[Federal Register Volume 69, Number 109 (Monday, June 7, 2004)]
[Notices]
[Pages 31850-31851]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-12740]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49787; File No. PCAOB-2003-08]


Public Company Accounting Oversight Board; Order Approving 
Proposed Rules Relating to Inspections of Registered Public Accounting 
Firms

June 1, 2004.

I. Introduction

    On October 15, 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

[[Page 31851]]

``Act'') and Section 19(b) of the Securities Exchange Act of 1934 (the 
``Exchange Act''), relating to inspections of registered public 
accounting firms. Notice of the proposed rules was published in the 
Federal Register on April 23, 2004.\1\ The Commission received three 
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. 34-49579 (April 19, 2004), 69 FR 22103 (April 
23, 2004).
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II. Description

    Section 104 of the Act directs the PCAOB to conduct a continuing 
program of inspections to assess the degree of compliance of each 
registered public accounting firm and associated persons of that firm 
with the Act, the rules of the Board, the rules of the Commission or 
professional standards in connection with the firm's performance of 
audits, issuance of audit reports and related matters involving 
``issuers,'' as defined in the Act. In furtherance of this provision, 
the PCAOB adopted proposed rules to establish procedures for 
inspections, and submitted them to the Commission for approval. 
Pursuant to the requirements of section 107(b) of the Act and section 
19(b) of the Exchange Act, the Commission approved publication of the 
proposed rules for public comment on April 16, 2004. The proposed rules 
on inspections consist of PCAOB Rules 4000 through 4010 (reserving Rule 
4005) and certain definitions that appear in PCAOB Rule 1001.
    The proposed rules set forth the schedule for regular inspections 
of registered public accounting firms. Registered firms that issue 
audit reports to 100 or fewer issuers will be inspected at least once 
every three years, and all other registered firms will be inspected 
annually. The PCAOB also may conduct special inspections of registered 
firms at any time. The rules describe the procedures the Board will 
follow when the inspection staff detects possible violations by firms 
under inspection. Under certain circumstances, the Board will report 
possible violations to the Commission and/or appropriate state 
regulatory agencies. In addition, the Board may decide to initiate an 
investigation of suspected violations.
    Each inspected firm will have an opportunity to review and comment 
on the draft inspection report relating to that firm before the Board 
issues its final inspection report. Copies of the report will be 
transmitted to the Commission and to the appropriate state regulatory 
authorities. Although not stated specifically in the inspection rules, 
it is our understanding and expectation that, as required by section 
104(g) of the Act, the Board also will make the findings of each 
inspection report available to the public. The Act provides that the 
portion of the report dealing with potential criticisms of or defects 
in the inspected firm's quality control systems will not be made public 
unless the firm has failed to address those criticisms or defects to 
the Board's satisfaction within 12 months after the date of the report. 
From time to time, as the Board deems appropriate, it also may publish 
public summaries, compilations or other general reports concerning the 
procedures, findings, and results of its various inspections.
    The Act provides that a registered public accounting firm may seek 
interim review by the Commission, pursuant to such rules as the 
Commission shall promulgate, if the firm (1) has reviewed the PCAOB's 
draft inspection report and responded to the substance of particular 
items in that report, and disagrees with the assessments contained in 
any final report prepared by the Board following that response, or (2) 
disagrees with the Board's determination that quality control 
criticisms or defects identified in the inspection report have not been 
addressed to the Board's satisfaction within 12 months of the date of 
the inspection report.

III. Discussion

    The three comment letters submitted with respect to the proposed 
inspection rules raised a number of issues relating to implementation 
of the rules and requested greater specificity in certain areas. Some 
of the concerns the commenters noted relate to the PCAOB's exercise of 
its discretion in the conduct of inspections and in referring potential 
violations to the Commission and state regulatory authorities. Their 
concerns also related to the confidentiality of inspection information, 
particularly in the hands of the Commission and state regulatory 
authorities. The PCAOB considered the issues these commenters raised 
and declined to accept their suggestions, and the resulting rules 
appear to establish a reasonable operating framework for inspecting 
registered public accounting firms. In implementing these rules, we 
would encourage the appropriate and necessary sharing of information 
among the Board and Federal and State agencies.

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 therefore ordered, pursuant to section 107 of the Act and 
section 19(b)(2) of the Exchange Act, that the proposed rules governing 
inspections of registered public accounting firms (File No. PCAOB-2003-
08) be and hereby are approved.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-12740 Filed 6-4-04; 8:45 am]
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