[Federal Register Volume 69, Number 98 (Thursday, May 20, 2004)]
[Notices]
[Pages 29150-29151]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11377]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49704; File No. PCAOB-2003-07]


Public Company Accounting Oversight Board; Order Approving 
Proposed Rules Relating to Investigations and Adjudications

May 14, 2004.

I. Introduction

    On October 10, 2003, the Public Company Accounting Oversight Board 
(the ``Board'' or the ``PCAOB'') filed with the Securities and Exchange 
Commission (the ``Commission'') proposed rules pursuant to Section 107 
of the Sarbanes-Oxley Act of 2002 (the ``Act'') and Section 19(b) of 
the Securities Exchange Act of 1934 (the ``Exchange Act''), relating to 
investigations and adjudications. Notice of the proposed rules was 
published in the Federal Register on March 26, 2004.\1\ The Commission 
received five comment letters relating to these rules. For the reasons 
discussed below, the Commission is granting approval of the proposed 
rules.
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    \1\ Release No. 34-49454 (March 19, 2004).
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II. Description

    Section 105 of the Act directs the PCAOB to establish fair 
procedures for the investigation and disciplining of registered public 
accounting firms and associated persons of such firms. In furtherance 
of this provision, the PCAOB proposed rules to establish procedures for 
investigations and adjudications, and adopted the proposed rules on 
September 29, 2003. Pursuant to the requirements of section 107(b) of 
the Act and Section 19(b) of the Exchange Act, the Commission published 
the proposed rules for public comment on March 26, 2003. The proposed 
rules on investigations and adjudications consist of 64 rules (PCAOB 
Rules 5000 through 5469 and 5500 through 5501), plus certain 
definitions that appear in PCAOB Rule 1001.
    The proposed rules on investigations and adjudications provide that 
the PCAOB and its staff may conduct investigations concerning any acts 
or practices, or omissions to act, by registered public accounting 
firms and persons associated with such firms that may violate any 
provisions of the Act, the rules of the PCAOB, the provisions of the 
securities laws relating to the preparation and issuance of audit 
reports and the obligations and liabilities of accountants with respect 
thereto, including Commission rules issued under the Act or 
professional standards. Pursuant to the Act, the PCAOB's proposed rules 
provide that it may require registered public accounting firms and 
their associated persons to cooperate with Board investigations and may 
seek information from other persons, including clients of registered 
firms.
    When violations are detected, the proposed rules provide an 
opportunity for a hearing, and in appropriate cases, for the PCAOB to 
impose sanctions designed to prevent a repetition of the violation and 
to enhance the quality and reliability of future audits. These 
sanctions may include temporarily or permanently prohibiting a firm or 
associated person from participating in audits of public companies or 
from being associated with a registered public accounting firm. 
Sanctions also may require special remedial measures, such as training, 
new quality control procedures, and the appointment of an independent 
monitor.
    The PCAOB also may hold hearings on disapproved registration 
applications, pursuant to Section 102 of the Act. Under the PCAOB's 
registration

[[Page 29151]]

rules, if the PCAOB is unable to determine that a public accounting 
firm has met the standard for approval of an application, the PCAOB may 
provide the firm with a notice of a hearing, which the firm may elect 
to treat as a written notice of disapproval for purposes of making an 
appeal to the Commission under Section 107(c) of the Act. If the firm 
chooses to request a hearing, the PCAOB would, in appropriate 
circumstances, afford the firm a hearing pursuant to its proposed rules 
relating to investigations and adjudications.
    At the time the PCAOB approved the rules relating to investigations 
and adjudications, it separately approved, and submitted for Commission 
approval on an accelerated basis, a subset of those rules that were 
intended to serve as temporary hearing rules in the event the PCAOB 
decided to disapprove an application for registration while the 
Commission was still considering action on the rules relating to 
investigations and adjudications. The Commission approved the PCAOB's 
temporary hearing rules on an accelerated basis on November 10, 2003, 
with the expectation that if it approved the proposed rules relating to 
investigations and adjudications, those permanent rules would supersede 
and replace the temporary hearing rules.\2\
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    \2\ Release No. 34-48765 (November 10, 2003).
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III. Discussion

    The PCAOB rules relating to investigations and adjudications 
generally establish a basic procedural framework for conducting 
investigations and disciplinary proceedings. Several of the comments 
the Commission received on the proposed rules reflected concern about 
the rules' lack of specificity with respect to certain matters left to 
the discretion of the PCAOB and its staff. These matters include, for 
example, the determination as to which persons will be permitted to be 
present during an investigatory examination. The Commission recognizes 
that the rules are broad in scope and that they contemplate the 
exercise of discretion by the PCAOB and its staff in a number of 
important areas. We fully expect the PCAOB and its staff to exercise 
this discretion in a balanced and fair-minded fashion with due regard 
for both the purposes of Section 105 of the Act and the legitimate 
concerns of the firms and individuals affected by the rules. The 
Commission also recognizes that the rules are new and undoubtedly will 
be revised and improved over time, as the PCAOB gains experience with 
their implementation. As this process continues, we would encourage the 
PCAOB to consider carefully the concerns expressed by commenters and 
others affected by the rules.
    The Commission previously indicated its concern with the operation 
of proposed Rule 5424(b), which would permit the PCAOB to request 
issuance of Commission subpoenas in connection with PCAOB disciplinary 
proceedings, either on the PCAOB's own behalf or for the benefit of the 
party that is the subject of the proceeding. The Commission notes, in 
connection with proposed Rule 5424(b), that the issuance of Commission 
subpoenas in connection with PCAOB disciplinary proceedings would be a 
novel and potentially complex arrangement, and the Commission staff has 
discussed with the PCAOB staff the need to develop and implement 
additional rules and procedures regarding the handling of subpoena 
requests. The two comment letters that addressed this issue supported 
the idea that respondents in a PCAOB hearing could ask the PCAOB to 
request a Commission subpoena to compel appearance by non-parties to 
the hearing. They agreed, however, that this procedure raised novel 
issues, and that the Commission and the PCAOB should adopt additional, 
carefully crafted rules to implement Rule 5424(b). The additional rules 
and procedures being developed by the PCAOB and Commission staffs would 
address, among other things, the steps that the parties to PCAOB 
proceedings would need to follow prior to applying for Commission 
subpoenas, as well as the Commission's processes for handling such 
requests once they are received. It is our understanding and 
expectation, which we have discussed with the PCAOB staff, that Rule 
5424(b) will not be available for use in PCAOB proceedings until these 
additional rules and procedures have been developed and implemented to 
our satisfaction.
    We are satisfied that the rules proposed by the PCAOB create a 
reasonable operating framework for investigating and disciplining 
registered public accounting firms and their associated persons.

IV. 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 thefore ordered, pursuant to Section 107 of the Act and 
Section 19(b)(2) of the Exchange Act, that the proposed rules on 
investigations and adjudications (File No. PCAOB-2003-07) be and hereby 
are approved (with the understanding that Rule 5424(b) will not be 
available for use in PCAOB proceedings until the appropriate 
implementation framework is in place), and that such rules, as of the 
date of this approval, supersede and replace the temporary hearing 
rules (File No. PCAOB-2003-06) in their entirety.

    By the Commission.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-11377 Filed 5-19-04; 8:45 am]
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