[Federal Register Volume 68, Number 112 (Wednesday, June 11, 2003)]
[Notices]
[Pages 35016-35030]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-14715]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47990; File No. PCAOB-2003-03]


Public Company Accounting Oversight Board; Notice of Filing of 
Proposed Rules Relating to Registration System

June 5, 2003.
    Pursuant to section 107(b) of the Sarbanes-Oxley Act of 2002 
(``Act''), notice is hereby given that on May 8, 2003, the Public 
Company Accounting Oversight Board (``Board'' or ``PCAOB'') filed with 
the Securities and Exchange Commission (``Commission'' or ``SEC'') the 
proposed rules described in Items I, II, and III below, which items 
have been prepared by the Board. The Commission is publishing this 
notice to solicit comments on the proposed rules from interested 
persons.

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

    The Board proposes to adopt a registration system for public 
accounting firms to implement section 102 of the Act. The proposed 
registration system consists of eight rules (PCAOB Rules 2100 through 
2106, and 2300, plus definitions that would appear in Rule 1001) and a 
form (PCAOB Form 1). The text of the proposed rules is available for 
inspection at the Office of the Secretary, the PCAOB, the Commission's 
Public Reference Room, and on the Board's Internet Web site at http://www.pcaobus.org/pcaob_rulemaking.htm.

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

    In its filing with the Commission, the Board included statements 
concerning the purpose of, and basis for, the proposed rules and 
discussed any comments it received on the proposed rules. The text of 
these statements may be examined at the places specified in Item IV 
below. The Board has prepared summaries, set forth in sections A, B and 
C below, of the most significant aspects of such statements.

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

1. Purpose
    Section 102 of the Act prohibits accounting firms that are not 
registered with the Board from preparing or issuing audit reports on 
issuers, as that term is defined in the Act and the Board's rules, or 
from participating in these activities. The Act provides that firms 
must register during the 180-day period following the Commission's 
determination that the Board has the capacity to carry out the 
requirements of Title I of the Act and to enforce compliance 
therewith.\1\ The Commission made this determination on April 25, 2003. 
In order to permit public accounting firms to comply with this 
requirement, the Board has adopted proposed rules to implement a 
registration system. The registration system consists of eight rules 
(PCAOB Rules 2100 through 2106, and 2300, plus definitions that would 
appear in Rule 1001) and a form (PCAOB Form 1). Each of the rules and 
each part of the form are discussed below.
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    \1\ See sections 101(d) and 102(a) of the Act.

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[[Page 35017]]

Rule 1001--Definitions of Terms Employed in Rules

    Rule 1001 contains definitions of terms used in the Board's rules. 
Certain of the definitions are taken, or closely track, those found in 
section 2 of the Act.\2\ Other definitions are based on those used in 
the Commission's rules.
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    \2\ Certain definitions in the Board's rules that are taken 
verbatim from the statute or that are self-evident are not discussed 
below.
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Accountant

    Although used in the Act, the term ``accountant'' is not defined in 
the Act. As used in the Act, the term refers to a natural person, as 
opposed to a legal entity.\3\ This concept of ``accountant'' is 
different from the Commission's definition of accountant under 
Regulation S-X, which includes legal entities, such as a registered 
public accounting firm.\4\ Therefore, to reflect the context in which 
the term ``accountant'' is used in the Act, and to distinguish the 
Board's definition from that in Regulation S-X, the Board is adopting a 
definition of ``accountant'' in Rule 1001(a)(ii) that is limited to 
natural persons.\5\
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    \3\ For example, section 102(b)(2)(E) of the Act requires 
disclosure of a list of ``all accountants associated with the firm 
who participate in or contribute to the preparation of audit 
reports, stating the license or certification number of each such 
person * * *.''
    \4\ Under Rule 2-01(f)(1) of Regulation S-X, accountant means a 
``registered public accounting firm, certified public accountant or 
public accountant performing services in connection with an 
engagement for which independence is required.'' Rule 2-01(f)(1) 
provides further that ``references to the accountant include any 
accounting firm with which the certified public accountant or public 
accountant is affiliated.'' See Rule 2-01(f)(1) of Regulation S-X, 
17 CFR 210.2-01(f)(1).
    \5\ The definitions in proposed Rule 1001 are marked with a 
letter and a Roman numeral. The letter matches the first letter of 
the word or phrase being defined and the Roman numeral serves to 
distinguish the definition from other defined words or phrases 
beginning with the same letter. This system has been adopted so that 
the definitions within Rule 1001 will remain in rough alphabetical 
order.
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    The definition covers three types of natural persons: (i) Those who 
are certified public accountants, (ii) those who hold a college, 
university, or higher professional degree in accounting, or a license 
or certification authorizing him or her to engage in the business of 
auditing or accounting, and (iii) those who hold a college, university, 
or higher professional degree in a field, other than accounting, and 
who participate in audits. The definition also specifies that the term 
does not include persons engaged only in ministerial or clerical tasks.
    The Board's definition is intended to include all natural persons, 
who have the requisite licensing, certification, training, and/or 
experience, whether obtained in the U.S. or a non-U.S jurisdiction, to 
be considered an accountant. In its proposing release, the Board put 
forth a similar definition. Commenters raised several concerns with the 
proposed definition. First, several commenters suggested that the 
proposed definition was overbroad and asked the Board to limit its 
application to only certified public accountants, or, at least, to 
clarify that it does not apply to persons with college degrees that 
perform only clerical or ministerial tasks on an audit. After 
considering these comments, the Board decided to revise the definition 
to clarify that the term does not capture persons engaged only in 
clerical or ministerial tasks. The Board did not, however, adopt the 
suggestions to limit the definition to only certified public 
accountants because such a definition would be significantly narrower 
than the common meaning of the term and because the Board understands 
that accountants who are not certified public accountants often 
participate in the preparation or issuance of audit reports. In 
addition, at least one non-U.S. commenter suggested that the proposed 
definition's use of the term ``undergraduate degree'' would not be 
meaningful as applied to non-U.S. accountants. Accordingly, at this 
commenter's suggestion, the Board has decided to change this part of 
the definition to refer to a ``college, university, or higher 
professional degree.''

Associated Entity

    Rule 1001(a)(iv) defines ``associated entity,'' as ``with respect 
to a public accounting firm (i) any entity that directly, indirectly, 
or through one or more intermediaries, controls or is controlled by, or 
is under common control with, such public accounting firm; or (ii) any 
``associated entity,'' as used in Rule 2-01(f)(2) of Regulation S-X, 17 
CFR 210.2-10(f)(2), that would be considered part of that firm for 
purposes of the Commission's auditor independence rules.'' This 
definition of ``associated entity'' is meant to give the term the same 
meaning as in the Commission's auditor independence rules.\6\
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    \6\ See Rule 2-01(f)(2) of Regulation S-X, 17 CFR 210.2-
01(f)(2); see also Commission Final Rule: Revision of the 
Commission's Auditor Independence Requirements, Release No. 33-7919, 
at notes 490 and 491 (November 21, 2000).
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    A few commenters suggested that the Board create its own definition 
of this term, rather than relying on the meaning of the term in the 
Commission's rules. One of these commenters suggested that the Board 
define the term as those firms with which the applicant ``holds itself 
out as being associated.'' The Board has decided not to adopt this 
suggestion because the suggested definition is narrower than the 
Commission's interpretation of the term, in some contexts, and does not 
seem more definite than the SEC's interpretation.

Audit

    In general, Rule 1001(a)(v) defines ``audit'' as an examination of 
an issuer's financial statements by an independent public accounting 
firm in accordance with the rules of the Board or the Commission for 
purposes of expressing an opinion on such statements. For the period 
preceding the adoption of the Board's applicable rules under section 
103 of the Act, however, the term covers an examination of an issuer's 
financial statements by an independent public accounting firm in 
accordance with generally accepted auditing standards (``GAAS'').\7\ 
The Board has adopted the same meaning for ``audit'' as used in section 
2(a)(2) of the Act.
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    \7\ Because GAAS and Commission rules require interim reviews of 
issuers' financial statements by independent public accountants, the 
term audit includes work performed in the context of such reviews. 
See American Institute of Certified Public Accountants (``AICPA'') 
Statement on Auditing Standards (``SAS'') 100 and Rule 10-01 of 
Regulation S-X, 17 CFR 210.10-01; see also section 2(a)(8) of the 
Act (implicitly stating that these reviews are audit services, by 
excluding from the definition of ``non-audit services'' services 
provided to an issuer ``in connection with an audit or review of the 
financial statements of an issuer'').
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Audit Report

    Rule 1001(a)(vi) defines ``audit report'' to mean ``a document or 
other record (1) prepared following an audit performed for purposes of 
compliance by an issuer with the requirements of the securities laws; 
and (2) in which a public accounting firm either (i) sets forth the 
opinion of that firm regarding a financial statement, report or other 
document; or (ii) asserts no such opinion can be expressed.'' The Board 
has adopted the same meaning for audit as used in section 2(a)(4) of 
the Act.
    Two commenters suggested that the term could be confusing to 
applicants and, if applied in certain contexts, could be overbroad. The 
Board has decided not to change the definition of this term since the 
term is defined in the Act. If specific issues arise in administering 
the definition in the context of the Board's registration rules or 
otherwise, the Board will consider issuing guidance on the definition.

Audit Services

    Rule 1001(a)(vii)(1) defines ``audit services'' as ``professional 
services

[[Page 35018]]

rendered for the audit of an issuer's annual financial statements and 
(if applicable) for the reviews of an issuer's financial statements 
included in the issuer's quarterly reports.'' This definition of 
``audit services'' is intended to capture the same category of services 
for which fees were required to be disclosed as ``audit fees'' pursuant 
to the Commission's 2000 proxy disclosure rules.\8\
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    \8\ See Schedule 14A, Item 9(e)(1), 17 CFR 240.14a-101; see also 
Commission Final Rule: Revision of the Commission's Auditor 
Independence Requirements, Release No. 33-7919 (November 21, 2000).
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    Several commenters suggested that the Board change the definition 
of ``audit services'' to conform to the category of fees disclosed as 
``audit fees'' under the SEC's recently revised auditor independence 
rules, adopted on January 28, 2003, as amended on March 26, 2003. As 
noted below in the discussion of Part II of the Form, the Board has 
decided not to change this definition at this time. However, the Board 
has decided to add paragraph (2) to this rule, which provides that, 
effective after December 15, 2003, the term ``audit services'' will 
mean ``professional services rendered for the audit of an issuer's 
annual financial statements, and (if applicable) for the reviews of an 
issuer's financial statements included in the issuer's quarterly 
reports or services that are normally provided by the accountant in 
connection with statutory and regulatory filings or engagements for 
those fiscal years.'' This definition in paragraph (2) is intended to 
conform to the category of fees disclosed as ``audit fees'' under the 
SEC's recently revised auditor independence rules.

Foreign Public Accounting Firm

    Rule 1001(f)(i) defines foreign public accounting firm as a 
``public accounting firm that is organized and operates under the laws 
of a non-U.S. jurisdiction, government or political subdivision 
thereof.'' This definition, which follows closely the definition of 
foreign public accounting firm in section 106(d) of the Act, is 
intended to clarify that the term covers accounting firms that are 
organized and operate in any jurisdiction outside of the United 
States.\9\
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    \9\ Section 106(d) of the Act defines foreign public accounting 
firm as a ``public accounting firm that is organized and operates 
under the laws of a foreign government or political subdivision 
thereof.''
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Issuer

    Rule 1001(i)(iii) defines the term ``issuer'' to include any public 
company, regardless of the jurisdiction of its organization or 
operation, that is required to file reports with the Commission or that 
has filed a registration statement for a public offering of securities. 
This definition is the same as the definition of the term ``issuer'' in 
section 2(a)(7) of the Act.

Non-Audit Services

    Rule 1001(n)(ii)(1) defines ``non-audit services'' to mean services 
related to financial information systems design and implementation as 
defined in Rule 2-01(c)(4)(ii) of Regulation S-X, 17 CFR 2-
01(c)(4)(ii), and all other services, other than audit services or 
other accounting services. This definition will be effective through 
December 15, 2003. Paragraph (2) of the rule provides that effective 
after December 15, 2003, ``non-audit services'' will mean ``all other 
services other than audit services, other accounting services, and tax 
services.'' The definition in paragraph (2) is designed to be 
consistent with the category of services disclosed as ``all other 
fees'' under the Commission's revised auditor independence rules, 
adopted on January 28, 2003, as amended on March 26, 2003. This 
definition is further addressed as part of the discussion of Part II of 
the Form below.

Other Accounting Services

    Rule 1001(o)(i)(1) defines ``other accounting services'' as 
services that are normally provided by the public accounting firm that 
audits the issuer's financial statements in connection with statutory 
and regulatory filings or engagements and assurance and related 
services that are reasonably related to the performance of the audit or 
review of the issuer's financial statements, other than ``audit 
services.'' The Board has modeled its definition of ``other accounting 
services'' on concepts used in the Commission's recent revision of its 
auditor independence disclosure rules.\10\ The term is meant to capture 
two categories of services: (1) Services the fees for which are to be 
disclosed as ``audit fees'' under the Commission's revised rules, but 
that were not previously disclosed as ``audit fees,'' and (2) services 
the fees for which are to be disclosed as ``audit-related fees'' under 
the Commission's revised rules.
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    \10\ See Commission Final Rule: Strengthening the Commission's 
Requirements Regarding Auditor Independence, Release No. 33-8183 
(January 28, 2003), as amended by Release No. 33-8183A (March 26, 
2003).
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    The first category generally consists of those services that, while 
not captured as ``audit services'' under the Board's rules, are 
performed to comply with GAAS. As explained in the Commission's 
adopting release, certain services, such as tax services and accounting 
consultations, may not be billed as audit services, but are necessary 
to comply with GAAS.\11\ This category would also include ``services 
that normally would be provided by the accountant in connection with 
statutory and regulatory filings or engagements'' and ``services that 
only the independent accountant reasonably can provide, such as comfort 
letters, statutory audits, attest services, consents and assistance 
with review of documents filed with the Commission.''\12\
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    \11\ Id. At 39.
    \12\ Id.
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    The term is also meant to capture services the fees for which are 
to be disclosed as ``audit-related fees'' under the Commission's 
revised auditor independence disclosure rules.\13\ In general, these 
are fees for ``assurance and related services (e.g., due diligence 
services) that traditionally are performed by the independent 
accountant.'' More specifically, as noted in the Commission's adopting 
release, these services would include, among others, ``employee benefit 
plan audits, due diligence related to mergers and acquisitions, 
accounting consultations and audits in connection with acquisitions, 
internal control reviews, attest services that are not required by 
statute or regulation and consultation concerning financial accounting 
and reporting standards.''\14\
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    \13\ See Commission Final Rule: Strengthening the Commission's 
Requirements Regarding Auditor Independence, Release No. 33-8183 
(January 28, 2003), as amended by Release No. 33-8183A (March 26, 
2003). See also Schedule 14A, Item 9(e)(2), 17 CFR 240.14a-101 (as 
amended, January 28, 2003).
    \14\ See Commission Final Rule: Strengthening the Commission's 
Requirements Regarding Auditor Independence, Release No. 33-8183 
(January 28, 2003), as amended by Release No. 33-8183A (March 26, 
2003).
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    In addition, paragraph (2) of the rule provides that, effective 
after December 15, 2003, the term ``other accounting services'' will 
mean assurance and related services that are reasonably related to the 
performance of the audit or review of the issuer's financial 
statements, other than audit services. The Board intends that this 
definition in paragraph (2) be consistent with the category of services 
disclosed as ``audit-related fees'' under the Commission's revised 
auditor independence rules. This definition is discussed further below 
in connection with the discussion of Part II of the Form.

[[Page 35019]]

Person Associated With A Public Accounting Firm (and Related Terms)

    The Board is adopting the same meaning for ``person associated with 
a public accounting firm'' as used in section 2(a)(9) of the Act, with 
a few, technical modifications. Commenters raised a number of concerns 
about the proposed definition. A number of commenters suggested that 
the definition should be limited to only a public accounting firm's 
employees, or at least should leave out certain independent 
contractors. While the Board does not believe that all independent 
contractors should be excepted from the definition, the Board has 
revised the definition to clarify that the term does not include 
persons whom the applicant reasonably believes are persons primarily 
associated with another registered public accounting firm. In addition, 
the Board has clarified that the definition does not cover persons 
engaged in only clerical or ministerial tasks. Finally, the word 
``other'' has been eliminated before the terms ``professional 
employee'' and ``independent contractor'' to clarify 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. 
Commenters' concerns about this definition were related to their 
concerns about the scope of Parts V and VIII of the Form. As discussed 
below, Part V, and, for foreign public accounting firms, Part VIII of 
the Form are being modified in light of commenters' concerns.

Play a Substantial Role in the Preparation or Furnishing of an Audit 
Report

    Rule 1001(p)(ii) defines the phrase ``play a substantial role in 
the preparation or furnishing of an audit report'' to mean ``(1) to 
perform material services that a public accounting firm uses or relies 
on in issuing all or part of its audit report with respect to any 
issuer, or (2) to perform the majority of audit procedures with respect 
to a subsidiary or component of any issuer the assets or revenues of 
which constitute 20 percent or more of the consolidated assets or 
revenues of such issuer necessary for the principal accountant to issue 
an audit report'' on the issuer.
    The first prong of this definition is based on language in section 
106(b)(1) of the Act.\15\ Note 1 to Rule 1001(p)(ii) explains that the 
term ``material services'' as used in this definition means services 
for which the engagement hours or fees constitute 20 percent or more of 
the total engagement hours or fees, respectively, provided by the 
principal accountant in connection with the issuance of all or part of 
its audit report with respect to any issuer.\16\
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    \15\ Section 106(b)(1) provides that foreign public accounting 
firms shall be deemed to have consented to produce audit workpapers 
and to be subject to the jurisdiction of the U.S. courts for 
purposes of enforcement of any request for such workpapers if the 
firm issues an opinion or ``otherwise performs material services 
upon which a registered public accounting firm relies in issuing all 
or part of any audit report or any opinion contained in the audit 
report.''
    \16\ One commenter expressed concern that this test would be 
applied on an aggregated basis. This test would be administered on a 
firm-by-firm basis. In other words, if a public accounting firm does 
work for the principal accountant and individually does not meet the 
20 percent of engagement hours or fees tests, the firm would not 
need to register solely because its work, when aggregated with other 
firms working on the same audit, would meet the 20 percent 
threshold.
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    The second prong of this definition is based on a similar standard 
used in the Commission's auditor independence rules related to partner 
rotation.\17\ As Note 2 to the rule indicates, the phrase ``subsidiary 
or component'' is meant to include any subsidiary, division, branch, 
office or other component of an issuer, regardless of its form of 
organization and/or control relationship with the issuer.
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    \17\ The Commission's adopting release provides that ``the lead 
partner on subsidiaries of issuers whose assets or revenues 
constitute 20% or more of the consolidated assets or revenues are 
included within the definition of `audit partner.' '' See Commission 
Final Rule: Strengthening the Commission's Requirements Regarding 
Auditor Independence, Release No. 33-8183 (January 28, 2003), as 
amended by Release No. 33-8183A (March 26, 2003).
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    For both the definition of material services as well as the second 
prong of the overall definition, the Board believes that a 
quantitative, as opposed to a qualitative, test imposes less of a 
burden on firms in determining whether or not they fall into this 
category. The Board has included a threshold of 20 percent, since this 
threshold is consistent with accounting literature on ``significance'' 
tests.\18\ Several commenters indicated their agreement with the 20 
percent threshold.
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    \18\ See Commission Final Rule: Strengthening the Commission's 
Requirements Regarding Auditor Independence, Release No. 33-8183 
(January 28, 2003), as amended by Release No. 33-8183A (March 26, 
2003), note 139 (citing APB Opinion No. 18, ``The Equity Method of 
Accounting for Investments in Common Stock,'' and ARB No. 43, 
Chapter 7, ``Capital Accounts.'').
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    Commenters raised several concerns about this proposed definition. 
One commenter expressed concern that the use of the phrase ``material 
services'' in the first prong could be read to include non-audit 
services, such as internal audit services, provided to non-audit 
clients when those services are relied upon by an auditor in issuing 
its audit report. Several accounting firms indicated that the first 
prong of the proposed definition would be difficult for non-affiliated 
foreign public accounting firms to comply with, since they would need 
access to the total engagement hours and fees, and therefore favored 
elimination of the first prong. Other commenters, however, raised 
concerns that the second prong of the definition might capture firms 
that perform relatively minor services such as routine observations of 
inventory test counts for a subsidiary or component of an issuer the 
assets or revenues of which constitute 20 percent or more of the 
consolidated assets or revenues of the issuer. Finally, commenters 
raised practical concerns about when and how the assets and revenues 
tests of the second prong of the definition should be administered.
    After carefully considering the comments it received, the Board has 
decided to keep both prongs of the definition, but to modify both 
prongs slightly and to clarify the second prong's application. 
Specifically, the Board has decided to add a sentence to Note 1 to the 
rule to clarify that ``material services'' does not include non-audit 
services provided to a non-audit client. Second, to avoid capturing 
routine procedures on a significant subsidiary as part of an audit, the 
second prong has been limited to performing ``the majority of audit 
procedures * * * necessary for the principal accountant to issue an 
audit report on the issuer.'' Finally, the Board has addressed 
commenters' concerns about the implementation of the second prong by 
adding Note 3 to the rule, which clarifies that the 20 percent 
determination should be made at the beginning of the issuer's fiscal 
year using prior year information and should be made only once during 
the issuer's fiscal year.

Public Accounting Firm

    Rule 1001(p)(iii) defines ``public accounting firm'' to mean a 
proprietorship, partnership, incorporated association, corporation, 
limited liability company, limited liability partnership, or other 
legal entity that is engaged in the practice of public accounting or 
preparing or issuing audit reports. The Board has adopted the same 
meaning of public accounting firm as used in section 2(a)(11)(A) of the 
Act. However, this definition is intended to include only legal 
entities, and not natural persons. An individual accountant that 
prepares or issues an audit report in his or her name would be a 
``proprietorship'' and

[[Page 35020]]

therefore fall under this definition. Under section 2(a)(11)(B) of the 
Act, the Board has the authority to expand this definition and 
designate by rule ``any associated person of any entity'' described in 
section 2(a)(11)(A) as a ``public accounting firm.'' The Board has not 
chosen to exercise this authority at this time.

State

    Rule 1001(s)(iii) would define ``State'' to mean any state of the 
United States, the District of Columbia, Puerto Rico, the Virgin 
Islands, or any other territory or possession of the United States. The 
Board has adopted the same definition of state as used in section 
2(a)(16) of the Act. The idea of including this definition, and the 
definition itself, was suggested by a commenter.

Tax Services

    Rule 1001(t)(i) defines ``tax services'' as ``professional services 
rendered for tax compliance, tax advice, and tax planning.'' This 
definition is based on, and meant to include the same group of services 
the fees for which would be disclosed as ``tax fees'' under the 
Commission's recently revised auditor independence disclosure rules.'' 
\19\ More specifically, as set forth in the Commission's adopting 
release, ``tax compliance generally involves preparation of original 
and amended tax returns, claims for refund and tax payment planning-
services'' and ``[t]ax planning and tax advice encompass a diverse 
range of services, including assistance with tax audits and appeals, 
tax advice related to mergers and acquisitions, employee benefit plans 
and requests for rulings or technical advice from taxing authorities.'' 
\20\ This definition is discussed further below in connection with the 
discussion of Part II of the Form.
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    \19\ See Commission Final Rule: Strengthening the Commission's 
Requirements Regarding Auditor Independence, Release No. 33-8183 
(January 28, 2003), as amended by Release No. 33-8183A (March 26, 
2003) (footnotes omitted).
    \20\ Id.
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Rule 2100--Registration Requirements for Public Accounting Firms

    Rule 2100(a) requires any public accounting firm that prepares or 
issues audit reports with respect to any issuer to register with the 
Board. In addition, Rule 2100(b) requires the registration of any 
public accounting firm that ``plays a substantial role in the 
preparation or furnishing of an audit report'' with respect to any 
issuer. These registration requirements implement section 102(a) of the 
Act, which provides that ``it shall be unlawful for any person that is 
not a registered public accounting firm to prepare or issue, or to 
participate in the preparation or issuance of, any audit report with 
respect to any issuer.''
    By introducing the ``substantial role'' test (defined through the 
quantitative test in Rule 1001(p)(ii) as described above), the rule 
clarifies the phrase ``participate in the preparation or issuance of, 
any audit report with respect to any issuer'' used in section 102(a) of 
the Act. In so doing, the Board intends to create a bright-line test to 
make it easier for firms and others to determine which firms are 
required to register with the Board. Stated differently, a firm that 
does not prepare or issue audit reports with respect to any issuer, but 
that does ``participate'' in the preparation of such reports, is only 
required to register if that participation amounts to a ``substantial 
role,'' as defined in Rule 1001(p)(ii).
    Rule 2100 does not exempt non-U.S. public accounting firms from 
registration. Therefore, a public accounting firm that is organized or 
that operates outside the United States must register if it prepares or 
issues an audit report on any issuer. In addition, such firms that play 
a substantial role in the preparation or furnishing of an audit report 
on any issuer must also register, even if the firm does not itself 
issue the audit report. Consistent with the Act, a Note to the rule 
provides that registration with the Board will not by itself provide a 
basis for subjecting a foreign public accounting firm to the 
jurisdiction of the U.S. federal or state courts, other than with 
respect to controversies between such firms and the Board.
    Under Rule 2100, individual accountants that are associated with 
public accounting firms are not required to register. As noted above, 
the definition of the term ``public accounting firm'' includes 
proprietorships, and an individual accountant that prepares or issues, 
in his or her own name, an audit report on an issuer would be viewed as 
a sole proprietor and required to register.\21\ Individual accountants 
that are associated with public accounting firms, however, are not 
required to register.
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    \21\ See Rule 1001(p)(iii).
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    Under the Act, the registration requirement will be effective 180 
days after the date on which the Commission makes its determination 
under section 101(d) of the Act that the Board is capable of carrying 
out its responsibilities under the Act. Since this determination was 
made on April 25, 2003, the rule will specify that domestic public 
accounting firms that wish to participate in or contribute to the 
preparation of audit reports must register by October 22, 2003. The 
Board has also decided to allow foreign public accounting firms an 
additional 180 days to register. Accordingly, the rule will provide 
that the mandatory registration date for these firms is April 19, 2004.
    Several commenters suggested that the Board's proposed rules were 
unclear as to whether they required the registration of firms that do 
not plan to participate in audits of issuers after October 22, 2003, 
but that have issued audit reports for issuers covering periods prior 
to the mandatory registration date. These commenters noted that such a 
firm may be asked to issue a consent with respect to the use of its 
opinion for the prior period. To address this concern, the Board has 
added a note to the rule that provides that the issuance of a consent 
to include an audit report for a prior period by a public accounting 
firm, that does not currently have and does not expect to have an 
engagement with any issuer to prepare or issue, or to play a 
substantial role in the preparation or furnishing of an audit report 
with respect to any issuer, will not by itself require a public 
accounting firm to register under Rule 2100.

Rule 2101--Application for Registration

    Rule 2101 requires public accounting firms applying for 
registration with the Board to complete and file an application for 
registration on Form 1. This rule is consistent with section 102(b) of 
the Act, which provides that ``a public accounting firm shall use such 
form as the Board may prescribe, by rule, to apply for registration 
under this section.''
    Rule 2101 further requires that, unless the Board directs 
otherwise, applications for registration and any exhibits to such 
applications must be filed electronically with the Board through the 
Board's Web-based registration system. The online registration 
mechanism is currently being developed and will be available in 
sufficient time for public accounting firms to register.
    In addition, several commenters suggested that the Board should 
provide a procedure for applicants to withdraw their applications. In 
response to these comments, the Board has added a sentence to Rule 2101 
providing that an applicant may withdraw its application for 
registration by written notice to the Board at any time before the 
approval or disapproval of the application. The Board will consider 
rules relating to the withdrawal from registration of

[[Page 35021]]

registered public accounting firms at a later date.

Rule 2102--Date of Receipt

    Rule 2102 defines the date of receipt of an application for 
registration as, unless the Board directs otherwise, the later of (a) 
the date on which the registration fee has been paid, or (b) the date 
on which the application is submitted to the Board through its Web-
based registration system. Although the Board had initially planned to 
have its registration system scan applications for completeness before 
accepting them, this step has been eliminated for administrative 
reasons. Applications will not be deemed received, however, until the 
required registration fee has been paid.

Rule 2103--Registration Fee

    Rule 2103 requires that each public accounting firm applying for 
registration with the Board pay a non-refundable registration fee. This 
rule is consistent with section 102(f) of the Act, which provides that 
``[t]he Board shall assess and collect a registration fee * * * from 
each registered public accounting firm, in amounts that are sufficient 
to recover the costs of processing and reviewing applications * * *.''
    The Board will publicly announce the registration fee amount and 
the payment procedure before the registration system is operational. 
The Board contemplates that the amount of an applicant's fee will be 
determined by formula and that fees will vary with the size of the 
applicant and the number of its issuer audit clients. Once the 
registration system is operational, the Board will, from time to time, 
announce (most likely by posting on its Web site or by a similar form 
of dissemination) the current registration fee for applicants. Several 
commenters made comments about the amount the Board should seek to 
recover in registration fees and the criteria the Board should use in 
allocating fees to applicants. The Board will consider these comments 
in connection with its setting of the registration fee.

Rule 2104--Signatures

    Rule 2104 requires each person signing the application for 
registration (including any consents) to manually sign a signature page 
or other document authenticating, acknowledging or otherwise adopting 
his or her signature that appears in typed form within the electronic 
filing of the application for registration. Such a document is required 
to be signed before the application is electronically filed with the 
Board through the Board's Web-based system. Further, consistent with 
the Act's provision on the retention of audit workpapers,\22\ filers 
are required to retain the manually signed documents for seven years. 
In addition, under the rules, the Board or its staff may request a copy 
of any manually signed document retained pursuant to Rule 2104. The 
Board's rule tracks the Commission's requirement on signatures for 
electronic filings in Regulation S-T.\23\
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    \22\ See section 103(a)(2)(A)(i); see also Commission Final 
Rule: Retention of Records Relevant to Audits and Reviews, Release 
No. 33-8180 (January 24, 2003) (requiring accounting firms to retain 
for seven years certain records relevant to their audits and reviews 
of issuers' financial statements).
    \23\ See Rule 302(b) of Regulation S-T, 17 CFR 232.302(b).
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Rule 2105--Conflicting Non-U.S. Laws

    Rule 2105 provides that an applicant may withhold information from 
its application for registration when submission of the information to 
the Board would cause the applicant to violate non-U.S. laws. A number 
of commenters raised a concern that submitting information in 
connection with an application for registration could cause an 
applicant to have to choose between obeying the laws of a non-U.S. 
jurisdiction and completing the application. The Board has decided to 
allow applicants to withhold such information from an application for 
registration.
    The rule further provides, however, that an applicant that claims 
that submitting information as part of its application would cause it 
to violate non-U.S. laws must identify, in accordance with the 
instructions on Form 1, the information that it claims would cause it 
to violate non-U.S. laws if submitted,\24\ and include as exhibits to 
Form 1: (i) A copy of the relevant portion of the conflicting non-U.S. 
law; (ii) a legal opinion that submitting the information would cause 
the applicant to violate the conflicting non-U.S. law; and (iii) an 
explanation of the applicant's efforts to seek consents or waivers to 
eliminate the conflict, if the withheld information could be provided 
to the Board with a consent or a waiver, and a representation that the 
applicant was unable to obtain such consents or waivers to eliminate 
the conflict. Like all other parts of the application, these exhibits 
must be submitted in English.
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    \24\ The Board's Web-based registration system will include an 
option, next to each Item on the Form, for the applicant to indicate 
that it is withholding information based on a conflicting non-U.S. 
law.
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    While the Board expects that this rule will mainly be used by non-
U.S. applicants, the rule would also allow a U.S. applicant to withhold 
information that would cause it to violate non-U.S. laws if submitted 
to the Board. It should be noted that, for purposes of this rule, the 
term ``non-U.S. law'' does not include laws of any state, territory, or 
political subdivision of the United States.

Rule 2106--Action on Applications for Registration

    Rule 2106 governs the Board's approval process. In general, under 
this rule, unless the applicant consents otherwise, the Board is 
required to take action on an application for registration not later 
than 45 days after the date of receipt of the application. Rule 2102 
defines the date of receipt. Such action may consist of approval, 
issuance of a written notice of a hearing specifying the proposed 
grounds for disapproval, or a request for additional information. Rule 
2106 is consistent with section 102(c)(1) of the Act, which provides 
that ``[t]he Board shall approve a completed application for 
registration not later than 45 days after the date of receipt of the 
application, in accordance with the rules of the Board, unless the 
Board, prior to such date, issues a written notice of disapproval to, 
or requests more information from, a prospective registrant.'' An 
applicant that does not elect to treat a notice of hearing as a notice 
of disapproval will be deemed to have waived the provisions in section 
(b) of this rule and in section 102(c)(1) that require the Board to act 
on applications within 45 days.
    Specifically, Rule 2106(a) provides that after reviewing the 
application for registration, and any additional information provided 
by the applicant or obtained by the Board, the Board will determine 
whether to approve the application. The Board will approve an 
application for registration if it determines that registration is 
consistent with the Board's responsibilities under the Act to protect 
the interests of investors and to further the public interest in the 
preparation of informative, accurate, and independent audit reports for 
companies the securities of which are sold to, and held by and for, 
public investors. If the Board is unable to determine that this 
standard has been met, or if the Board concludes that the application 
may be materially inaccurate or incomplete, it will either request 
additional information from the applicant or provide the applicant with 
written notice of a hearing, pursuant to the Board's procedural rules 
governing disciplinary proceedings, to determine whether to approve or 
disapprove the application. Such notice will specify, in reasonable 
detail, the proposed grounds

[[Page 35022]]

for disapproval and may, at the applicant's election, be treated as a 
written notice of disapproval for purposes of section 102(c) of the 
Act.
    If the Board requests additional information, a new 45-day review 
period will begin when the requested information is received. The Board 
may request additional information when an applicant has failed to 
complete fully Form 1, or when the information is otherwise necessary 
in order to make a determination on the application.\25\ Rule 2106(c) 
provides that the Board will take action on such supplemented 
applications as soon as practicable, and not later than 45 days after 
receipt of the supplemented application.\26\ If the applicant declines 
to provide the requested information, or fails to do so within a 
reasonable amount of time, the Board may deem the application 
incomplete (and disapprove it on that basis, pursuant to Rule 
2106(b)(2)), may deem the application not to have been received in 
accordance with Rule 2102, or may take such other action as the Board 
deems appropriate.
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    \25\ Accordingly, the Board may request additional information 
regarding any of the applicant's responses contained in Form 1, as 
well as additional matters that have come to the Board's attention 
and that are relevant to the Board's decision on an application.
    \26\ This sentence was added to the Rule at the suggestion of a 
commenter that was concerned that the Board might take the full 45-
day period notwithstanding that only relatively minimal supplemental 
information was involved.
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    Commenters raised several concerns with Rule 2106 as proposed by 
the Board. Some commenters suggested that the Board's standard for 
approval was too subjective or, at least, that the Board should provide 
more guidance on how it will be applied by the Board. Section 102 of 
the Act does not provide an explicit standard for the Board's 
determination to approve or disapprove an application for registration. 
At the same time, the Act clearly contemplates that the Board will 
apply some standard to applications for registration before deciding 
whether to approve or disapprove a completed application.\27\ The 
standard in Rule 2106(a) is based on the Board's mandate under section 
101(a) of the Act. The Board considered providing more specific 
criteria, but has decided that additional criteria would be 
inappropriate in light of the varied circumstances of public accounting 
firms that likely will be applying for registration. For instance, the 
Board considered providing that the failure of an applicant or its 
associated accountants to have all licenses and registrations required 
by governmental and professional organizations would be a basis for 
disapproval. In response to the Board's proposal to require applicants 
to represent that they have all such licenses, a number of commenters 
gave reasons why they could not provide such a representation. In 
addition, the Board considered providing that certain criminal and/or 
civil governmental actions would be a basis for disapproval. Actions 
against an accountant that might justify disapproval of the application 
of a sole proprietor might not warrant disapproval of the application 
of a large public accounting firm if the accountant was one of many 
employees of the firm, however. Accordingly, the Board has determined 
to retain the current standard and make an evaluation based on the 
facts and circumstances of whether each application meets the criteria 
in Rule 2106(a).
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    \27\ See section 102(c) of the Act.
---------------------------------------------------------------------------

    Several commenters suggested that applicants should have ``due 
process'' procedures through which they could seek and obtain review of 
a disapproval of their application within the Board. The Board has 
addressed these comments by changing the rule to provide that, if the 
Board is unable to determine that the statutory standard has been met, 
or if the Board concludes that the application may be materially 
inaccurate or incomplete, it will either request additional information 
from the applicant or provide the applicant with written notice of a 
hearing, pursuant to the Board's procedural rules governing 
disciplinary proceedings,\28\ to determine whether to approve or 
disapprove the application. Such notice will specify, in reasonable 
detail, the proposed grounds for disapproval. Because the statute 
provides for the Board to make these decisions within 45 days and also 
provides for appeal to the Commission, the applicant may, at its 
election, treat the notice as a written notice of disapproval for 
purposes of section 102(c) of the Act. Under sections 102(c)(2) and 
107(c) of the Act, a written notice of disapproval may be appealed to 
the Commission. Therefore, an election to treat a hearing notice as a 
disapproval will afford applicants an immediate opportunity to seek 
Commission review.
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    \28\ These rules will be the subject of a future Board 
rulemaking.
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Rule 2300--Public Availability of Information Submitted to the Board: 
Confidential Treatment Requests

    Rule 2300(a) provides that applications for registration will be 
publicly available as soon as practicable after the Board approves or 
disapproves the application. This is consistent with section 102(e) of 
the Act, which provides that applications for registration ``or such 
portions of such applications * * * as may be designated under the 
rules of the Board'' must be available for public inspection.
    In order to prevent the disclosure of confidential information,\29\ 
Rule 2300 also sets forth a procedure by which applicants can request 
confidential treatment of any information submitted to the Board in 
connection with their applications for registration. Under Rule 
2300(b), an applicant for registration may request confidential 
treatment of any portion of an application that either (i) contains 
information reasonably identified by the public accounting firm as 
proprietary information, or (ii) is protected from public disclosure by 
applicable laws related to the confidentiality of proprietary, 
personal, or other information.
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    \29\ Section 102(e) also states that the public availability of 
registration applications is subject to ``applicable laws relating 
to the confidentiality of proprietary, personal, or other 
information'' and directs the Board to ``protect from public 
disclosure information reasonably identified by the subject 
accounting firm as proprietary information.''
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    Rule 2300(c)(2) requires that confidential treatment requests 
contain a detailed explanation of the reasons that, based on the facts 
and circumstances of the particular case, the information for which 
confidentiality is sought meets the requirements in Rule 2300(b). Rule 
2300(f) states that unless the applicant seeking confidential treatment 
consents otherwise, confidential treatment requests themselves will be 
afforded confidential treatment without the need for a request for 
confidential treatment. Rule 2300(d) provides that pending a 
determination by the Board as to whether to grant the request for 
confidential treatment, the information in question will not be made 
available to the public. Rule 2300(e) states that if the Board 
determines to deny a request, the applicant requesting confidential 
treatment will be notified of the Board's decision in writing and of 
the date on which the information in question will be made public.
    Under Rule 2300(g), the information as to which the Board grants 
confidential treatment under Rule 2300 will not be made public. The 
Board anticipates that a notation in the application that is made 
publicly available will appear in the place of the information for 
which confidential treatment was granted. However, the granting of 
confidential treatment will not limit the Board's ability to provide 
this information to the Commission or to comply with any subpoena 
issued by

[[Page 35023]]

a court or other body of competent jurisdiction, nor will it prevent 
the Board from making use of this information in connection with the 
execution of its responsibilities under the Act. For example, the 
information may be used in the Board's inspection program and 
investigations, as well as in any resulting proceedings, subject to the 
applicant's right to seek a protective order in such a proceeding. In 
the event the Board receives a subpoena, the Board will notify the 
applicant of such subpoena to allow the applicant an opportunity to 
object to the subpoena. Finally, Rule 2300(h) delegates the Board's 
functions under this Rule to the Director of Registration and 
Inspection.
    Commenters made several suggestions to improve the Board's proposed 
confidentiality rule. One commenter suggested the Board delegate the 
function of determining these requests and allow for appeal to the 
Board. Rule 2300(h) responds to this suggestion. Several commenters 
noted that the proposed rule did not specify when applications would be 
made available publicly and suggested that that should not take place 
until the applications had been approved or disapproved. Rule 2300(a) 
has been modified to reflect that applications will not be made 
available publicly until after the Board has approved or disapproved 
them. Commenters also suggested that the Board should provide notice to 
an applicant upon receiving a third-party subpoena seeking access to 
information the Board has granted confidential treatment and oppose 
such subpoenas. Rule 2300(g) now provides for such notice. While the 
Board does not believe it would be appropriate to provide in its rules 
that it will object to all such subpoenas, the Board will respond to 
such subpoenas in a manner consistent with its responsibilities under 
the Act, including its responsibility to protect proprietary 
information under section 102(e) of the Act. The confidential treatment 
requester will, of course, be free to protect its interests by seeking 
to participate in the proceeding from which the subpoena arose.

Form 1

    The proposed rules also consist of instructions to PCAOB Form 1, 
which is the form to be used by public accounting firms to register 
with the Board. The Board plans to develop a Web-based form that will 
be available only electronically.
    Form 1 consists of general instructions and nine parts, subdivided 
into various items requiring the disclosure of particular information 
concerning the applicant and its associated accountants, and the 
applicant's audit clients. The information these items call for is, in 
general, required by section 102(b) of the Act. To the extent that Form 
1 calls for information in addition to that specified in section 
102(b), the additional information is closely related to the statutory 
minimum requirements, and is, in the Board's judgment, reasonably 
related to the determination that the Board will make in deciding 
whether to approve or disapprove an application. The general 
instructions and each of the parts of the Form is explained in more 
detail below.

General Instructions

    The general instructions to the Form contain basic information 
about the application and the application process. In general, these 
instructions are self-explanatory. General instructions 7, 9 and 10 
were added in response to comments received on the Board's proposal.
    Many non-U.S. commenters suggested that the disclosure of certain 
information required by the Form, as originally proposed, would violate 
non-U.S. laws, particularly related to confidentiality, data protection 
and privacy. In response to these comments, the Board added General 
Instruction 7, which allows an applicant to withhold information from 
its application where disclosure of the information would cause the 
applicant to violate non-U.S. laws. General Instruction 7 specifies 
that an applicant claiming that submitting information would cause it 
to violate non-U.S. laws must so indicate by making a notation under 
the relevant item number of the Web-based form, and furnish as 
exhibits: (i) A copy of the relevant portion of the conflicting non-
U.S. law, (ii) a legal opinion supporting the applicant's position, and 
(iii) an explanation of the applicant's efforts to seek consents or 
waivers, if applicable, and a representation that the applicant was 
unable to obtain such consents to eliminate the conflict.
    In addition, some commenters were concerned that it may be 
difficult to ensure that application information is current when 
submitted in light of the fact that, particularly for larger public 
accounting firms, it may take significant amounts of time to compile 
the information necessary to apply for registration. To address this 
concern, the Board has added General Instruction 9 to provide that 
where the Form seeks current information, applicants may submit the 
information as of a date not earlier than 90 days prior to submission 
of the application and that such information will be deemed current for 
purposes of the Form. General Instruction 10 specifies that information 
submitted as part of Form 1, including any exhibits to the Form, must 
be in English.

Part I--Identity of the Applicant

    Part I of the Form calls for information about the identity of the 
applicant. This Part is generally intended to elicit basic information 
about the applicant and its operations and to facilitate the Board's 
interaction with the applicant. The seven specific items in this part 
require information about the applicant's name and identification 
number, contact information, primary contact with the Board, form of 
organization, offices, associated entities engaged in the practice of 
public accounting, and professional licenses or certifications.
    In Item 1.1, applicants are required to state the legal name of the 
applicant and, if different, the name or names under which the 
applicant currently, or in the past five years, issues or has issued 
audit reports. This Item has been changed in two respects from the 
Board's proposal. First, this Item as proposed required applicants that 
have such a number to disclose their federal employer identification 
number (or comparable non-U.S. identifier), and, in the case of a sole 
proprietor, the applicant's social security number. In response to 
commenters' concerns about disclosure of confidential personal 
identifiers, the Board has eliminated the requirement for applicants to 
provide identifying numbers in response to this Item. Second, at least 
one commenter suggested that the Board clarify which predecessor 
entities constitute the applicant for purposes of the disclosure of 
names under which the applicant has issued audit reports in the last 
five years. The Board has sought to clarify this by modifying Item 1.1 
to apply only to those predecessors for which the applicant is the 
successor in interest with respect to the entity's liabilities.
    Items 1.2 and 1.3 ask for basic contact information from the 
applicant. These Items are unchanged from the Board's proposal, except 
that the Board has added a requirement to Item 1.2 that applicants 
state their Web site address, if available.
    Item 1.4 asks for the applicant's legal form of organization and 
the jurisdiction under the law of which the applicant is organized or 
exists. Under the Board's registration system, organizations, and not 
natural persons, are required to apply for registration. Accordingly, 
among the examples given of legal forms of organizations are 
``proprietorship'' and ``partnership.'' This Item

[[Page 35024]]

contemplates that natural persons practicing accounting under their own 
name and that are not organized as a legal entity will apply as a 
``proprietorship.'' Likewise, groups of natural persons practicing 
accounting that are not organized as another legal entity should apply 
as a ``partnership,'' whether a partnership has been legally formed or 
not.
    Item 1.5 requires applicants with more than one office to furnish, 
as an exhibit, the physical address (and, if different, mailing 
address) of each of the applicant's offices. Item 1.6 requires 
applicants to list the name and address of their ``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. The term ``associated entities'' is 
defined in the Board's rules in a manner consistent with the term's use 
in the Commission's auditor independence rules.\30\
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    \30\ See Rule 2-01(f)(2) of Regulation S-X, 17 CFR 210.2-
01(f)(2).
---------------------------------------------------------------------------

    One commenter suggested that Item 1.5 be limited to offices that 
issue audit reports, as that term is defined in the Act and the Board's 
rules. In addition, several commenters suggested that Item 1.6 be 
limited to only associated entities that issue audit reports or that 
the term ``associated entities'' be defined differently or limited to 
entities within one particular country. After considering these 
comments, the Board has decided to leave these Items as proposed. The 
Board chose the term ``associated entities'' to capture certain 
entities that are related to the applicant, but that are not 
necessarily in a control relationship with the applicant. The term is 
presumably one public accounting firms are familiar with because of its 
use in the Commission's auditor independence rules. The instruction 
makes clear that individual accountants associated with the applicant 
should not be listed in responding to this Item. The Board believes 
that obtaining information on all the applicant's offices and those 
associated entities of the applicant that engage in the practice of 
public accounting or preparing or issuing audit reports, or comparable 
reports prepared for clients that are not issuers, strikes the 
appropriate balance between the Board's need for information about the 
applicant's operations and the need to avoid overburdening applicants 
for registration.
    Item 1.7 requires applicants to list every license or certification 
number issued to the applicant authorizing it to engage in the business 
of auditing or accounting, and the name of the issuing authority. This 
Item does not require applicants to list the license numbers of 
individual associated accountants within the firm (these are required 
by Item 7.1), nor does it require applicants to furnish information on 
business licenses required of entities engaged in businesses other than 
accounting or auditing.
    As proposed, Item 1.8 would have required applicants to state if 
the firm and all individual accountants associated with the firm who 
participate in or contribute to the preparation of audit reports have 
all required licenses and certifications. This Item was intended to 
ensure that public accounting firms applying for registration have the 
requisite governmental and professional licenses and certifications to 
audit issuers. Although one commenter supported and suggested expanding 
this Item, a number of both large and small public accounting firms 
suggested that, for various reasons, they could not affirmatively 
answer this question despite their good faith efforts to ensure that 
the firm and all its associated accountants maintained all required 
licenses. In light of these concerns, and because information on the 
applicant's and its associated accountants' licenses or certifications 
is still required through Items 1.7 and 7.1, the Board has decided to 
eliminate Item 1.8.

Part II--Listing of Applicant's Public Company Audit Clients and 
Related Fees

    As required by Section 102(b)(2)(A) and (B) of the Act, Part II of 
the Form requires disclosure of the names of all issuers for which the 
applicant has prepared or issued audit reports during the previous 
calendar year, and for which the applicant expects to prepare or issue 
audit reports during the current calendar year, and the annual fees 
received by the applicant from these issuers for audit services, other 
accounting services, and non-audit services. Part II implements this 
directive through four specific items.
    The first three items require disclosures about the applicant's 
issuer audit clients, including their names, identifying information, 
and disclosures about the fees billed the issuer by the applicant. The 
contours of the required fee disclosures are specified through 
definitions of the terms ``audit services,'' ``other accounting 
services,'' and ``non-audit services.''\31\
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    \31\ A Note to Items 2.1 and 2.2 explains that, consistent with 
the Commission's proxy disclosure rules, only fees billed by the 
principal accountant need be disclosed in response to this item. The 
Note also explains how disclosures are to be made for issuers that 
are investment companies. The treatment is based on and is 
consistent with the Commission's disclosure rules.
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    To capture different time periods, these disclosures are divided 
into three items. Item 2.1 covers issuers for which the applicant 
prepared or issued any audit report during the previous calendar year. 
Item 2.2 covers issuers for which the applicant prepared or issued any 
audit report during the current calendar year. Item 2.3 covers issuers 
for which the applicant expects to prepare or issue any audit report 
during the current calendar year. Items 2.1 and 2.2 require the same 
information: the issuer's name, business address, the date of the audit 
report, and the total amount of fees billed for audit services, other 
accounting services, and non-audit services. Because Item 2.3 refers to 
a future period, it only asks for the issuer's name and business 
address. A Note to Items 2.3 and 2.4 clarifies when an applicant can 
``expect to prepare or issue'' an audit report for an issuer.
    Finally, Item 2.4 seeks information from applicants that did not 
prepare or issue an audit report dated during the preceding or current 
calendar year, and that do not expect to prepare or issue an audit 
report during the current calendar year. Specifically, this Item seeks 
information about the issuers for which these applicants played, or 
expect to play, a substantial role in the preparation of an audit 
report during the preceding or current calendar year. For these 
issuers, the applicant must disclose the issuer's name, business 
address, the name of the public accounting firm that issued, or is 
expected to issue, the audit report, the date (or expected date) of the 
audit report, and the type of substantial role played by the applicant 
with respect to the audit report.
    Commenters expressed a number of practical concerns about compiling 
the necessary information to respond to Part II of the Form as 
proposed. In particular, a number of commenters suggested that the fee 
disclosures track the categories used in the SEC's revised auditor 
independence disclosure rules and pointed out that a number of issuers 
that will be required to disclose fees in those categories have not 
previously been required to publicly report these fees.
    In response to these comments, the Board has modified the 
definitions of ``audit services,'' ``other accounting services,'' and 
``non-audit services'' to make clear that, once the revised SEC rules 
are effective, the Board intends to use these categories for the fee

[[Page 35025]]

disclosures required by Part II of the Form.
    The Board understands that fee information in these categories has 
not been collected historically and that public accounting firms are in 
the process of putting in place systems to track information in these 
categories. Nonetheless, section 102(b)(2)(B) of the Act specifically 
requires applications for registration to include disclosure of fees 
for ``audit services,'' ``other accounting services'' and ``non-audit 
services.'' Accordingly, until such time as the SEC's revised rules are 
effective, the Board has, to the extent permissible under the Act, used 
categories from the existing SEC proxy disclosure rules that were 
adopted in November 2000 for the disclosures required by this Part of 
the Form.
    Specifically, until December 15, 2003, the term ``audit services'' 
will be defined to mean the same category of services for which fees 
are required to be disclosed as ``audit fees'' pursuant to the 
Commission's 2000 proxy disclosure rules.\32\ Section 102(b)(2)(B) of 
the Act specifically requires applicants to disclose fees for ``other 
accounting services,'' which are not required to be disclosed under the 
existing proxy disclosure rules. Accordingly, the Board has defined 
``other accounting services'' by reference to concepts from the SEC's 
revised auditor independence disclosure rules. As explained in greater 
detail above in connection with the discussion of the definition of 
``other accounting services,'' until December 15, 2003, this term will 
include two categories of services: (1) services the fees for which are 
to be disclosed as ``audit fees'' under the Commission's revised rules, 
but that were not previously disclosed as ``audit fees,'' and (2) 
services the fees for which are to be disclosed as ``audit-related 
fees'' under the Commission's revised rules.
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    \32\ See Schedule 14A, Item 9(e)(1), 17 CFR 240.14a-101; see 
also Commission Final Rule: Revision of the Commission's Auditor 
Independence Requirements, Release No. 33-7919 (November 21, 2000).
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    While fee disclosures are not currently being made in these 
categories, these categories of fees have been defined with some 
precision through the SEC's rulemaking process. In addition, some 
issuers and public accounting firms may be in the process of developing 
systems to track fees in these categories since disclosures of these 
amounts will be required under the SEC's revised rules, effective for 
filings after December 15, 2003.
    Under the existing proxy disclosure rules, fees must also be 
disclosed for financial information systems design and implementation, 
as defined in Rule 2-01(c)(4)(ii) of Regulation S-X, 17 CFR 2-
01(c)(4)(ii), and all other services (i.e., services the fees for which 
are not disclosed as audit fees or financial information systems design 
and implementation fees). Until December 15, 2003, the term ``non-audit 
services'' will be defined to include these two categories of services. 
After December 15, 2003, applicants will be required to disclose fees 
for the category of services the fees for which are disclosed as ``all 
other fees'' under the Commission's revised auditor independence rules.
    The Board understands that not all issuers are subject to these 
requirements and that companies subject to the requirements currently 
are not required to disclose fees for ``other accounting services,'' as 
specifically required by section 102(b)(2)(B) of the Act. To address 
commenters' concerns about the difficulty of accurately compiling this 
information in these situations, the Board added a Note to Items 2.1 
and 2.2 that provides that, to the extent these fee amounts have not 
previously been disclosed or otherwise known by the applicant, 
estimated amounts may be used in responding to these Items of the Form. 
The Board does not intend to penalize applicants that use good faith 
efforts to estimate the fees for ``other accounting services'' during 
this time. Consistent with these changes, applicants will not be 
separately required to disclose fees for ``tax services,'' as had been 
proposed. The Board may choose, once the SEC's revised rules are 
effective, to require disclosure of ``tax services'' as part of 
registered public accounting firms' annual reports. The contents of 
these reports will be the subject of a future Board rulemaking.
    In response to other comments received, the Board has simplified 
and clarified Part II of the Form in several other respects. First, the 
Board has eliminated the requirement to provide the issuer's standard 
industry code (``SIC''). Second, the Board has slightly modified the 
wording of Items 2.1 through 2.3 to make clear that the disclosure 
requirements pertain to audit reports dated during the relevant time 
period. Third, the Board has added language to the Notes to Items 2.2 
and 2.3 to further clarify when applicants can ``expect to prepare or 
issue'' an audit report for an issuer. Specifically, those Notes now 
provide that an applicant may presume that it is expected to prepare or 
issue an audit report for an issuer (i) if it has been engaged to do 
so, or (ii) if it issued an audit report during the preceding calendar 
year for an issuer, absent an indication from the issuer that it no 
longer intends to engage the applicant.
    Fourth, in response to some commenters' concerns about the burden 
of making the necessary determinations to comply with Item 2.4, the 
Board has limited this Item to those applicants that did not prepare or 
issue an audit report dated during the preceding or current calendar 
year, and that do not expect to prepare or issue an audit report dated 
during the current calendar year. In other words, as the Note to this 
Item explains, applicants that disclose the name of an issuer in 
response to any of Items 2.1-2.3 need not respond to this Item. 
Finally, the requirement in Item 2.4 to explain the applicant's role in 
the audit has been modified to require only identification of the type 
of substantial role played by the applicant with respect to the audit 
report. To enable applicants to comply with this instruction, it is 
contemplated that the Web-based Form will contain a ``pull-down menu'' 
with a list of types of substantial roles, including an option to check 
``other.''
    The Board will consider issuing additional guidance on the fee 
disclosures required by Part II of the Form as the date for 
registration to begin nears.

Part III--Applicant's Financial Information

    Section 102(b)(2)(C) of the Act provides that the Board may require 
applicants to submit ``such other current financial information for the 
most recently completed fiscal year of the firm as the Board may 
reasonably request.'' Consistent with this provision of the Act, the 
Board proposed that applicants disclose fees received by the applicant 
during its most recently completed fiscal year for: audit services, 
other accounting services, tax services, and all other products and 
services, whether the fees were received from ``issuers'' or from their 
other clients.
    A number of commenters stated that they are not currently tracking 
revenues in these categories for all their clients and that compiling 
this information in this form would be impractical or at least very 
burdensome. In light of these comments, the Board has decided not to 
require this information as part of public accounting firms' 
registration applications at this time. The Board does, however, intend 
to require applicants to submit information in these categories as part 
of their annual reports with the Board under section 102(d) of the Act. 
Although the contents of the annual and periodic reports will be the 
subject of a future Board rulemaking, the Board encourages

[[Page 35026]]

public accounting firms planning to register with the Board to begin 
collecting fee information in these four categories for all their 
clients in order to be able to report revenue in this format on an 
ongoing basis in the future.

Part IV--Statement of Applicant's Quality Control Policies

    As required by section 102(b)(2)(D) of the Act, Part IV requires 
the applicant to provide, as an exhibit, a narrative, summary 
description of its quality control policies for its accounting and 
auditing practices, including procedures to monitor compliance with 
independence requirements. GAAS requires accounting firms to have 
quality controls for their audit practices.\33\
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    \33\ See SAS No. 25; AU Sec.  161; see also Statements on 
Quality Control Standards (``SQCS'') No. 2; AICPA SEC Practice 
Section (``SECPS'') Membership Requirements, Appendix K, SECPS sec. 
1000.45.
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    A few commenters suggested that this Part of the Form should be 
limited to a representation about the firm's quality control policies 
complying with applicable standards. The Board does not believe that 
this approach would be consistent with the statutory directive. Several 
other commenters sought clarification of the parameters of the 
description called for by this Part of the Form. As explained in the 
proposing release, the description should be in a clear, concise, and 
understandable format and should convey the scope and the key elements 
of the applicant's quality controls for its accounting and auditing 
practice. A description that addresses all of the elements of quality 
control covered by the professional quality control standards the firm 
is subject to will be sufficient. Technical descriptions and detailed 
explanations of procedures are not required. Absent unusual 
circumstances, the Board does not contemplate granting confidential 
treatment requests for this Item.

Part V--Listing of Certain Proceedings Involving the Applicant

    As required by section 102(b)(2)(F) of the Act, Part V calls for 
information about criminal, civil, or administrative or disciplinary 
proceedings against the applicant or its associated persons. While the 
Act only requires applicants to submit information about pending 
proceedings related to audit reports, the Form requires information 
about certain additional proceedings that may reflect on the 
applicant's fitness for registration, even though the proceedings may 
no longer be pending or do not relate to audit reports.
    As proposed, this Part of the Form was divided into six specific 
items that sought disclosure of different types of proceedings 
involving different persons for different periods of time. Many 
commenters expressed concerns about both the scope and the complexity 
of the disclosures required of applicants by this Part of the Form.\34\ 
Accordingly, the Board has sought both to simplify and to narrow its 
request for information in this Part of the Form, while still 
preserving the information necessary to decide whether to approve or 
disapprove registration applications.
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    \34\ In particular, a number of non-U.S. accounting firms and 
professional associations expressed concern that proposed Item 5.5 
would require applicants to familiarize themselves with, and 
analogize to, a number of provisions of the U.S. Code. This Item has 
been eliminated from the Form.
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    Specifically, this Part now contains three Items. Item 5.1 would, 
in general, require applicants to disclose whether the applicant or any 
associated person of the applicant is currently a defendant or 
respondent (or was a defendant or respondent in a proceeding that 
resulted in an adverse finding against the applicant or person during 
the previous five years) in three types of proceedings:
    1. Any pending criminal proceeding;
    2. Any pending civil (or alternative dispute resolution) proceeding 
initiated by a governmental entity arising out of the applicant's or 
such person's conduct in connection with an audit report, or a 
comparable report prepared for a client that is not an issuer; and
    3. Any pending administrative or disciplinary proceeding arising 
out of the applicant's or such person's conduct in connection with an 
audit report, or a comparable report prepared for a client that is not 
an issuer.
    The third part of this Item further specifies what types of 
proceedings qualify as ``administrative or disciplinary proceedings'' 
and provides that investigations that have not resulted in the 
commencement of a proceeding need not be included. At least one 
commenter specifically suggested that, if the Board required disclosure 
of more than pending proceedings, the look-back period should be 
limited to five years since this period is consistent with the 
disclosure requirements for past proceedings against officers and 
directors of public companies.\35\
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    \35\ Item 401 of Regulation S-K. 17 CFR 229.401(f).
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    Item 5.2 would require applicants to disclose pending civil 
proceedings (or ADR proceedings) against the applicant or its 
associated persons initiated by a private (i.e., non-governmental) 
entity that involve conduct in connection with an audit report or a 
comparable report prepared for a client that is not an issuer. This 
Item is largely required by section 102(b)(2)(F) of the Act. For each 
proceeding listed in response to Items 5.1 and 5.2, applicants are 
asked to provide basic information about the proceeding, the parties, 
the allegations, and the proceeding's outcome.
    The phrase ``a comparable report prepared for a client that is not 
an issuer,'' as used in these Items, is meant to capture reports of 
audits performed for clients that are not issuers. Notes to Items 5.1 
and 5.2 provide that, for these Items, foreign public accounting firm 
applicants need only disclose such proceedings for the applicant and 
any proprietor, partner, principal, shareholder, officer, or manager of 
the applicant who provided at least 10 hours of audit services for any 
issuer during the last calendar year. This is the same group of persons 
within foreign public accounting firms that must be listed in response 
to Part VII of the Form and for which consents must be obtained under 
Part VIII of the Form.
    Finally, Item 5.3, permits, but does not require, applicants to 
include an exhibit describing any proceeding listed in response to this 
Part and giving the reasons that, in the applicant's view, such 
proceeding should not be a basis for the denial of its application for 
registration. The failure to file such an exhibit with respect to a 
particular proceeding will not raise any inference concerning the 
applicant's view of the impact of that proceeding on its application. 
The Board will consider any information provided pursuant to this Item 
in its approval process.

Part VI--Listing of Filings Disclosing Accounting Disagreements with 
Public Company Audit Clients

    As required by section 102(b)(2)(G) of the Act, Part VI requires 
applicants to identify instances in which the applicant's issuer audit 
clients disclosed disagreements with the applicant in Commission 
filings. For each such instance in the preceding or current calendar 
year, the applicant is required to disclose the name of the issuer, the 
name and date of the filing, and to submit, as exhibits, copies of the 
identified filings. Disagreements under this Part are specified by 
reference to the provisions of Regulation S-K that require such 
disclosures.
    To clarify an issue raised by a few commenters, an applicant is 
only required to identify instances in which the applicant's issuer 
audit clients disclosed disagreements with the applicant in such 
issuers' Commission filings. Therefore, if an issuer did not disclose a 
disagreement in a

[[Page 35027]]

Commission filing or if such disclosure is not required by a Commission 
filing,\36\ the applicant of that issuer audit client need not disclose 
such disagreement in Form 1.
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    \36\ For instance, currently annual reports for foreign private 
issuers on Forms 20-F and 40-F do not require this type of 
disclosure.
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    Several commenters suggested that the Board obtain information 
required by Part VI from the Commission's Edgar system or require 
applicants to provide only a hyperlink to or a Central Index Key 
(``CIK'') number for a particular filing, as opposed to providing 
copies of the actual filings. While the Board recognizes that the 
information requested in this Item is or will be publicly available 
through Edgar, section 101(b)(2)(G) of the Act specifically requires 
that an applicant submit ``as part of its application for registration 
* * * copies of periodic or annual disclosure filed by an issuer with 
the Commission * * *.'' Moreover, this information is not organized by 
the public accounting firms involved in the disclosed disagreements in 
the Commission's Edgar system.

Part VII--Roster of Associated Accountants

    As required by section 102(b)(2)(E) of the Act, Part VII requires 
applicants to submit information about the accountants associated with 
the firm who participate in or contribute to the preparation of audit 
reports. The scope of this requirement is different for foreign firms 
than for domestic firms. Domestic applicants must list all accountants 
who are ``persons associated with the applicant'' and provided at least 
10 hours of audit services for any issuer during the last calendar 
year. Foreign public accounting firms applying for registration must 
list all accountants who are a proprietor, partner, principal, 
shareholder, officer, or manager of the applicant and who provided at 
least 10 hours of audit services for any issuer during the last 
calendar year.
    For each accountant listed, applicants must provide the person's 
name and all license or certification numbers (and name of issuing 
authority) authorizing the person to engage in the business of auditing 
or accounting.
    In addition, both domestic and non-U.S. applicants are required to 
disclose the total numbers of accountants and CPAs (or accountants with 
comparable licenses from non-U.S. jurisdictions) employed with the 
applicant, and the total number of personnel employed by the applicant.
    Many commenters indicated that the disclosure required by Items 7.1 
and 7.2, as originally proposed, was administratively burdensome and 
suggested that the Board narrow the scope of the roster and clarify 
which accountants would be covered by the roster. To address these 
concerns, the Board has limited the roster reporting requirements for 
domestic applicants to accountants who are ``persons associated with 
the applicant'' and provided at least 10 hours of audit services for 
any issuer during the last calendar year, and the requirements for non-
U.S. applicants to partners or managers who provided at least 10 hours 
of audit services for any issuer during the last calendar year.\37\ In 
addition, as noted above, by excluding from its definition of the term 
``accountant'' persons who are engaged in only clerical or ministerial 
tasks, the Board has further limited the disclosure required in Part 
VII of the Form, as originally proposed.
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    \37\ The Board has used the term ``manager'' in Parts V, VII and 
VIII of the Form because of the term's use in, and familiarity to, 
the accounting profession. The term is intended to capture the 
highest level of supervisory position below the partner level of the 
firm.
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    Further, in light of privacy and confidentiality concerns expressed 
by commenters, the Board has also eliminated the requirement to 
disclose the social security number (or comparable non-U.S. identifier) 
of each accountant listed on the roster.
    Also, at least one commenter requested clarification of the time 
frame for reporting the information required by Part VII. To address 
this concern, the Board has added an instruction to the Form that 
specifies that applicants may submit information as of a date not 
earlier than 90 days prior to the submission of the application and 
that such information will be deemed current for purposes of the Form.

Part VIII--Consents of Applicant

    As required by section 102(b)(3) of the Act, Part VIII of the Form 
requires applicants to furnish, as an exhibit to their applications, 
consents related to the applicant's and its associated persons' 
cooperation and compliance with any request for testimony or the 
production of documents made by the Board. Note 1 to the instruction 
makes clear that the consent and the language in the instruction 
(except for insertion of the applicant's name) must be verbatim. The 
note also specifies that the consents from the applicant's associated 
persons required by paragraph (b) of the Item must be secured by the 
applicant no later than 45 days after submitting the application or, 
for persons who become associated persons of the firm subsequent to the 
submission of the application, at the time of the person's association 
with the firm. The consents must be signed in accordance with Rule 
2104, which, among other things, requires the manually signed version 
of the statement to be retained for seven years.
    Many commenters indicated that compliance with Part VIII, as 
originally proposed, would cause an applicant to violate certain non-
U.S. laws. In response to this concern, the Board has added Rule 2105 
and corresponding instructions in the Form, which allow an applicant to 
withhold information from its application for registration, including 
the firm and associated person consents required by Part VIII, where 
disclosure of the information would cause the applicant to violate non-
U.S. laws.
    Further, to accommodate privacy restrictions related to employment 
in certain non-U.S. jurisdictions, the Board has added Note 3 to this 
Item, which narrows the scope of ``associated persons'' from whom non-
U.S. applicants are required to secure consents. As revised, for non-
U.S. applicants, the term ``associated persons'' as used in this item 
covers only those accountants who are partners or managers and who 
provided at least 10 hours of audit services for any issuer during the 
last calendar year.
    In addition, some commenters noted that Part VIII, as originally 
proposed, did not specify the language to be used in the consents that 
the applicant is required to secure from its associated persons. In 
response to this comment, the Board has added Note 2 to this item, 
which sets forth the exact language to be used in the associated 
persons' consents. Moreover, in response to the suggestion that the 
Board extend the 45-day deadline for securing consents from associated 
persons in order to ease the administrative burden for larger firms, 
the Board has clarified that applicants must secure such consents not 
later than 45 days after submitting their applications. In other words, 
an applicant does not have to wait until its application is submitted 
to the Board to secure such consents, but can begin obtaining these 
consents as soon as possible. Further, many commenters objected to the 
blanket consent used in Part VIII and suggested that the Board amend 
its proposal to include a reservation in the consent form, to only 
require applicants to use their best efforts to secure the associated 
person consents, to clarify that the consent would only apply 
prospectively to

[[Page 35028]]

independent contractors, and/or to limit the consents to cover only 
reasonable, and not simply any, requests by the Board. Section 
102(b)(3) of the Act,\38\ however, specifies the scope and contents of 
the consents, and the Board therefore has decided not to modify this 
item to include these suggested qualifications.\39\ Some commenters 
expressed concern about the amount of work involved in securing, 
gathering and maintaining written consents from each of their 
associated persons in accordance with Rule 2104. While the Board is 
requiring that the applicant's consent and the associated persons' 
consents be manually signed and that such manually signed documents be 
retained for seven years in accordance with Rule 2104, the Board leaves 
it to the individual applicants to determine other details as to how 
such consents will be obtained and maintained internally.
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    \38\ Section 102(b)(3) specifically requires that ``each 
application * * * include * * * a consent executed by the public 
accounting firm to cooperation in and compliance with any request 
for testimony or the production of documents made by the Board * * * 
and an agreement to secure and enforce similar consents from each of 
the associated persons of the public accounting firm as a condition 
of their continued employment by or other association with such 
firm.''
    \39\ While commenters did not identify any state laws that 
conflict with the required consents, one commenter suggested that 
the Board make explicit that the Board's rules, as approved by the 
Commission, requiring the consents would preempt any contrary state 
law. The Board's rules implement Congress' determination in the Act 
that applicants for registration must agree to ``secure and enforce 
[such] consents from each of the associated persons of the public 
accounting firm as a condition of their continued employment by or 
other association with the firm.'' Accordingly, any otherwise 
applicable state or local law that conflicts with this requirement 
or stands as an obstacle to the accomplishment and execution of the 
full purposes and objectives of Congress would be preempted. See 
Crosby v. National Foreign Trade Council, 530 U.S. 363, 372-73 
(2000); City of New York v. FCC, 486 U.S. 57, 64 (1988).
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Part IX--Signature of Applicant

    Part IX requires an authorized partner or officer of the applicant 
to sign the application in accordance with Rule 2104 and to certify the 
application's completeness and accuracy. Incomplete and inaccurate 
applications are subject to possible disapproval under Rule 2106(b)(2).

Part X--Exhibits

    Part X lists the exhibits that must accompany the application and 
includes instructions on the format for exhibits with multiple pages. 
The nature of each exhibit is described in the corresponding items, 
Rule 2105 or Rule 2300.
2. Statutory Basis
    The statutory basis for the proposed rules is Title I of the Act.

B. Board's Statement on Burden on Competition

    The Board does not believe that the proposed rules will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. Under the proposed rules, all 
public accounting firms must register with the Board if they wish to 
prepare or issue audit reports on issuers, as that term is defined in 
the Act and the Board's rules, or to play a substantial role in the 
preparation or issuance of such reports. In general, the information 
required to complete the Board's registration application is 
specifically required to be a part of those applications by section 
102(b) of the Act. To the extent that Form 1 calls for information in 
addition to that specified in section 102(b), the additional 
information is closely related to the statutory minimum requirements, 
and is, in the Board's judgment, either necessary to facilitate the 
Board's responsibilities or reasonably related to the determination 
that the Board will make in deciding whether to approve or disapprove 
an application.
    Moreover, to the extent permissible under the Act and consistent 
with the Board's responsibilities, the Board has sought to base the 
contents of the application on information public accounting firms 
currently collect, in part to avoid imposing any undue burden on 
applicants that could have a disproportionate effect on smaller public 
accounting firms. In addition, the proposed rules provide a mechanism 
for applicants to seek confidential treatment of any proprietary 
information included in their application that should not be publicly 
available. The Board has also allowed public accounting firms that do 
not currently prepare or issue audit reports, or play a substantial 
role in the preparation or issuance of audit reports, but that wish to 
enter this business, to register with the Board. Further, the Board has 
announced that registration fees will vary based on the size of the 
applicant and the number of its issuer audit clients.
    Several commenters suggested that requiring foreign public 
accounting firms to register with the Board could discourage smaller 
foreign public accounting firms, and foreign public accounting firms 
that are not affiliated with large international networks of firms, 
from auditing issuers. The Board has given careful consideration to the 
impact of its registration rules on non-U.S. firms and has taken a 
number of steps to minimize any such effect. In particular, as 
described in Section II.A above, the Board has crafted certain changes 
to its original proposal to minimize, where permissible under the 
statute and consistent with the Board's responsibilities, the burdens 
on foreign public accounting firms applying for registration. Given 
these modifications, the Board believes that the cost and effort for 
smaller firms to register with the Board will not be significantly 
disproportionate to that for larger firms,\40\ and therefore would not 
have a significant impact on competition. Moreover, the Board believes 
that the 180-day deferral of registration for non-U.S. firms should 
also minimize the administrative burden for smaller non-U.S. firms, 
also diminishing any anti-competitive effect.
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    \40\ In general, under the Board's registration system, non-
affiliated foreign public accounting firms will be required to 
respond to the same information requests as affiliated foreign 
public accounting firms applying for registration. Because much of 
the information requested in Form 1 is focused on the applicant's 
practice of auditing ``issuers,'' as that term is defined in the Act 
and the Board's rules, foreign public accounting firms with more 
issuer audit clients will necessarily be requested to provide more 
information to apply for registration than foreign public accounting 
firms with smaller practices auditing issuers.
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C. Board's Statement on Comments on the Proposed Rules Received From 
Members, Participants or Others

    The Board released its registration system proposal for public 
comment on March 7, 2003. The Board received 46 written comment letters 
relating to its proposal. In addition, on March 31, 2003, the Board 
convened a public roundtable to discuss special issues raised by 
registration and oversight of non-U.S. firms, at which 14 
representatives of foreign governments, non-U.S. public accounting 
firms and professional organizations, and U.S. institutional investors 
participated.\41\
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    \41\ The following governments, firms and organizations 
participated in the public roundtable meeting: European Commission; 
U.K. Department of Trade and Industry; Embassy of Switzerland; 
Embassy of Australia; Financial Services Agency (Japan); Canadian 
Public Accountability Board; Wirtschaftspruferkammer (German Chamber 
of Accountants); F[eacute]d[eacute]ration des Experts Comptables 
(FEE); Ernst & Young (Brussels, Belgium); PricewaterhouseCoopers 
(Toronto, Canada); Deloitte Touche Tohmatsu (Santiago, Chile); KPMG 
(London); Pennsylvania Public Employees' Retirement System; and the 
State of Wisconsin Investment Board.
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    The Board has carefully considered all comments it has received. In 
response to the written comments received and remarks made at the 
roundtable, the Board has clarified and modified certain aspects of its 
proposed

[[Page 35029]]

rules and form instructions. The changes made to the proposed rules and 
form instructions in response to these comments are summarized in 
Section II.A.1. above.
    In addition, under section 106(c) of the Act, the Board and the 
Commission each have the authority to ``exempt any foreign public 
accounting firm'' from any provision of the Act as ``necessary or 
appropriate in the public interest or for the protection of 
investors.'' The Board received numerous comments in letters from 
public accounting firms, foreign governments and foreign professional 
accounting associations, requesting such exemptions from the Board's 
registration requirements, as well as its inspections and disciplinary 
programs.\42\
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    \42\ The Board also received comment letters against such 
exemptions, for example on the grounds that ``[i]ncluding foreign 
auditors under the purview of the new Public Company Accounting 
Oversight Board would, thus, add a much-needed element of auditor 
oversight for firms reviewing corporations trading in U.S. 
markets.'' See Letter from Senator Carl Levin dated March 21, 2003 
(in PCAOB Docket No. 1 public file).
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    Some commenters expressed concerns about registration of non-U.S. 
public accounting firms, including that the Board's registration of 
non-U.S. public accounting firms (1) would be duplicative of existing 
or planned home-country auditor oversight programs, (2) would require 
information, the disclosure of which would violate foreign laws on 
confidentiality, data protection and privacy, (3) would require 
information that does not have clear equivalents in non-U.S. 
jurisdictions, (4) would require accumulation of information not 
already compiled and not readily available, and (5) would lessen 
competition among public accounting firms by discouraging some firms 
from registering.
    In response to the concern that registration of non-U.S. public 
accounting firms would be duplicative of existing or planned auditor 
oversight programs, as an initial step, the Board sought, as part of 
its roundtable meeting, to gather information about existing or planned 
oversight bodies outside the United States. The Board has also 
commenced dialogue with non-U.S. oversight bodies in order to achieve 
its objectives generally, as well as to try to find ways to reduce 
administrative burdens and to provide for coordination in areas where 
there is a common programmatic interest, such as annual reporting, 
inspection and discipline.
    Many commenters suggested that registration of non-U.S. firms would 
require information, the disclosure of which would violate non-U.S. 
laws, particularly those related to confidentiality, data protection 
and privacy. In response to this concern, the Board added Rule 2105 and 
corresponding instructions in Form 1, which allow applicants to 
withhold information from its application for registration where 
disclosure of the information would cause the applicant to violate non-
U.S. laws. Also, in order to allow firms time to give full 
consideration to the potential conflict of law issues, the Board has 
afforded non-U.S. firms an additional 180 days to register.
    Furthermore, in light of concerns with respect to conflicts with 
confidentiality, data protection, and privacy laws, the Board has 
eliminated or narrowed the scope of information required by Form 1, as 
originally proposed. Specifically, any requirements to provide Social 
Security numbers, taxpayer numbers, and comparable non-U.S. tax 
identifiers have been eliminated. In part to address concerns with 
respect to the confidentiality of information on criminal, civil and 
administrative proceedings in Part V, the Board has significantly 
narrowed the disclosure required for non-U.S. applicants. Also, the 
list of accountants associated with a non-U.S. firm has been narrowed. 
In particular, as revised, Form 1 requires non-U.S. accounting firms to 
list only those accountants who are proprietors, partners, principals, 
shareholders, officers or managers of the applicant and who each 
provide at least 10 hours of audit services for any issuer during the 
last calendar year. Finally, to accommodate privacy restrictions 
related to employment in certain non-U.S. jurisdictions, the scope of 
``associated persons'' from whom the applicant is required to secure 
consents has been narrowed to cover only those accountants identified 
on the list of accountants. As discussed above, to the extent that a 
non-U.S. law would prohibit disclosure of information that is still 
required, new Rule 2105 permits a firm to withhold the information and 
submit instead (i) a copy of the conflicting non-U.S. law, in English, 
(ii) a legal opinion that submitting the information would cause the 
applicant to violate the conflicting non-U.S. law, and (iii) an 
explanation of the applicant's efforts to seek consents or waivers to 
eliminate the conflict, if the withheld information could be provided 
to the Board with a consent or a waiver, and a representation that the 
applicant was unable to obtain such consents or waivers to eliminate 
the conflict.
    The Board has eliminated or modified certain disclosure 
requirements where determining a non-U.S. equivalent may be 
particularly burdensome, in an effort to address concerns that 
registration would require information that does not have clear 
equivalents in non-U.S. jurisdictions. For example, in response to a 
comment that the term ``undergraduate degree'' was not meaningful in a 
non-U.S. context, the Board revised the educational reference in its 
originally proposed definition of accountant to ``a college, university 
or higher professional degree.'' The Board has also eliminated the 
requirement from its original proposal to disclose a ``violation of a 
substantially equivalent non-U.S. statute'' to certain provisions of 
the United States Code.
    In response to concerns that registration of non-U.S. firms would 
require accumulation of information not already compiled and not 
readily available, the Board has allowed an additional 180 days for 
firms to compile information and to obtain any necessary consents or 
waivers from associated persons to provide the information requested by 
the form. Further, the Board has significantly modified and in some 
cases eliminated disclosure requirements, the information for which 
commenters noted, would be burdensome to gather. For example, Part III 
of Form 1, which as proposed required disclosure of information on firm 
revenues, has been eliminated. Moreover, with respect to Part II in 
Form 1, the Board has modified the disclosure categories for audit, 
non-audit, and other accounting services to track more closely those 
used by the Commission. As a practical matter, at the time when non-
U.S. firms are required to be registered with the Board (i.e., by April 
19, 2004), the disclosure categories in effect will be those used in 
the Commission's recently revised auditor independence disclosure 
rules, with which foreign private issuers will be required to comply 
for periodic annual reports filed after December 15, 2003.
    In addition, the Board has tried to facilitate the reporting in 
Part II by allowing applicants to use estimates to the extent that such 
information has not been previously disclosed or is not known. Finally, 
in an effort to minimize the administrative burden of compiling 
information for the registration process, the requirements in Form 1 to 
provide accountant names and license numbers, consents to cooperate 
with Board inspections and investigations, and information about 
certain legal proceedings, as applied to non-U.S. firms, have been 
significantly narrowed to include only partners and managers who 
participate in or contribute to the preparation of audit reports for 
issuers.

[[Page 35030]]

    Several commenters raised concerns that registration of non-U.S. 
firms would lessen competition among public accounting firms by 
discouraging some firms from registering. As described above, the Board 
has eliminated and modified many of the disclosure requirements 
originally proposed. Given these modifications, the Board believes that 
the cost and effort for smaller firms to register with the Board will 
not be significantly disproportionate to that for larger firms and 
therefore would not have a significant impact on competition. Moreover, 
the Board believes that the 180-day deferral of registration for non-
U.S. firms should also minimize the administrative burden for smaller 
non-U.S. firms, also diminishing any anti-competitive effect.
    While the Board believes that it must require registration of non-
U.S. firms, it also recognizes that it must be flexible about how 
registration operates in the case of those firms and that it may not be 
practical to treat foreign accounting firms as if they were, for 
purposes of the Board's regulation, in all respects the same as U.S.-
based firms. The Board is prepared to work with its foreign 
counterparts to find ways to accomplish the goals of the Act without 
subjecting foreign firms to unnecessary burdens or conflicting 
requirements. Where possible, the Board will seek to build compliance 
with its requirements on compliance with foreign regulatory regimes. 
The proposed 180-day deferral of foreign firm registration will afford 
the Board the opportunity to explore ways of accomplishing that goal 
with non-U.S. accounting oversight bodies.
    In addition, the nature of the oversight to be exercised over 
registered foreign public accounting firms is a matter the Board has 
yet to resolve. The Board is aware that several countries have adopted 
or proposed corporate reforms that include new regulatory oversight of 
the auditing profession, and many countries have already adopted or 
planned programs to register, inspect and discipline accounting firms 
that prepare and issue audit reports for filing in those respective 
jurisdictions. The Board expects that the various reforms being 
considered in other jurisdictions will continue to improve the quality 
of audit reports prepared by firms worldwide. In this regard, the Board 
has already commenced dialogue with other oversight bodies outside the 
United States in order to achieve its objectives generally, as well as 
to try to find ways to reduce administrative burdens and to provide for 
coordination in areas where there is a common programmatic interest, 
such as annual reporting, inspection, and discipline.

III. Date of Effectiveness of the Proposed Rules and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the Board consents, the Commission will:
    (A) By order approve such proposed rules; or
    (B) Institute proceedings to determine whether the proposed rules 
should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed 
rules are consistent with the Act or as necessary or appropriate in the 
public interest or for the protection of investors. Persons making 
written submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rules that are filed 
with the Commission, and all written communications relating to the 
proposed rules 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 Room. Copies of such filings will also be 
available for inspection and copying at the principal office of the 
PCAOB. All submissions should refer to File No. PCAOB-2003-03 and 
should be submitted by July 2, 2003.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-14715 Filed 6-10-03; 8:45 am]
BILLING CODE 8010-01-P