[Federal Register Volume 68, Number 152 (Thursday, August 7, 2003)]
[Notices]
[Pages 47111-47113]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20134]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48278; File No. PCAOB-2003-02]


Public Company Accounting Oversight Board; Order Approving 
Proposed Rules on Funding and Notice of Filing and Order Granting 
Accelerated Approval of Amendment No. 1 to the Proposed Rules on 
Funding

August 1, 2003.

I. Introduction

    On April 17, 2003, the Public Company Accounting Oversight Board 
(``Board'' or ``PCAOB'') filed with the Securities and Exchange 
Commission (``Commission'') proposed rules PCAOB-2003-02 pursuant to 
sections 107 and 109 of the Sarbanes-Oxley Act of 2002 (``Act''). 
Notice of the proposed rules was published in the Federal Register on 
June 27, 2003.\1\ The Commission received five 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. 48075 (June 23, 2003); 
68 FR 38406 (June 27, 2003).
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    On July 30, 2003, the PCAOB adopted Amendment No. 1 to its proposed 
rules and submitted that amendment to the Commission.\2\ We find there 
is good cause to approve this amendment prior to the thirtieth day 
after publication in the Federal Register and, for the reasons 
discussed below, we are approving the amendment.
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    \2\ Amendment No. 1 was delivered to the Commission's Office of 
the Secretary on July 30, 2003.
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II. Description

    In accordance with the Act,\3\ the PCAOB has adopted proposed rules 
\4\ that would establish a mechanism to fund the operations of the 
PCAOB with an annual accounting support fee to be collected from 
issuers.\5\ Under sections 107 and 109 of the Act, such rules are 
subject to the approval of the Commission. In addition, section 109(h) 
of the Act amends Section 13(b)(2) of the Securities Exchange Act of 
1934 (``Exchange Act'') to require issuers to pay the allocable share 
of a reasonable annual accounting support fee or fees, determined in 
accordance with Section 109 of the Act.
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    \3\ See, e.g., Section 109(d) of the Act.
    \4\ PCAOB Rules 7100 through 7104.
    \5\ The term ``issuer'' is defined in section 2(a)(7) of the Act 
to mean ``an issuer (as defined in section 3 of the Securities 
Exchange Act of 1934 (15 U.S.C. 78(c)), the securities of which are 
registered under section 12 of that Act (15 U.S.C. 78l), or that is 
required to file reports under section 15(d) (15 U.S.C. 78o(d)), or 
that files or has filed a registration statement that has not yet 
become effective under the Securities Act of 1933 (15 U.S.C. 77a et 
seq.), and that it has not withdrawn.''
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    The following is a brief summary of certain key provisions 
contained in the proposed funding rules.
    Proposed PCAOB Rule 7100 provides, among other things, that the 
annual accounting support fee shall equal the approved budget of the 
Board, less the sum of all registration fees and annual fees collected 
during the preceding year from registered public accounting firms.
    Proposed PCAOB Rule 7101 provides for the accounting support fee to 
be allocated to four classes of issuers, two of which are: (1) 
Publicly-traded companies with average, monthly U.S. equity market 
capitalizations \6\ during the preceding year, based on all classes of 
common stock, of greater than $25 million, and (2) investment companies 
with average, monthly U.S. equity market capitalizations (or net asset 
values) of greater than $250 million.\7\ In recognition of the 
structure of investment companies and the relatively less-complex 
nature of investment company audits (as compared to operating company 
audits), investment companies would be assessed at a lower rate than 
operating companies. Other classes of issuers would be allocated shares 
of zero.\8\
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    \6\ Rule 1001(i)(i) defines ``issuer market capitalization'' to 
include only the aggregate market value of securities traded in the 
United States, whether those securities are issued by entities based 
in the United States or elsewhere. The definition excludes the 
market value of securities traded outside the United States.
    \7\ This class would include both registered investment 
companies and issuers that have elected to be regulated as business 
development companies pursuant to Section 54 of the Investment 
Company Act of 1940 (``Investment Company Act''). In the case of an 
investment company with multiple series of funds, the average, 
monthly U.S. equity market capitalization, or net asset value, of 
each series would be measured against the $250 million threshold 
separately.
    \8\ For example, an issuer would be allocated a share of zero 
if: its average, monthly U.S. equity market capitalization during 
the preceding year is less than $25 million (or, in the case of 
investment companies, of less than $250 million), its only 
outstanding public securities are debt securities, or its share 
price (or net asset value) on a monthly, or more frequent, basis is 
not publicly available. Other issuers that would be allocated shares 
of zero include: (1) Those that are not required to file audited 
financial statements with the Commission, (2) employee stock 
purchase, savings and similar plans, and (3) bankrupt issuers that 
file modified reports.
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    Proposed PCAOB Rule 7102 governs the assessment of the Board's 
accounting support fee. Shares of the accounting support fee would be 
rounded to the nearest $100.
    Proposed PCAOB Rule 7103 governs the collection of the accounting 
support fee. The fee would be due 30 days after notice is sent. 
Interest would accrue at 6 percent per annum commencing on the 31st day 
after the notice is sent. The proposed rule also provides that no 
registered public accounting firm may sign an unqualified opinion \9\ 
with respect to an issuer's financial statements, or issue a consent to 
include an audit opinion issued previously, unless the auditor has 
ascertained that the issuer has no past due fees payable to the 
Board.\10\ In addition, the Commission notes that failure to pay the 
accounting support fee would be a violation of section 13(b)(2)(C) of 
the Exchange Act.
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    \9\ ``An unqualified opinion states that the financial 
statements present fairly, in all material respects, the financial 
position, results of operations, and cash flows of the entity in 
conformity with generally accepted accounting principles.'' AICPA, 
Statements on Auditing Standards (``SAS'') No. 58, Codification of 
Statements on Auditing Standards (``AU'') 508.10.
    \10\ See Accelerated Approval of Amendment No. 1, infra.
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    Proposed PCAOB Rule 7104 provides that if the accounting standard 
setting body recognized by the Commission under Section 108(b)(1)(B) of 
the Act \11\

[[Page 47112]]

designates the PCAOB as the collection agent for that body's support 
fee then the PCAOB's collection and assessment rules (PCAOB proposed 
rules 7102 and 7103) would apply to that accounting standard setting 
body's support fee. Proposed rule 7104 states that the PCAOB, however, 
would not be responsible for calculating the standard setting body's 
support fee or the allocation of such fee among issuers.
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    \11\ The Commission has designated the Financial Accounting 
Standards Board (``FASB'') as an accounting standard setting body 
under section 108. See Financial Reporting Release No. 70 (April 25, 
2003) (68 FR 23333 (May 1, 2003)). The Financial Accounting 
Foundation (``FAF''), which is the board of trustees that provides 
administrative and operational functions for the FASB in accordance 
with section 19(b)(1)(A)(ii) of the Securities Act of 1933, 15 
U.S.C. 77s(b)(1)(A)(ii), has informed the Commission that it intends 
to appoint the PCAOB as its collection agent and to utilize the 
formula in PCAOB rule 7101 as the allocation to be used for the FASB 
support fee. See letter dated June 11, 2003 from Joseph S. 
LaGambina, Executive Vice President, FAF, addressed to Mr. Scott 
Taub, Deputy Chief Accountant.
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III. Discussion of Comment Letters

    The Commission received five comment letters regarding the PCAOB's 
proposed rules on the support fee. One letter was from the Investment 
Company Institute, one letter was from a financial services 
company,\12\ one was from the Federation of German Industries, and two 
letters were from accounting firms.\13\
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    \12\ Letter from Nationwide Financial Services, Inc.
    \13\ See letters from KPMG LLP and Deloitte & Touche LLP.
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    The Investment Company Institute (``ICI'') expressed concern that 
the funding rules would cause issuers of variable insurance contracts 
to pay twice the amount of support fees charged to other types of 
investment companies. Variable contracts are typically issued by an 
investment company that invests its assets in one or more other 
underlying investment companies, and the ICI noted that, under the 
proposed rules, both the variable contract issuer and the underlying 
investment company would pay a support fee.\14\ While we appreciate the 
ICI's concerns, we note that the financial statements of both 
investment companies must be audited, and that the PCAOB would oversee 
both audits. Further, we note that under the proposed rules investment 
companies already are assessed at a lower rate than other issuers. 
Accordingly, we believe that the PCAOB rule is reasonable in this 
regard.
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    \14\ Nationwide Financial Services, Inc., expressed similar 
concerns.
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    The ICI also requests additional advice on how the rules apply to 
``master-feeder fund arrangements'' where feeder funds sell shares to 
the public and then use the proceeds to purchase shares of a master 
fund, which are offered in private placements. We encourage the PCAOB 
to consider whether additional guidance is appropriate.
    The Federation of German Industries noted, among other things, that 
many foreign private issuers are not required to disclose the number of 
shares outstanding in the United States in their periodic reports filed 
with the Commission but that such information should be available from 
applicable stock exchanges in the United States.\15\
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    \15\ The number of shares traded in the United States is a 
necessary component of the fee calculation under the PCAOB's 
proposed rules. See PCAOB rules 1001(i)(i) and 7101.
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    The comment letters from the accounting firms noted concerns and 
requested guidance regarding, among other things, PCAOB proposed rule 
7103(b), which provides that auditors may not sign an unqualified audit 
opinion with respect to an issuer's financial statements, or issue a 
consent to the use of a previously issued audit opinion, unless the 
registered public accounting firm has ascertained that the issuer 
either has no outstanding past-due share of the accounting support fee 
or has a pending petition for correction of the fee.
    One accounting firm also indicated that proposed rule 7103(b) was 
unnecessary given other incentives on issuers to pay the fee, was 
counter to the policy of encouraging the issuance of timely audit 
reports, was inappropriate in that the PCAOB was in a better position 
than the auditor to ascertain if payment had been made, and placed an 
inappropriate burden on auditors.\16\ We observe, however, that a Note 
to proposed rule 7103 states that auditors may ascertain that no past-
due fee is outstanding by obtaining a representation from the issuer or 
a confirmation from the PCAOB. Auditors routinely obtain 
representations from management and seek confirmations from outside 
sources as part of their audit processes. Further, because the 
limitation in proposed rule 7103 pertains only to the issuance of 
unqualified audit opinions and consents, the rule would not prevent an 
auditor from signing a qualified or adverse audit opinion regardless of 
whether the issuer has paid its portion of the support fee. \17\ As 
discussed below, the PCAOB has adopted an amendment to this provision.
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    \16\ Letter from Deloitte & Touche LLP.
    \17\ Under the PCAOB's proposed rules, an issuer may not delay 
publication of a qualified or adverse audit report simply by not 
paying its portion of the support fee.
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IV. Accelerated Approval of Amendment No. 1; Solicitation of Comments

    Amendment No. 1 to the proposed rule change would provide that the 
auditor of an issuer's financial statements may sign an unqualified 
audit opinion with respect to the issuer's financial statements, or 
issue a consent to the use of previously issued auditor opinions, even 
if the issuer has outstanding a past-due share of the accounting 
support fee and has not filed a petition for correction of that fee, if 
the issuer needs the auditor opinion or consent in order to submit a 
report to, or make a filing with, the Commission. Under the amendment, 
the issuer would submit to the PCAOB a notice of the signing of the 
audit opinion or issuance of the consent not later than one business 
day after the related filing is made with the Commission. This 
exception would not continue longer than 15 business days after the 
earlier of the submission of the notice to the PCAOB or the filing of 
the report or registration statement with the Commission, and may not 
be invoked for more than one such 15-business day period with respect 
to any share of the accounting support fee that the issuer is assessed 
under rule 7102.
    We find good cause to approve Amendment No. 1 to the proposed rule 
prior to the thirtieth day after the date of publication of notice of 
filing Amendment No. 1 in the Federal Register. The original proposed 
rules, as noted above, were published in the Federal Register. We 
believe that Amendment No. 1 refines the rules and facilitates capital 
formation by assuring that an issuer, due to the inability to obtain an 
unqualified audit report or auditor consent, would not be denied access 
to the capital markets due to an inadvertent issue with respect to 
payment of the support fee. Amendment No. 1 also clarifies the 
obligations of auditors when an issuer or the auditor, upon the eve of 
a report or registration statement being filed with the Commission, 
becomes aware that the issuer has not paid or sought correction of a 
support fee. Amendment No. 1 does not contain major modifications from 
the scope and purpose of the rules as originally proposed, and was 
developed from the original proposal. We believe, moreover, that 
approving Amendment No. 1 will provide greater clarity and facilitate 
capital formation, thus furthering the public interest and the investor 
protection goals of the Act and of the securities laws. Finally, we 
also

[[Page 47113]]

find that it is in the public interest to approve the rules as soon as 
possible to expedite the implementation of the proposed rules.
    Accordingly, we believe good cause exists, consistent with sections 
107 and 109 of the Act, and Section 19(b) of the Exchange Act, to 
approve Amendment No. 1 to the proposed rules on an accelerated basis.
    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether the amendments 
are consistent with the Act and the securities laws or are 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 
amendments that are filed with the Commission, and all written 
communications relating to the amendments 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 at the Commission's Public Reference Room.
    All submissions should refer to File No. PCAOB-2003-02 and should 
be submitted by September 8, 2003.

V. Conclusion

    Title I of the Act assigns to the PCAOB the task of designing and 
implementing registration, standard-setting, inspection, and 
disciplinary systems that promote the preparation of accurate, 
informative and independent audit reports. To fulfill these functions, 
the PCAOB must have a reliable source of funds and rules that provide 
for the allocation, assessment, and collection of fees in an equitable 
manner in accordance with section 109(d) of the Act.
    Congress, in enacting section 109, required that the recoverable 
budget expenses of the PCAOB and the accounting standard setting body 
be payable through accounting support fees assessed on issuers. 
Congress also set forth the basic formula for calculating the support 
fees based on issuers' relative market capitalizations.
    The PCAOB is charged under section 109 to adopt rules, subject to 
the Commission's approval, that establish a reasonable annual 
accounting support fee (or a formula for the computation thereof) as 
may be necessary or appropriate to establish and maintain the Board, 
and provide for the equitable allocation and assessment of the support 
fees among, and collection of the support fees from, issuers. Section 
109 directs the PCAOB to allow for differentiation of the fees among 
classes of issuers, as appropriate.
    On the basis of the foregoing, the Commission finds that the 
proposed rules, as amended, 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 sections 107 and 109 of the 
Act, and section 19(b)(2) of the Exchange Act, that the proposed rules 
(File No. PCAOB-2003-02), as amended, be and hereby are approved.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-20134 Filed 8-6-03; 8:45 am]
BILLING CODE 8010-01-P