[Federal Register Volume 68, Number 187 (Friday, September 26, 2003)]
[Notices]
[Pages 55667-55673]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-24324]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48511; File No. PCAOB File No. 2003-05]


Public Company Accounting Oversight Board; Notice of Filing of 
Proposed Rules Relating to Compliance With Auditing and Related 
Professional Practice Standards and Advisory Groups

September 22, 2003.
    Pursuant to section 107(b) of the Sarbanes-Oxley Act of 2002 (the 
``Act''), notice is hereby given that on July 14, 2003, the Public 
Company Accounting Oversight Board (the ``Board'' or the ``PCAOB'') 
filed with the Securities and Exchange Commission (the ``SEC'' or 
``Commission'') the proposed rules described in Items I and II 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

    On June 30, 2003, the Board adopted rules relating to compliance 
with auditing and related professional practice standards and relating 
to advisory groups. The proposal includes two rules (PCAOB Rules 3100 
and 3700) and a definition that would appear in Rule 1001. The text of 
the proposed rules is as follows:

Section 1. General Provisions

Rule 1001. Definitions of Terms Employed in Rules

* * * * *
    (a)(viii) Auditing and Related Professional Practice Standards.
    The term ``auditing and related professional practice standards'' 
means the auditing standards, related attestation standards, quality 
control standards, ethical standards, and independence standards 
(including any rules implementing Title II of the Act), and any other 
professional standards, that are established or adopted by the Board 
under section 103 of the Act.
* * * * *

Section 7. Professional Standards

Part 1--General Requirements

Rule 3100. Compliance With Auditing and Related Professional Practice 
Standards

    A registered public accounting firm and its associated persons 
shall comply with all applicable auditing and related professional 
practice standards.
* * * * *
Part 7--Establishment of Professional Standards

Rule 3700. Advisory Groups

    (a) Formation.
    To assist it in carrying out its responsibility to establish 
auditing and related professional practice standards, the Board will 
convene one or more advisory groups, in accordance with section 
103(a)(4) of the Act.
    (b) Composition.
    Advisory groups, in combination or as sub-groups designated by the 
Board within one advisory group, will contain

[[Page 55668]]

individuals with expertise in one or more of the following area--
    (1) accounting;
    (2) auditing;
    (3) corporate finance;
    (4) corporate governance;
    (5) investing in public companies; and
    (6) other areas that the Board deems to be relevant to one or more 
auditing or related professional practice standards.
    (c) Selection of Members of Advisory Groups.
    Members of advisory groups will be selected by the Board, in its 
sole discretion, based upon nominations, including self-nominations, 
received from any person or organization.

    Note: The Board will announce, from time to time, periods during 
which it will receive nominations to an advisory group. During those 
periods, nominations may be submitted by any person or organization, 
including, but not limited to, any investor, any accounting firm, 
any issuer, and any institution of higher learning.

    (d) Personal Membership.
    Membership in an advisory group will be personal to the individuals 
selected to serve on the advisory group. A member's functions and 
responsibilities, including attendance at meetings, may not be 
delegated to others.
    (e) Ethical Duties of Advisory Group Members.
    Members of an advisory group shall comply with EC3, EC8(a), EC9, 
and, with respect to any private publication or public statement about 
the Board or any advisory group or any of the activities of the Board 
or any advisory group, EC10 of the Board's Ethics Code.
    (f) Ad Hoc Task Forces.
    The Board may, in its discretion, establish ad hoc task forces. The 
membership of such task forces may include, but is not limited to, 
advisory group members. To the extent not otherwise required, members 
of ad hoc task forces shall comply with paragraph (e) of this Rule.

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

(a) Purpose
    (i) Rules 1001(a)(viii) and 3100.
    Rule 1001(a)(viii) defines ``auditing and related professional 
practice standards'' as the auditing standards, related attestation 
standards, quality control standards, ethical standards, and 
independence standards (including any rules implementing Title II of 
the Act), and any other professional standards, that are established or 
adopted by the Board under section 103 of the Act (hereafter referred 
to in this Section A. as ``Standards'').
    Section 103(a) of the Act directs the Board, by rule, to establish 
auditing and related attestation standards, quality control standards, 
and ethics standards ``to be used by registered public accounting firms 
in the preparation and issuance of audit reports, as required by [the] 
Act or the rules of the Commission, or as may be necessary or 
appropriate in the public interest or for the protection of 
investors.'' Section 103(b) of the Act also directs the Board to 
establish independence standards to implement, or as authorized under, 
Title II of the Act.\1\
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    \1\ See also Report of the Committee on Banking, Housing, and 
Urban Affairs, U.S. Senate, on S. 2673, S. Rep. No. 107-205 (July 
26, 2002) (``The Committee has concluded that the Board's plenary 
authority in this area is essential for the Board's effective 
operation, a position taken during the hearings by a number of 
witnesses * * *''). Board Rules adopting or modifying auditing and 
related professional practice standards require approval by the 
Commission. In addition, the Board recognizes that the Commission 
may also establish professional standards applicable to accountants 
that practice before it and audit reports filed with it and that the 
Commission has the authority to institute proceedings to amend the 
Board's Rules, including those that establish auditing and related 
professional practice standards. See sections 2(a)(10), 3(c)(2), and 
107(b)(5) of the Act.
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    As a corollary to the Board's statutory authority to establish and 
amend Standards, all public accounting firms that are registered with 
the Board must comply with the Board's Standards. While this 
requirement is implicit in the Act, the Board has codified the 
obligation of registered firms to comply with the Board's Standards in 
Rule 3100. Any registered public accounting firm or person associated 
with such a firm that fails to adhere to applicable Board Standards may 
be the subject of a Board disciplinary proceeding in accordance with 
section 105 of the Act.\2\ In general, the Board's Standards will apply 
to registered public accounting firms and their associated persons in 
connection with their audits of (and related attestations concerning) 
the financial statements of issuers, as defined in section 2(a)(7) of 
the Act, and those firms' auditing and related attestation practices.
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    \2\ In addition, the Act provides that any violation of the 
Board's Rules is to be treated for all purposes in the same manner 
as a violation of the Securities Exchange Act of 1934, 15 U.S.C. 78a 
et seq., or the rules and regulations issued thereunder, and any 
person violating the Board's Rules ``shall be subject to the same 
penalties, and to the same extent, as for a violation of [the 
Exchange] Act or such rules or regulations.'' Section 3(b)(1) of the 
Act.
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    (ii) Rule 3700.
    While the Board will, by rule, establish Standards, it recognizes 
that the development of such Standards should be an open, public 
process in which investors, the accounting profession, the preparers of 
financial statements, and others will have the opportunity to 
participate. To this end, as discussed in PCAOB Release No. 2003-005 
(April 18, 2003), the Board intends to provide for a public comment 
process on proposed standards.\3\ The Board's staff will, of course, be 
actively involved in the standards-setting process, but the Board also 
encourages proposals and recommendations on its standards-setting 
agenda and standards development projects from the public. Moreover, in 
order to obtain the advice of a broad range of experts, the Board has 
determined to form an advisory group, the Standing Advisory Group 
(``SAG''), which may be divided into sub-groups by the Board if the 
need for specialized advice arises. Finally, the Board may also 
establish one or more ad hoc task forces to assist the staff with the 
drafting of technical language, among other things.
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    \3\ In response to PCAOB Release No. 2003-005, the Board 
received several comments relating to the process by which the Board 
will establish standards. While this release is intended to address 
only the adoption of Rules 3100 and 3700, the Board will 
nevertheless take these comments into consideration in its 
standards-setting work.
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    Section 103(a)(4) of the Act provides that the Board shall 
``convene, or authorize its staff to convene, such expert advisory 
groups as may be appropriate * * * to make recommendations concerning 
the content (including proposed drafts) of auditing, quality control, 
ethics, independence, or other standards required to be established 
under this section.'' The Board has decided initially that it is likely 
to exercise this authority by convening the SAG to participate in the 
standards-setting process. Rule 3700 addresses the formation, 
composition, and other basic matters concerning advisory groups, 
including the SAG.
    (1) Role, Size and Composition.
    The role of the SAG will be to assist the Board in reviewing 
existing

[[Page 55669]]

Standards, in evaluating proposed Standards recommended by Board staff, 
Board-formed technical task forces or others and recommending to the 
Board new or amended Standards. The role of the SAG will not ordinarily 
include technical drafting (which will be performed by the Board's 
staff, with the assistance of ad hoc task forces, when necessary). 
Instead, the Board will look to the SAG to provide advice and insight 
as to the need to formulate new Standards or change existing Standards 
and opinions on the impact of proposed new or changed Standards.
    The Board contemplates that the SAG initially will have 
approximately 25 members. As noted above, the Board may, based on the 
circumstances of particular projects, prior to or after the formation 
of the SAG, form ad hoc task forces of specially qualified persons 
selected by the Board to assist it with specific projects. Members of 
any appointed ad hoc task force may or may not be members of the SAG.
    The SAG will be composed of individuals with a variety of 
backgrounds, including practicing auditors, preparers of financial 
statements, investors (both individual and institutional), and 
others.\4\ In order to achieve this diversity, the Board expects that 
no one field of expertise will predominate among the SAG membership. 
Although SAG members may be employed or otherwise affiliated with 
particular organizations, the Board expects SAG members to serve in 
their individual capacities and not to serve as representatives of 
particular interests, groups or employers.
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    \4\ The Board also anticipates appointing individuals from 
academia and State accounting regulators, among others, to the SAG.
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    (2) Nominations of SAG Members
    In determining appointments to the SAG, the Board intends to 
solicit nominations, including self-nominations. Interested parties 
will have 45 days from the date of the Board's Notice (``Notice'') to 
the public to submit nominations on a form which will be provided in 
the Notice. Interested parties who have submitted nominations prior to 
the publication of the Notice, will be sent nomination forms for 
completion at the time of publication of the Notice.
    (3) Qualifications
    In evaluating nominations for the SAG, the Board will seek 
individuals with an interest in the quality of the audits of public 
companies. The Board may also consider certain factors in determining 
SAG appointments including but not limited to the following--
    (a) SAG members will be individuals of integrity, with an 
understanding of the responsibilities for and the nature of financial 
disclosure required under the securities laws and the obligations of 
accountants with respect to the preparation of and issuance of audit 
reports with respect to such disclosures; and
    (b) SAG members will have a working knowledge of one or more of the 
following subjects and a general understanding of the remaining 
subjects--
    [sbull] generally accepted auditing standards (as developed by 
previous auditing standards setting bodies and adopted by the Board as 
Standards and, in the future, as set from time to time by the Board);
    [sbull] generally accepted accounting principles;
    [sbull] the creation, audit or analysis of public financial 
statements;
    [sbull] public company corporate governance; and
    [sbull] other fields that the Board deems to be relevant.
    (4) Term
    Unless the appointment is revoked for cause, as determined by the 
Board, or unless the SAG member voluntarily resigns from the SAG, 
membership on the SAG will be for a term of two years; provided, 
however, that approximately 50 percent of the initial members will be 
appointed for a three-year term to assure continuity. Members will not 
be limited in the number of terms that they may serve.
    (5) Conditions of Membership
    Rule 3700(d) specifically states that members of the SAG will serve 
in their individual capacities and therefore may not delegate their 
duties, including attendance at meetings, as SAG members. In addition, 
each appointee to the SAG shall agree in writing to the following 
``conditions of membership'' in order to avoid potential conflicts of 
interest and to assure that the Board's standards-setting agenda is 
met--
    (a) to serve on a voluntary basis without compensation from the 
Board; \5\
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    \5\ SAG members shall be entitled to reimbursement for 
documented reasonable travel expenses relating to participation in 
official SAG meetings or other SAG activities.
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    (b) to seek constructive resolutions to issues raised by the Board 
for the SAG;
    (c) to act in the public interest in his or her individual capacity 
and not as a representative of any constituency;
    (d) to attend at least 75 percent of all SAG meetings; \6\
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    \6\ Attendance may be in person or by telephone or 
teleconference. SAG members who fail to participate in the minimum 
number of meetings shall be subject to removal by the Board unless 
excused from attendance by the Chair of the SAG for good reason.
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    (e) to agree to spend, at an expected minimum, between 50 and 100 
hours per year on SAG matters or such reasonably greater amount of time 
as may be necessary to achieve the goals of the SAG and the Board; \7\
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    \7\ During the first year of the SAG, members may expect to 
spend more than the minimum number of hours on SAG matters.
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    (f) to refrain from using his or her position on the SAG to 
influence Board members or Board staff on matters directly affecting 
that SAG member or his or her employer, business partners or clients; 
\8\
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    \8\ SAG members are not precluded from appearing or practicing 
before the Board regarding matters generally affecting all issuers 
or registered public accounting firms, including, indirectly, the 
member, his or her employer, business partners or clients. 
Accordingly, a SAG member who is employed by a registered public 
accounting firm would be permitted to be involved in preparing a 
comment on a Board rule proposal that generally affects all issuers 
or registered public accounting firms.
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    (g) to recuse himself or herself, or otherwise withdraw from, 
consideration of any matter before the SAG or the Board directly 
affecting such SAG member, his or her employer, business partners or 
clients. If recusal or withdrawal is not practical in either such 
member's or the Board's opinion, such SAG member shall resign from the 
SAG; \9\
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    \9\ Matters generally affecting issuers or registered public 
accounting firms, even though affecting the SAG member, his or her 
employer, business partners or clients, shall not require the member 
to recuse or withdraw him or herself from consideration of the 
matter or to resign from SAG. The Board expects that most standards-
setting projects will affect issuers (or categories of issuers) and 
registered public accounting firms and their associated persons in a 
generally similar manner; however, if a standard would have a unique 
or disproportionate effect on a particular issuer or firm, a SAG 
member employed by that issuer or firm would be required under Rule 
3700 to recuse himself or herself.
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    (h) to be bound by EC3, EC8(a), EC9, and, with respect to any 
private publication or public statement regarding the Board or the SAG 
or any of the activities of the Board or the SAG, EC10 of the Board's 
Ethics code; \10\
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    \10\ The text of the Ethics Code as adopted by the PCAOB on June 
30, 2003 is available on the PCAOB Web site. In PCAOB Release No. 
2003-008 (June 30, 2003), the Board clarified that for purposes of 
applying EC8(a) to SAG members, the SAG members shall not be 
considered to lack independence or objectivity with regard to SAG 
matters merely because they (or their employer, business partners or 
clients) are subject to the direct or indirect oversight of the 
Board.
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    (i) to annually certify his or her continuing compliance with ``the 
conditions of membership;'' and
    (j) to agree to any such other provisions that the Board may deem

[[Page 55670]]

necessary to avoid even the appearance of a conflict of interest.\11\
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    \11\ The Commission understands that paragraphs (f) and (g) of 
the conditions of membership are intended to implement particular 
aspects of Rule 3700(e). In addition, the Commission understands 
that paragraph (j) is intended to address other individual conflict 
of interest situations of advisory group members that may arise, as 
distinct from rules of general applicability that would be subject 
to Commission approval.
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    (6) Meetings and Board Relations.
    The Board has determined that the first Chair of the SAG will be 
the Board's Chief Auditor and Director of Professional Standards who 
will be a non-voting member of the SAG. The Board will approve the 
agenda for all annual, semi-annual or quarterly SAG meetings as set 
forth below. Agenda items may also be added where the Board determines 
that the assistance of the SAG is required in response to emerging 
issues or problems. The Chair will be responsible for preparing the 
meeting agenda, organizing and overseeing meetings, conference calls 
and related activities, acting as the general liaison to the Board and 
finalizing all submissions to the Board based on the SAG 
recommendations.
    The SAG will hold an annual meeting to discuss the agenda presented 
to the SAG on the annual standards-setting process and related matters. 
The SAG will also hold a semi-annual meeting. Both the annual and the 
semi-annual meetings will be open to the public. Meetings of the SAG 
may also be held, at the direction of the Board or the Chair, during 
the intervening quarters. In addition, at the direction of the Chair, 
monthly meetings of the SAG may be held, by video or teleconference, 
for the Board's staff to report on new issues raised by the Board for 
the SAG's consideration and to discuss the status of pending issues. 
Final decisions on recommendations to the Board and related activities 
will be conducted at the annual, semi-annual, or other open meeting of 
the SAG.\12\ The meetings held in the quarters between the annual and 
semi-annual meeting, if any, and the monthly meetings will not 
generally be open to the public.
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    \12\ The Board expects the SAG to make decisions in an efficient 
and speedy manner. To this end, the SAG need not defer decisions on 
recommendations for the annual or semi-annual open meetings. Rather, 
at the direction of the Chair, the SAG may make decisions on 
recommendations at any meeting, so long as it is open to the public 
in some manner, including, at the direction of the Chair, 
telephonically.
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    If so directed by the Chair of the SAG, the SAG may convene 
hearings, roundtable discussions or other fact-finding activities 
designed to assist the SAG in the development of recommendations on new 
or amended Standards or other recommendations to the Board.
    Decisions on whether a recommendation should be made to the Board 
will be by a majority of the SAG members present in person or by video 
or teleconference. Recommendations from the SAG will be presented to 
the Board at an open meeting of the Board. Such recommendations will be 
provided in writing, including dissenting opinions, if any, by SAG 
members. The Board retains the exclusive authority to adopt, modify, or 
reject any SAG recommendation, in its sole discretion, in order to 
protect investors by improving the fairness and reliability of 
corporate disclosures as set forth in the Act.
(b) 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 rule 
concerning compliance with standards, all registered public accounting 
firms and their associated persons must comply with all applicable 
auditing and related professional practice standards. The functional 
equivalent of this requirement is found in the Act, which provides for 
the Board to impose sanctions on registered firms or associated persons 
who violate such standards, and the codification of that requirement in 
the Board's rules does not add to the burden already imposed by the 
Act. The rules relating to advisory groups do not impose any burden on 
competition but, rather, provide for public participation, on a 
voluntary basis, in the process of advising the Board on the 
establishment of standards.

C. Board's Statement on Comments on the Proposed Rules Received From 
Members, Participants or Others

    The Board released the proposed rules for public comment in PCAOB 
Release No. 2003-005 (April 18, 2003). A copy of PCAOB Release No. 
2003-005 and the comment letters received in response to the PCAOB's 
request for comment are available on the PCAOB's Web site at http://www.pcaobus.org. The Board received 22 written comments. The Board has 
clarified and modified certain aspects of the proposed rules in 
response to comments it received, as discussed below.
    The Board had proposed to use ``professional auditing standards'' 
as the term defined in Rule 1001(a)(viii). Several commenters expressed 
concern that characterizing attestation, quality control, ethical, and 
independence standards as ``professional auditing standards'' would 
confuse people as to the defined term's meaning. To address these 
concerns, the Board has chosen to use the term ``auditing and related 
professional practice standards'' as the defined term for the standards 
established or adopted by the Board under section 103 of the Act. The 
Board has used the longer term ``auditing and related professional 
practice standards,'' rather than the shorter ``professional 
standards,'' because the term ``professional standards'' is defined 
otherwise in section 2(a)(10) of the Act. The term ``auditing and 
related professional practice standards'' is similar to that portion of 
the definition of the term ``professional standards'' that appears in 
section 2(a)(10)(B) of the Act. (Hereafter in this section C., the term 
``Standards'' shall be used to refer to the standards encompassed by 
the defined term ``auditing and related professional practice 
standards.'')
    In addition, the Board's proposed definition was based on a portion 
of the definition of ``professional standards'' in section 2(a)(10)(B) 
of the Act. For purposes of clarity, the Board has modified this 
definition slightly to track more closely the description of the 
standards the Board will set in section 103(a)(1) of the Act. The 
definition still includes any other type of standard provided for in 
the definition of ``professional standards'' in section 2(a)(10)(B) of 
the Act that the Board establishes or adopts under section 103 of the 
Act. Accordingly, the definition, as revised, covers the same scope of 
standards as the Board's proposed rule.
    A number of commenters suggested that proposed Rule 3100 was either 
beyond the Board's authority or would create the impression that the 
Rule applied to areas outside the Board's authority. To address these 
concerns, commenters suggested adding language about the scope of the 
Board's authority to Rule 3100. After considering these comments, the 
Board decided to adopt the Rule as proposed. Rule 3100 requires 
registered public accounting firms and their associated persons to 
comply with all applicable Standards. Accordingly, if the Board's 
Standards do not apply to an engagement or other activity of the firm, 
Rule 3100, by its

[[Page 55671]]

own terms, does not apply to that engagement or activity.\13\
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    \13\ For example, the Board's Interim Auditing Standards provide 
that, ``[i]n connection with the preparation or issuance of any 
audit report, a registered public accounting firm, and its 
associated persons, shall comply with generally accepted auditing 
standards, as described in the AICPA Auditing Standards Board's 
Statement of Auditing Standards No. 95, as in existence on April 16, 
2003 (Codification of Statements on Auditing Standards, AU Sec.  150 
(AICPA 2002)).'' See Rule 3200T. The term ``audit report'' is 
defined in the Act and the Board's Rules to mean the audit of an 
issuer. See Rule 1001(a)(vi), adopted by the Board in PCAOB Release. 
No. 2003-007. Moreover, the Board notes that it would not be a 
correct description of its authority to say, as one commenter 
suggested Rule 3100 provide, that ``A registered public accounting 
firm and its associated persons shall comply with all applicable 
professional auditing standards in performing an audit of an 
issuer.'' Particularly with respect to the quality control standards 
the Board is authorized to establish, the Board may adopt standards 
that, while related to registered public accounting firms' audit 
practices, must be complied with other than in the course of 
performing an audit. Cf. section 103(a)(2)(B) of the Act (requiring 
the Board to include, among the ``quality control standards that it 
adopts with respect to the issuance of audit reports, requirements * 
* * relating to * * * hiring, professional development, and 
advancement of personnel'').
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    Finally, one commenter suggested that Rule 3100 also require 
registered public accounting firms and their associated person to be 
duly licensed, registered or permitted or otherwise to hold valid 
practice privileges and be in good standing under the laws of each 
applicable state. Registration with the Board does not supersede state 
registration or licensing requirements and the Board expects registered 
public accounting firms and their associated persons to comply with 
state and other applicable legal requirements.\14\ Rule 3100, however, 
is merely intended to codify the obligation of registered public 
accounting firms and their associated persons to comply with Board 
Standards and to ensure that the Board's Standards are enforceable. 
Accordingly, the Board decided not to amend the Rule as proposed to 
reflect this suggestion. Authorities other than the Board may 
nevertheless require that accounting firms or individual auditors 
comply with the Board's Standards in the conduct of audits of (or 
attestations concerning) the financial statements of non-issuers.\15\ 
In that event, those authorities may enforce the Board's Standards 
pursuant to their own processes.
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    \14\ See Rule 2-01(a) of Regulation S-X, 17 CFR 200.2-01(a).
    \15\ Cf. section 209 of the Act (stating that ``[i]n supervising 
nonregistered public accounting firms and their associated persons, 
appropriate State regulatory authorities should make an independent 
determination of the proper standards applicable * * *'').
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    In addressing proposed Rule 3700, commenters suggested that it 
might be appropriate to establish more than one advisory group since 
expertise is likely to be required in more than one specialized area. 
The Board is aware that it may need advice in one or more specialized 
areas. However, the Board has determined to form only one standing 
advisory group, the SAG. This group, however, may, at the Board's 
direction, form specialized sub-groups as needed. In addition, the 
Board may form ad hoc task forces to work with Board staff in 
formulating Standards in specialized areas which may then, in the 
Board's discretion, be added to the SAG's agenda for discussion at SAG 
meetings.
    In addition, commenters recommended adding other specific groups 
from which nominations could be received to the groups identified in 
Rule 3700(c) as proposed. After careful consideration of these 
comments, the Board determined that Rule 3700(c) should reflect the 
Board's intention to accept nominations from all sources. Accordingly, 
Rule 3700(c) was revised to state that the Board will accept 
nominations from any person or organization, including self-
nominations. A note to this part of Rule 3700 provides that the Board 
will announce, from time to time, periods during which it will receive 
nominations for an advisory group.
    With respect to qualifications of the advisory group members, one 
commenter suggested that all members have qualifications similar to 
those ``requirements set forth for audit committee members in recently 
issued stock exchange and SEC'' rules or proposed rules. The New York 
Stock Exchange (``NYSE'') proposed listing requirements require that 
all members of audit committees of listed companies be financially 
literate. In addition, at least one member of the audit committee must 
meet the definition of an ``audit committee financial expert.'' \16\ 
The NASDAQ Stock Market (``NASDAQ'') proposed rules regarding 
qualifications for service on audit committees require that all audit 
committee members must be able to read and understand financial 
statements including a company's balance sheet, income statement, and 
cash flow statement and that the audit committee have at least one 
member who meets the definition of an ``audit committee financial 
expert.'' \17\ After considering this comment, the Board decided to 
adopt the Rule as proposed by the Board. While Rule 3700 does not 
specifically state the qualifications each member must have, the Rule 
does set forth the types of expertise that the Board will look for in 
advisory group members. In addition, as noted in Section C.4. of this 
Release, the Board may also consider certain specific qualifications in 
selecting nominees to the SAG. The Board believes that it will likely 
select members who, at a minimum, would meet the general qualifications 
set forth for ``all'' audit committee members in the proposed Rules of 
the NYSE and NASDAQ while providing the Board with the flexibility to 
select members from a broad spectrum of backgrounds to assist it in 
meeting the requirements of the Act. SAG members will be selected based 
upon qualifications which will be elicited from them on a nomination 
form and through the evaluative process.
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    \16\ See SEC Release No. 34-47672; File No. SR-NYSE-2002-33 
(April 11, 2003).
    \17\ See SEC Release No. 34-47516; File No. SR-NASD-2002-141 
(March 17, 2003).
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    Furthermore, commenters suggested that the composition of the SAG 
be flexible because the Board may find that it is unable to attract a 
sufficient number of qualified members from fields such as finance and 
investment. In response to this concern, it should be noted that the 
Board expects that the SAG will be broadly representative and that no 
one field of expertise will predominate among the SAG membership. Other 
concerns regarding composition related to assuring that the SAG have a 
sufficient number of members with technical expertise including 
requiring a majority of members to be practicing auditors. Although the 
Board certainly intends that the SAG have practicing auditors among its 
members, the Board believes that it is important that the SAG be able 
to provide advice in a broad range of areas, including technical 
auditing expertise, and that technical expertise in particular areas 
may be obtained by forming ad hoc task forces, as needed and as 
appropriate for particular standards-setting projects. Other commenters 
recommended that--
    (a) the four largest auditing firms be represented on the SAG;
    (b) non-U.S. auditors be represented;
    (c) the number of members associated with a single firm, company or 
association be limited;
    (d) membership be dispersed among those affiliated with firms, 
companies and associations of various sizes; and
    (e) there be a balance between financial information suppliers 
(representatives of public companies and auditors) and financial 
information users (equity and debt investors).
    As noted above, the Board recognizes the need to have diversity on 
the SAG and in selecting members will keep

[[Page 55672]]

diversity in mind while assuring that no one expertise will predominate 
among the SAG membership.
    With respect to the actual functions of the SAG, one commenter, 
suggested that the SAG be involved in all standards-setting proposals 
while another commenter recommended that the actual drafting of the 
Standards fall within the SAG's authority. In order to maintain 
flexibility in the rulemaking process, the Board determined not to 
revise the proposed Rule to reflect these comments. Although the SAG is 
likely to be involved in the Board's standards-setting process as 
discussed in the Release, the Board does not intend to make SAG 
involvement mandatory to every standards-setting project. In addition, 
the actual drafting of the Standards is likely to be done by the 
Board's staff assisted by ad hoc task forces where necessary.
    Another comment related to recommending that the SAG work toward 
``harmonizing'' international standards. Neither Rule 3100 nor 3700 is 
intended to address substantive standards-setting issues. Rather the 
Board intends to address such issues, including cooperation with 
standards setters in other jurisdictions, in the future.
    Commenters also made recommendations regarding SAG procedural 
matters. These commenters suggested that the Board address--
    (a) the process for making recommendations on Standards for 
consideration by the Board;
    (b) whether or not SAG meetings would be open to the public;
    (c) the format and the frequency of the meetings;
    (d) the process by which the Board will set the SAG's agenda;
    (e) the appointment of a Chair for the SAG;
    (f) whether the Board will provide all resources for drafting, 
editing, monitoring comments and publishing new and amended Standards;
    (g) the term of appointment to the SAG; and
    (h) an avenue for minority viewpoints to be expressed in any report 
or recommendation to the Board.
    With the exception of the comment on resources for drafting and 
publishing new Standards, the Board has addressed all of these comments 
in Section B.7. of the Release. In summary, the SAG will hold an annual 
meeting and a semi-annual meeting. Additional meetings may be held in 
the intervening quarters. Monthly telephonic meetings are also expected 
to be held at the discretion of the Chair. The annual and semi-annual 
meetings, and any meeting at which the SAG makes a final decision on a 
recommendation to the Board, will be open to the public. Agenda items 
for the SAG will be driven in part by the schedule to be set by the 
Board for the review of the Interim Auditing Standards. Other agenda 
items will be added by the Board where the Board determines that a 
response to emerging issues or problems connected with audits needs to 
be addressed. The Board determined that the first Chair of the SAG will 
be the Board's Chief Auditor and Director of Professional Standards. 
All SAG members will be appointed for two-year terms except that 
approximately one-half of the appointees initially appointed to the SAG 
will be appointed for a three-year term to assure continuity. There 
will be no limits on the terms that a member of the SAG may serve. The 
Board anticipates that drafting, editing, monitoring comments and 
publishing, will be conducted by the Board and its staff. To the extent 
that the SAG is specifically authorized by the Board to undertake any 
of these functions and the expenses have been preapproved by the Board 
or a staff member delegated by the Board, the Board will cover the 
SAG's costs.
    In response to the issue of whether the SAG's meetings will be open 
to the public and in order to assure that the public is informed of the 
SAG's operations, the Board determined that the annual and semi-annual 
meetings of the SAG will be open. In addition, decisions on making 
recommendations to the Board will only be made at an open meeting of 
the SAG. All recommendations to the Board by the SAG will be presented 
to the Board in open public meetings of the Board and such 
presentations will include the presentation of minority views of the 
SAG members. Finally, it should be noted that Board standards-setting 
proposals will be subject to the public comment process before being 
adopted by the Board.
    With respect to Rule 3700(e) relating to the ethical duties of the 
SAG members, one commenter recommended that the SAG members be subject 
to Section EC14, the certification requirements, of the Ethics Code. In 
response to this comment, the Board added to its ``conditions of 
membership'' described in Section C of the Release, a requirement that 
members of the SAG shall annually certify their continuing compliance 
with the ``conditions of membership.'' A second commenter recommended 
that both Rule 3700(e) and EC8(a) of the Ethics Code be clarified to 
confirm that being a practicing auditor does not, in and of itself, 
constitute a financial interest requiring recusal. Section EC8(a) of 
the Ethics Code was revised to add an explanatory note that clarifies 
this issue.\18\ A third commenter recommended that members of the SAG 
be prohibited from ``unauthorized'' speaking for the Board. In response 
to this comment, the Board revised Rule 3700(e) to make EC10 of the 
Board's Ethics Code applicable to any private publication or public 
statement by an advisory group member with regard to the Board or the 
advisory group or any of the activities of the Board or the advisory 
group. Finally, a fourth commenter recommended that a member of the SAG 
be permitted to share SAG material with support personnel within the 
member's home organization who are assigned to assist the member in his 
or her duties. The Board did not add a provision to address this 
concern. The Board believes that SAG members will normally be able to 
perform their responsibilities without needing access to non-public 
Board information. To the extent that it may be appropriate, from time 
to time, to permit non-public standards-setting information to be 
shared with individuals outside the SAG, including to permit SAG 
members to consult technical experts who are not employees or staff of 
the Board, the Board may require that such individuals agree to the 
confidentiality provisions under Section EC9 of the Ethics Code.
---------------------------------------------------------------------------

    \18\ See PCAOB Release No. 2003-008 (June 30, 2003).
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III. Date of Effectiveness of the Proposed Rules and Timing for 
Commission Action

    Section 19(b) of the Exchange Act provides that 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 requirements of Title I of the Act. 
Persons making written submissions should file six

[[Page 55673]]

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 filing will also be available for 
inspection and copying at the principal office of the PCAOB. All 
submissions should refer to File No. PCAOB-2003-05 and should be 
submitted by October 17, 2003.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-24324 Filed 9-25-03; 8:45 am]
BILLING CODE 8010-01-P