, the Board specifically 
addressed this issue by adding a note to Rule 2207(c)(1) to provide 
that the materials maintained by the firm do not need to include any 
information (1) that the firm does not possess, and (2) as to which the 
firm asserts that the firm would violate non-U.S. law by requiring 
another person to provide the information to the firm.
    As the commenters noted, the Board explained at length its purpose 
and intended administration of Rule 2207(e). The Board noted that its 
position is not dissimilar from the same situation it faces in the 
registration context. The Commission is not aware of any instances or 
concerns in the registration context in which the PCAOB has acted 
unreasonably with regard to conflicts with non-U.S. laws that were 
raised by non-U.S. firms.
    The Commission believes the Board's responses to these comments are 
not unreasonable. The Commission presumes that the Board will continue 
to exercise reasonable judgment and discretion in considering conflicts 
with

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non-U.S. laws that are raised in connection with the completion of a 
Form 2 or Form 3 as it has for the past six years with respect to 
similar issues in the registration context.\4\
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    \4\ The Commission also notes that the Board has been willing to 
provide further implementation guidance where necessary to explain 
its administration of similar requirements. See http://
www.pcaob.org/Registration/2004-03-11_FAQ.pdf.
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2. Firm Awareness of Form 3 Triggering Events
    Certain items reported in Form 3 describe events that a firm must 
report to the Board within 30 days after the firm has become aware of 
certain facts. The Form provides that the firm is deemed to have become 
aware of the relevant facts on the date that any partner, shareholder, 
principal, owner, or member of the firm first becomes aware of the 
facts.
    All commenters expressed concern that triggering the reporting 
requirement based on the awareness of any one of the large number of 
people who fall into the definition provided by the Board, especially 
if they are not part of senior management, would be burdensome. Several 
of these commenters observed that, in response to the proposed rules, 
firms would put in place policies and procedures requiring reportable 
information be reported to the persons in the organization responsible 
for compliance with the rules. Because of their view that firms would 
put the necessary policies and procedures in place, these commenters 
recommended that the Commission encourage the PCAOB to consider issuing 
guidance providing that a registered firm will not be considered out of 
compliance with a reporting obligation if there is an inadvertent 
failure to follow internal procedures that are designed in good faith 
to effectuate reporting.
    Similar comments were originally raised to the Board in connection 
with the Board's original proposal of the annual and special reporting 
rules. After consideration of the comments received, the Board narrowed 
the Form 3 reporting requirements as to the reportable events and 
clarified the ``deemed aware'' standard as to which persons are 
covered. In addition, the Board stated it believes it is reasonable to 
expect a firm to have controls designed to ensure that any such person 
who becomes aware of relevant facts understands the firm's reporting 
obligation and brings the matter to the attention of persons 
responsible for compliance with the obligation.
    We agree. This matter is not dissimilar to the need for issuers to 
maintain appropriate disclosure and controls and procedures to meet 
their reporting obligations, including for current reporting on Form 8-
K that is on a much shorter timeframe than Form 3 reporting. Those 
procedures include those to ensure that information is accumulated and 
communicated to the appropriate personnel to allow timely disclosure. 
This matter also is not dissimilar to a registered public accounting 
firm's existing obligations under the Commission's and the PCAOB's 
auditor independence requirements, which in many instances reaches down 
to obligations involving members of an engagement team below a partner 
level. Lastly, as to when it would be appropriate for the Board to take 
disciplinary action for reporting violations, the Commission assumes 
the Board will continue to exercise its discretion as to whether 
disciplinary action is warranted under the particular facts and 
circumstances.
3. Disclosure of the Dates of Consents of Audit Reports
    Under the proposed rules, firms would be required to report on Form 
2 the dates of any consent to an issuer's use of an audit report the 
firm previously issued to that issuer, if such consent constitutes the 
only instance of the firm issuing an audit report for that issuer 
during the reporting period. Three commenters expressed opposition to 
this proposed requirement on the basis that it would not be 
sufficiently meaningful to warrant the potential burden of gathering 
and reporting it,\5\ with one noting that this information would in 
most, if not all, cases have already been listed in the previous year's 
public report on Form 2.\6\
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    \5\ See comments of E&Y, KPMG, and PwC.
    \6\ See comments of PwC.
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    We are not persuaded by the arguments raised by commenters that 
this requirement would be an undue burden, and we believe that it is 
not unreasonable for the Board to request firms to provide the dates of 
consents when such consent constitutes the only instance of the firm 
issuing an audit report for that issuer during the reporting period. We 
acknowledge that for the larger firms, they will likely need to 
institute additional controls to compile the information, but we do not 
believe the burden to be unreasonable.
4. Reporting of Withdrawn Audit Reports
    The rules proposed by the Board include a requirement that a firm 
file a Form 3 when it withdraws an audit report and the related issuer 
has failed to comply with its requirement to file a Form 8-K regarding 
the event. Some commenters opposed this proposal and expressed the view 
that this matter fundamentally is about issuer conduct and, therefore, 
is more appropriately left to the Commission in the context of its 
disclosure framework and that such monitoring and reporting would 
create an unnecessary and duplicative burden on registered firms.\7\
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    \7\ See comments of Deloitte and PwC.
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    Commenters expressed these same concerns during the Board's comment 
period and the Board responded to these comments by noting the 
following: (1) The point of this item is not have the firm draw the 
Board's attention to potential problems with an issuer's financial 
statements, but that a withdrawn audit report is a risk indicator 
concerning the auditor's conduct preceding the withdrawal, not merely a 
risk indicator concerning the issuer's financial statements; and (2) 
the Board has a regulatory interest in being aware of this information 
and possibly following up on that information for reasons directly 
related to its oversight of auditors.
    The Commission agrees with the responses made by the PCAOB and 
believes that a requirement for registered firms to report this 
information is not unreasonable. In addition, we note the response of 
one commenter who indicated that registered firms already routinely 
track such instances.
5. Differing Approach in Forms 2 and 3 to the Reporting of the 
Engagement of Consultants or Professionals Subject to PCAOB/SEC 
Discipline
    Form 2 requires registered firms to report information about 
certain types of relationships with individuals and entities who have 
specified disciplinary and other histories. One such reporting 
requirement under Part VII of Form 2 requires firms to report 
arrangements for services related to the firm's audit practice or 
related to services the firm provides to issuer audit clients. Section 
II of Form 3 includes a similar reporting trigger, however that trigger 
is not limited to individuals who provide audit services. Two 
commenters raised concerns about these requirements.\8\
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    \8\ See comments of KPMG and Deloitte.
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    Both commenters acknowledged a statement made by the Board in its 
adopting release where the Board expressed its view that limiting the 
scope of the Form 3 reporting requirement would negate the purpose of 
the reporting requirement, ``which is generally intended to gather 
information about new relationships with persons or

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entities that are effectively restricted from providing auditing 
services.'' \9\ Both commenters disagreed with the Board's response.
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    \9\ See PCAOB Release No. 2008-004, June 10, 2008 [page 22].
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    The Commission believes the Board appropriately explained its 
rationale for the difference in the Form 2 and Form 3 reporting 
requirements and believes that it is not unreasonable for the Board to 
request this information in the current manner in which it is 
requested.
6. Requests for Additional Implementation Guidance
    As noted in the above discussion, the Commission has considered the 
concerns and issues raised by commenters and appreciates the feedback. 
While the Commission believes the aforementioned matters are not 
unreasonable requirements, the Commission does encourage the Board to 
monitor implementation of its annual and special reporting rules and to 
be open to issuing timely implementation guidance as necessary as to 
these and the other comments raised, as was done with the Board's 
implementation of its registration rules.\10\
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    \10\ See, e.g., http://www.pcaob.org/Registration/Registration_
FAQ.pdf; and http://www.pcaob.org/Registration/2004-03-11_FAQ.pdf.
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B. Recommendation as to the Annual Fee

    Section 102(f) of the Act requires the Board to ``assess and 
collect a registration fee and an annual fee from each registered firm 
in amounts that are sufficient to recover the Board's costs of 
processing and reviewing applications and annual reports.'' \11\ The 
PCAOB has collected registration fees from every firm that has 
registered with the Board since 2003. However, the Board has not 
assessed or collected annual fees from any registered firms.
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    \11\ 15 U.S.C. 7212(f).
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    In our order approving the PCAOB's budget and accounting support 
fee for 2008, the Commission directed the PCAOB to, among other things, 
analyze historical and planned expenditures related to the review and 
processing of registrations and annual reports of public accounting 
firms.\12\ We understand from this analysis that there are unrecovered 
historical costs that need to be collected from registered firms. In 
addition, the Board needs to determine the amount of current and future 
costs of reviewing and processing registrations and annual reports and 
how and over what period to recover those costs. These matters also are 
impacted due to changes to the Board's registration profile that may 
occur as a result of the requirement for auditors of non-public broker 
dealers to be registered with the Board for fiscal periods ending on or 
after January 1, 2009.
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    \12\ See Release No. 34-56986 (December 18, 2007).
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    The Commission recommends that, in setting its annual fee under 
PCAOB Rule 2202, Annual Fee, the Board recover all of the unrecovered 
historical costs associated with the Board's review and processing of 
registration applications in the first annual fee billed to registered 
public accounting firms and that these costs be recovered only from 
registered public accounting firms that were registered prior to 
January 1, 2009, and that such bill be separately itemized. In 
addition, for consistency and to aid transparency, the Commission 
recommends that future costs associated with reviewing and processing 
registration applications, processing annual and special reporting, and 
related system maintenance and development costs be recovered over a 
time period that is consistent with the time period the PCAOB uses for 
its financial statement purposes to depreciate long-lived assets 
similar to that used by the PCAOB in processing registration 
applications and annual and special reports.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed PCAOB rules on annual and special reporting by registered 
public accounting firms are consistent with the requirements of the Act 
and the securities laws and are necessary or appropriate in the public 
interest or 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 proposed PCAOB Rules on 
Annual and Special Reporting by Registered Public Accounting Firms 
(File No. PCAOB-2008-04) be and hereby are approved.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-19838 Filed 8-18-09; 8:45 am]

BILLING CODE 8010-01-P
