[Federal Register Volume 68, Number 139 (Monday, July 21, 2003)]
[Notices]
[Pages 43242-43244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-18497]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48180; File No. PCAOB-2003-03]


Public Company Accounting Oversight Board; Order Approving 
Proposed Rules Relating to Registration System

July 16, 2003.

I. Introduction

    On May 8, 2003, the Public Company Accounting Oversight Board 
(``Board'' or ``PCAOB'') filed with the Securities and Exchange 
Commission (``Commission'') proposed rules PCAOB-2003-03 pursuant to 
Section 107(b) of the Sarbanes-Oxley Act of 2002 (``Act''). Notice of 
the proposal was published in the Federal Register on June 11, 2003.\1\ 
The Commission received sixteen comment letters. For the reasons 
discussed below, the Commission is granting approval of the proposed 
rules.
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    \1\ Securities Exchange Act Release No. 47990 (June 5, 2003); 68 
FR 35016 (June 11, 2003).
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II. Description

    Section 102 of the Act prohibits any person that is not a 
registered public accounting firm from preparing or issuing an audit 
report with respect to any ``issuer,'' as that term is defined in the 
Act, or from participating in preparation or issuance of any such 
report. In order to enable public accounting firms to comply with this 
registration requirement, the Board has proposed rules to establish a 
registration system. The registration system consists of eight rules 
(PCAOB Rules 2100 through 2106, and 2300), as well as definitions that 
would appear in Rule 1001, and a registration form (PCAOB Form 1).
    Under the Act, the registration requirement is effective 180 days 
after the date on which the Commission makes its determination under 
101(d) of the Act that the Board is capable of carrying out its 
responsibilities under the Act. The Commission made this determination 
on April 25, 2003, which means that domestic public accounting firms 
that wish to prepare or issue, or participate in the preparation or 
issuance of, audit reports with respect to any issuer must register 
with the Board by October 22, 2003.\2\
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    \2\ As discussed below, the Board's proposal would give foreign 
public accounting firms an additional 180 days (i.e., until April 
19, 2004) to register.
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    The proposed registration form requires disclosure of information 
concerning the applicant and its associated accountants, and about the 
applicant's audit clients that file reports with the Commission. 
Applicants must pay a fee to cover the costs of processing and 
reviewing registration applications, the amount of which will be 
announced by the Board prior to commencing acceptance of registration 
applications. Within 45 days of receiving an application, the Board 
must (1) approve the application, (2) issue a written notice of a 
hearing, or (3) request more information from the prospective 
registrant.
    Although the Board has authority under the Act to exempt, with the 
approval of the Commission, non-U.S. public accounting firms, in whole 
or in part, from any of the Board's requirements under the Act, the 
Board decided that its proposed registration rules would apply to non-
U.S. public accounting firms that prepare or furnish audit reports with 
respect to ``issuers'' or that play a substantial role in the 
preparation or furnishing of these reports. In response to concerns 
expressed by foreign regulators, accounting firms and others about the 
impact of the Board's proposed rules on non-U.S. accounting firms, the 
Board made several accommodations prior to submitting its proposed 
rules to the Commission.
    These accommodations include (1) reducing the scope of information 
required by the registration form, (2) allowing firms to withhold 
certain information on the form if they can demonstrate that providing 
the information would conflict with non-U.S. law (by providing an 
English copy of the non-U.S. law, a legal opinion that submitting the 
information would violate the law, and an explanation of the 
applicant's efforts to seek consents or waivers to eliminate the 
conflict), and (3) allowing non-U.S. firms an additional six months to 
register with the PCAOB.\3\
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    \3\ The Board held a public roundtable meeting on March 31, 
2003, at which various foreign regulators, accounting firms, and 
professional organizations, as well as representatives of U.S. 
institutional investors, discussed the ramifications of the 
registration of non-U.S. accounting firms.
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    Pursuant to the Act, registered public accounting firms must file 
annual reports with the Board and are subject to the Board's oversight 
through its inspection, investigation and

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disciplinary programs. The proposed rules that are approved by this 
order address only the Board's registration requirements for public 
accounting firms, and do not address the reporting or other 
requirements that will be imposed on registered firms or the manner in 
which the Board will exercise its oversight authority under the Act.

III. Summary of Comment Letters

    The Commission received sixteen comment letters regarding the 
proposed registration system. Eight of these letters were from foreign 
governments and professional groups, and their comments related 
primarily to the impact of the proposal on non-U.S. accounting 
firms.\4\ Seven of the letters were from major accounting firms and the 
SEC Practice Section of the American Institute of Certified Public 
Accountants (``AICPA/SECPS'').\5\ and one letter was from the National 
Association of State Boards of Accountancy (``NASBA'')
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    \4\ Letters in this group were submitted by the European 
Commission, the European Federation of Accountants, the Financial 
Services Agency of Japan, the Institute of Chartered Accountants in 
England and Wales, the Instut der Wirtschaftspr[uuml]fer and the 
Wirtschaftspr[uuml]ferkammer (jointly), the Japanese Institute of 
Certified Public Accounts, the Swiss State Secretariat for Economic 
Affairs, and the Swiss Institute of Certified Public Accountants and 
Tax Consultants.
    \5\ In addition to the letter submitted by the AICPA/SECPS, 
letters in this group were submitted by BDO Seidman LLP, Deloitte & 
Touche LLP, Ernst & Young LLP, Grant Thorton LLP, KPMG and 
PricewaterhouseCoopers.
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    Most of the letters from foreign governments and professional 
groups commended the Board on its accommodations for non-U.S. 
accounting firms, although they continued to express a desire for 
complete exemption from registration and oversight by the PCAOB. Most 
commenters in this group were of the view that registration in the 
United States would be costly, duplicative and burdensome. They 
expressed concern about the scope of the information requested in the 
registration form, about their perception that some of the information 
requested (e.g., general consents to cooperate with Board requests for 
information) went beyond registration and into the realm of oversight, 
and about their perception of the burden on small firms of complying 
with the proposal and the resulting risk of further consolidation in 
the accounting profession. Several of these commenters expressed 
concern about the confidentiality of information submitted to the 
Board. Many commenters in this group requested that the registration 
requirement be delayed, both to permit firms to complete their 
registration applications and to give the Board's foreign counterparts 
time to develop or enhance their own registration and oversight regimes 
and agree with the Board on ways to reduce the need for PCAOB 
registration and oversight.
    The letters from the AICPA/SECPS and the six largest accounting 
firms operating in the United States raised concerns about the scope of 
information requested by the PCAOB's proposed registration form and 
requested clarification of several issues. Among other things, the 
commenters in this group expressed concern about the confidentiality of 
information submitted to the Board, the scope of certain definitions 
such as ``associated person'' and ``associated entity,'' the manner of 
obtaining the Board's proposed relief from submitting information that 
would violate non-U.S. law, and the differences in SEC and Board 
requirements for fee disclosure. Several of the commenters in this 
group noted that the Board's broad requirement that applicants consent 
to cooperate with any request of the Board for testimony or documents 
should be subject to established privileges, such as the attorney-
client privilege, and constitutional protections against self-
incrimination. Commenters also objected to the Board's request for 
information about legal proceedings, particularly criminal proceedings, 
which were not related to audits. Many of the commenters in this group 
suggested that the Board and the Commission permit ``provisional'' 
registration in order to avoid disruption in the delivery of audit 
services. These commenters expressed concern that even if applicants 
make a good faith effort to comply, they might not be able to obtain 
all required information (or respond to Board requests for supplemental 
information) by the October 22, 2003 deadline, and that the Board may 
have difficulty in processing information by that date, even if it is 
submitted in time.
    The NASBA letter requested that the Board cooperate with state 
boards of accountancy in their regulatory role, and suggested several 
ways in which the Board and the Commission might support state 
regulatory bodies.

IV. Discussion

    Title I of the Act assigns the Board the formidable task of 
designing and implementing a registration and oversight system within a 
relatively short period of time. The investor protection goals of the 
Act justify the need for prompt action, but the importance of the 
Board's task and its potential impact on the public securities markets 
demand that it be undertaken in a thoughtful and reasoned manner. After 
careful review of the Board's proposed registration system, the 
Commission finds that it is consistent with the requirements of the Act 
and the securities laws and is necessary and appropriate in the public 
interest and for the protection of investors.\6\
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    \6\ Section 107(b)(3) of the Act.
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A. Impact on Non-U.S. Accounting Firms

    The Board has taken an important step in its mandate under the Act 
by proposing rules regarding registration of non-U.S. audit firms that 
prepare, issue, or play a substantial role in the preparation or 
issuance of, audit reports relating to U.S. public companies. This step 
has raised concerns in the international community, and the Board has 
made efforts to address those concerns, through its roundtable meeting 
in March, through its public comment process and through meetings and 
discussions with foreign regulators. In response to these concerns, the 
Board made significant accommodations in its proposal, especially with 
regard to non-U.S. accounting firms, including changes eliminating the 
potential conflicts of law raised by the registration system, narrowing 
the scope of information to be provided, and extending the deadline for 
foreign firms to register. This approach is similar to the approach the 
Commission has taken in implementing other provisions of the Act, by 
allowing for certain accommodations.
    The Board has acknowledge that it is still considering the nature 
of its oversight, especially with respect to foreign public accounting 
firms. The Commission encourages the Board to continue its reasoned 
approach when considering its oversight role, especially with respect 
to non-U.S. firms. In this regard, we applaud the Board's initiative 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.
    We urge the Board to continue its dialogue with oversight bodies 
outside the United States in order to try to find ways to reduce 
administrative burdens and coordinate in areas of common programmatic 
interest, such as annual reporting, inspections and discipline. We 
encourage the Board to move expeditiously to determine the nature and 
scope of its oversight over foreign public accounting firms. The

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Commission is cognizant that many countries have embarked on ambitious 
reforms with respect to auditor oversight, and that the International 
Organization of Securities Commissions has issued a statement noting 
the basics of robust and effective oversight. Given these developments, 
we are confident that the Board and its foreign counterparts will make 
progress in developing workable cooperative arrangements.

B. Other Aspects of the Registration System

    Many of the comment letters submitted by accounting firms and 
professional groups related to specific aspects of the registration 
form. A continuing theme of many of the comment letters was the desire 
for clarification of certain definitions, rules and registration form 
line items. It is not surprising that first-time users of a 
registration form and those seeking to work through a complex 
registration system would find areas of ambiguity. We believe that some 
of the issues raised by commenters in this group can be addressed by 
the PCAOB through formal or informal interpretations and 
clarifications, and, in this connection, we understand that the Board 
is considering the publication of ``Frequently Asked Questions'' and 
responses. We encourage the Board to use this and other means to assist 
applicants in complying with the registration rules. We also encourage 
the Board to review the registration form after the Board has gained 
more experience with the registration process, to determine whether 
amendments to the form can be made to make the registration process 
more efficient.
    Finally, with respect to the comments submitted by NASBA, we 
appreciate the efforts of that organization and its members to work 
with the PCAOB on the important task of auditor regulation and 
oversight. We believe that both the Board and state regulatory bodies 
will benefit from continued close cooperation.

V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rules are consistent with the requirements of the Act and the 
securities laws and are necessary and appropriate in the public 
interest and for the protection of investors.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Securities Exchange Act of 1934, that the proposed rules (File No. 
PCAOB-2002-03) be and hereby are approved.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-18497 Filed 7-18-03; 8:45 am]
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