[Federal Register Volume 69, Number 142 (Monday, July 26, 2004)]
[Notices]
[Pages 44555-44563]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16921]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50047; File No. PCAOB-2004-04]


Public Company Accounting Oversight Board; Notice of Filing of 
Proposed Rules Relating to Oversight of Non-U.S. Registered Public 
Accounting Firms

July 20, 2004.
    Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 
(``Act''), notice is hereby given that on June 18, 2004, the Public 
Company Accounting Oversight Board (``Board'' or ``PCAOB'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rules described in Items I and II below, which items have been prepared 
by the Board and are presented here in the form submitted 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 9, 2004, the Board adopted PCAOB Rules 4011 and 4012, PCAOB 
Rule 5113 and PCAOB Rules 6001 and 6002, and two definitions that would 
appear in PCAOB Rule 1001, to codify the Board's framework relating to 
the oversight of non-U.S. public accounting firms. The text of the 
proposed rules and definitions is as follows:

Section 1. General Provisions

Rule 1001.Definitions of Terms Employed in Rules
    When used in the Rules, unless the context otherwise requires:
* * * * *
(f)(ii) Foreign Registered Public Accounting Firm
    The term ``foreign registered public accounting firm'' means a 
foreign public accounting firm that is a registered public accounting 
firm.
* * * * *
(n)(iii) Non-U.S. Inspection
    The term ``non-U.S. inspection'' means an inspection of a foreign 
registered public accounting firm conducted within a non-U.S. oversight 
system.
* * * * *

Section 4. Inspections

* * * * *
Rule 4011. Statement by Foreign Registered Public Accounting Firms
    A foreign registered public accounting firm that seeks to have the 
Board rely, to the extent deemed appropriate by the Board, on a non-
U.S. inspection when the Board conducts an inspection of such firm 
pursuant to Rule 4000 shall submit a written statement signed by an 
authorized partner or officer of the firm to the Board certifying that 
the firm seeks such reliance for all Board inspections.
Rule 4012. Inspections of Foreign Registered Public Accounting Firms
    (a) If a foreign registered public accounting firm has submitted a 
statement pursuant to Rule 4011, the Board will, at an appropriate time 
before each inspection of such firm, determine the degree, if any, to 
which the Board may rely on the non-U.S. inspection. To the extent 
consistent with the Board's responsibilities under the Act, the Board 
will conduct its inspection under Rule 4000 in a manner that relies to 
that degree on the non-U.S. inspection. In making that determination, 
the Board will evaluate--
    (1) information concerning the level of the non-U.S. system's 
independence and rigor, including the adequacy and integrity of the 
system, the independence of the system's operation from the auditing 
profession, the nature of the system's source of funding, the 
transparency of the system, and the system's historical performance; 
and
    (2) discussions with the appropriate entity or entities within the 
system concerning an inspection work program.
    (b) The Board's evaluation made pursuant to paragraph (a) may 
include, but not be limited to, consideration of--
    (1) the adequacy and integrity of the system, including--
    (i) whether the system has the authority to inspect audit and 
review engagements, evaluate the sufficiency of the quality control 
system, and perform such other testing as deemed necessary of foreign 
public accounting firms; and whether the system can exercise such 
authority without the approval of, or consultation with, any person 
affiliated or otherwise connected with a public accounting firm or an 
association of such persons or firms;
    (ii) whether the system has the authority to conduct investigations 
and

[[Page 44556]]

disciplinary proceedings of foreign public accounting firms, any 
persons of such firms, or both, that may have violated the laws and 
standards relating to the issuance of audit reports, and whether the 
system can exercise such authority without the approval of, or 
consultation with, any person affiliated or otherwise connected with a 
public accounting firm or an association of such persons or firms;
    (iii) whether the system has the authority to impose appropriate 
sanctions for violations of the non-U.S. jurisdiction's laws and 
standards relating to the issuance of audit reports, and whether the 
system can exercise such authority without the approval of, or 
consultation with, any person affiliated or otherwise connected with a 
public accounting firm or an association of such persons or firms; and
    (iv) whether the persons within the system have adequate 
qualifications and expertise;
    (2) the independence of the system from the auditing profession, 
including--
    (i) whether the system has the authority to establish and enforce 
ethics rules and standards of conduct for the individual or group of 
individuals who govern the system and its staff and has prohibited 
conflicts of interest, and whether the system can exercise such 
authority without the approval of, or consultation with, any person 
affiliated or otherwise connected with a public accounting firm or an 
association of such persons or firms;
    (ii) whether the person or persons governing the system--
    (A) have been appointed, or otherwise selected, by the government 
of the non-U.S. jurisdiction, without the approval of, or consultation 
with, any person affiliated or otherwise connected with a public 
accounting firm or an association of such persons or firms; and
    (B) may be removed only by the government of the non-U.S. 
jurisdiction and may not be removed by any person affiliated or 
otherwise connected with a public accounting firm or an association of 
such persons or firms;
    (iii) whether a majority of the individuals with whom the system's 
decision-making authority resides do not hold licenses or 
certifications authorizing them to engage in the business of auditing 
or accounting and did not hold such licenses or certificates for at 
least the last five years immediately before assuming their position 
within the system;
    (iv) whether a majority of the individuals with whom the system's 
decision-making authority resides, including the individual who 
functions as the entity's chief executive or equivalent thereof, are 
not practicing public accountants; and
    (v) whether each entity within the system has the authority to 
conduct its day-to-day operations without the approval of any person 
affiliated or otherwise connected with a public accounting firm or an 
association of such persons or firms;
    (3) the source of funding for the system, including whether the 
system has an appropriate source of funding that is not subject to 
change, approval or influence by any person affiliated or otherwise 
connected with a public accounting firm or an association of such 
persons or firms;
    (4) the transparency of the system, including whether the system's 
rulemaking procedures and periodic reporting to the public are openly 
visible and accessible; and
    (5) the system's historical performance, including whether there is 
a record of disciplinary proceedings and appropriate sanctions, but 
only for those systems that have existed for a reasonable period of 
time.
* * * * *

Section 5. Investigations and Adjudications

* * * * *
Rule 5113. Reliance on the Investigations of Non-U.S. Authorities
    Upon the recommendation of the Director of Enforcement and 
Investigations or upon the Board's own motion, the Board may, in 
appropriate circumstances, rely upon the investigation or a sanction, 
if any, of a foreign registered public accounting firm by a non-U.S. 
authority.
* * * * *

Section 6. International

Rule 6001. Assisting Non-U.S. Authorities in Inspections
    The Board may, as it deems appropriate, provide assistance in an 
inspection of a registered public accounting firm organized and 
operating under the laws of the United States conducted pursuant to the 
laws and/or regulations of a non-U.S. jurisdiction. The Board may 
consider the independence and rigor of the non-U.S. system in 
determining the extent of the Board's assistance.
Rule 6002. Assisting Non-U.S. Authorities in Investigations
    The Board may, as it deems appropriate, provide assistance in an 
investigation of a registered public accounting firm organized and 
operating under the laws of the United States conducted pursuant to the 
laws and/or regulations of a non-U.S. jurisdiction. The Board may 
consider the independence and rigor of the non-U.S. system in 
determining the extent of the Board's assistance.

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
    Section 106(a) of the Act provides that non-U.S. public accounting 
firms are subject to the Act and the rules of the Board and the 
Commission issued under the Act in the same manner and to the same 
extent as a U.S. public accounting firm. The Board developed a 
framework under which the Board could implement the Act's provisions by 
relying, to an appropriate degree, on a non-U.S. oversight system. The 
proposed rules codify the Board's framework relating to the oversight 
of non-U.S. public accounting firms.
    The rules adopted address the Board's oversight of non-U.S. 
accounting firms that register with the Board and the Board's 
willingness to assist non-U.S. authorities in their oversight of U.S. 
firms.
    The Board's rules on inspections (PCAOB Rules 4011 and 4012) 
provide a foreign registered public accounting firm an opportunity to 
minimize the unnecessarily duplicative administrative burdens of dual 
oversight by requesting that the Board rely--to an extent deemed 
appropriate by the Board--on inspections of the registered firm under 
the home country's oversight system. Under the Board's rules, a firm 
would first provide the Board with a one-time statement asking the 
Board to rely on a non-U.S. inspection. At an appropriate time before 
each inspection of a non-U.S. firm that has submitted such a statement, 
the Board would determine the appropriate degree of reliance based on 
information about the non-U.S. system obtained primarily from the non-
U.S. regulator regarding

[[Page 44557]]

the independence and rigor of the non-U.S. system. The Board would also 
base its decision on its discussions with the appropriate entity or 
entities within the oversight system concerning the specific inspection 
work program for the non-U.S. firm's inspection at hand. The more 
independent and rigorous a home-country system, the higher the Board's 
reliance on that system. A higher level of reliance translates into 
less direct involvement by the Board in the inspection of the non-U.S. 
registered public accounting firm.
    The Board's rule on investigations (PCAOB Rule 5113) provides that 
the Board may, in appropriate circumstances, rely upon the 
investigation or sanction, if any, of a foreign registered public 
accounting firm by a non-U.S. authority. The Board's reliance would 
depend, in part, on the independence and rigor of the non-U.S. 
authority. Reliance also may depend on the non-U.S. authority's 
willingness to update the Board regarding the investigation on a 
regular basis and its willingness and authority to share the relevant 
evidence gathered with the Board.
    The Board has also adopted two rules reflecting its willingness to 
assist non-U.S. authorities in their oversight of firms located in the 
U.S. and registered with the Board. PCAOB Rule 6001 relates to 
inspections and provides that the Board may, as it deems appropriate, 
assist a non-U.S. authority in its inspection of a registered U.S. 
firm. PCAOB Rule 6002 relates to investigations and provides that the 
Board may, as it deems appropriate and to the extent permitted by law, 
assist a non-U.S. authority in the investigation of a registered U.S. 
accounting firm.
(b) Statutory Basis
    The statutory basis for the proposed rule 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. The proposed rules codify the 
Board's framework relating to the oversight of non-U.S. public 
accounting firms.

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

    The Board released the proposed rules for public comment in PCAOB 
Release No. 2003-024 (December 10, 2003). A copy of PCAOB Release No. 
2003-024 and the comment letters received in response to the PCAOB's 
request for comment are available on the PCAOB's Web site at 
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.
Rule 4011--Statement by Foreign Registered Public Accounting Firm
    PCAOB Rule 4011 states that a foreign registered public accounting 
firm that seeks to have the Board rely on a non-U.S. inspection when 
the Board conducts an inspection of such firm pursuant to PCAOB Rule 
4000 shall submit a written statement signed by an authorized partner 
or officer of the firm to the Board certifying that the firm seeks such 
reliance for Board inspections.
    The Board's proposed rule would have required that foreign 
registered public accounting firms submit to the Board a written 
petition, in English, describing the non-U.S. system's laws, rules and/
or other information to assist the Board in evaluating such system's 
independence and rigor. Many commenters argued that this requirement 
was neither practical nor effective, that different public accounting 
firms within the same jurisdiction may translate and describe the 
system differently, and that non-U.S. regulators, rather than public 
accounting firms, are in a better position to describe the non-U.S. 
system, as they may possess information unknown by a foreign registered 
public accounting firm.
    In response to these comments, the Board has decided not to impose 
the petition requirement. The Board's rule does not require a foreign 
registered public accounting firm to describe its oversight system, 
including its legal underpinnings. As explained more fully below, under 
PCAOB Rule 4012, the Board will, at an appropriate time, obtain 
information about the non-U.S. system directly from the appropriate 
non-U.S. regulator.
    Instead of requiring a petition, the Board has adopted a rule 
permitting a foreign registered public accounting firm to submit a one-
time statement certifying that it seeks to have the Board rely on a 
non-U.S. inspection when the Board conducts an inspection pursuant to 
PCAOB Rule 4000. This statement may be submitted at any time after the 
foreign public accounting firm's registration application has been 
approved by the Board. The statement, which must be signed by an 
authorized partner or officer of the firm, should be addressed to the 
attention of the Secretary and may be submitted via post or electronic 
mail (pcaobus.org">secretary@pcaobus.org). If the statement is submitted via 
electronic mail, the words ``Rule 4011 Statement'' must be included in 
the subject line.
    The Board believes that a foreign registered public accounting 
firm's one-time statement, which is not associated with any specific 
Board inspection, should resolve the concern expressed by some 
commenters that proposed PCAOB Rule 4011 would have left unclear when a 
foreign registered public accounting firm should submit the earlier 
proposed petition. Commenters indicated that some non-U.S. 
jurisdictions are in the process of developing new auditor oversight 
regimes or otherwise modifying their existing regimes. Those commenters 
were uncertain whether their petitions would need to be submitted 
immediately and then updated as changes occurred, or if they should 
wait until the changes to their local oversight regimes were finalized. 
Because the one-time statement is not associated with a specific Board 
assessment for a specific Board inspection under new PCAOB Rule 4012 
and no longer includes any description requirements of the non-U.S. 
system, a foreign registered public accounting firm may submit the 
statement without waiting for the finalization of any potential changes 
to its oversight regime. Of course, if the foreign registered public 
accounting firm is selected for inspection before the finalization of 
changes to its non-U.S. system, the Board would make a reliance 
determination under PCAOB Rule 4012 based on the system in place at the 
time of the determination. As explained more fully below, finalization 
of changes in a non-U.S. system that affects a system's independence or 
rigor would necessitate a review of the Board's previous determination.
    In addition, in response to comments, the Board has eliminated the 
proposed Exhibit 99.3 to Form 1, which would have allowed an applicant 
an option to provide the name and physical address of the applicant's 
foreign registrar or any other authority responsible for regulation of 
the applicant's practice of accounting. The Board believes it is more 
efficient for the Board to identify the appropriate non-U.S. regulator 
itself, rather than have a non-U.S. public accounting firm submit an 
additional exhibit to the Board through the registration system.
    It should be noted that PCAOB Rule 4011 (and PCAOB Rule 4012) are 
not limitations on the Board. Thus, even if a non-U.S. registered 
public accounting firm does not choose to submit a

[[Page 44558]]

statement pursuant to Rule 4011, the Board may take steps it determines 
are necessary to facilitate the inspection of such firm through the 
cooperative framework.
Rule 4012--Inspections of Foreign Registered Public Accounting Firms
    The Board has reorganized much of the substance, with some 
modification, of proposed PCAOB Rule 4011 into PCAOB Rule 4012. PCAOB 
Rule 4012 provides that the Board shall determine the degree, if any, 
it may rely on a non-U.S. inspection of a foreign registered public 
accounting firm that has submitted a statement pursuant to PCAOB Rule 
4011. The Board will make such determination at an appropriate time 
before each inspection of such firm. In making that determination, the 
Board will evaluate (1) information concerning the level of the non-
U.S. system's independence and rigor, including the adequacy and 
integrity of the system, the independence of the system's operation 
from the auditing profession, the nature of the system's source of 
funding, the transparency of the system, and the system's historical 
performance and (2) discussions with the appropriate entity or entities 
within the system concerning an inspection work program for the 
particular firm. The Board will consider certain illustrative 
criterion, now listed in the rule, in applying the broad principles 
articulated in PCAOB Rule 4012. PCAOB Rule 4012 also provides that the 
Board shall conduct its inspection under PCAOB Rule 4000 in a manner 
that relies on non-U.S. inspections, to the degree determined by the 
Board and to the extent consistent with the Board's responsibilities 
under the Act.
    The Board received wide-ranging comments on the Board's proposal 
for determining the appropriate degree of reliance, including concerns 
about the Board's fundamental approach to oversight of foreign 
registered public accounting firms to requests for clarification or 
change to the Board's process for assessing a non-U.S. system.
    After careful consideration of the comments, the Board has made 
certain changes to the proposed rule and offers clarification in other 
areas, each of which is explained below.
Comments on the Board's Overall Approach
    With regard to the Board's overall approach, some commenters argued 
that the Board should adopt a ``mutual recognition'' model whereby the 
Board would accord complete deference to the home-country regulator in 
the areas of inspections, investigations and sanctions. Similarly, one 
commenter suggested that the Board should not issue its own inspection 
report for a foreign registered public accounting firm, but instead 
should rely on the report of the non-U.S. regulator.
    The Board does not believe that a ``mutual recognition'' approach 
would be in the interests of U.S. investors or the public. While the 
Board is hopeful that it will be able to place a high degree of 
reliance on certain non-U.S. systems of oversight, the Board believes 
that it must preserve the ability to participate fully and directly in 
the inspection, investigation and sanction of foreign registered public 
accounting firms if warranted by the particular facts and 
circumstances. Under the Act, the Board's mission is to oversee the 
auditors of issuers in order to protect the interests of investors and 
further the public interest in the preparation of informative, fair, 
and independent audit reports. More specifically, the Board is required 
by the Act to conduct inspections in order to assess the registered 
public accounting firm's compliance with U.S. laws, regulations and 
professional standards. Because non-U.S. regulatory authorities do not 
have this same mission, deferring to those authorities regardless of 
the circumstances would not be in the interests of U.S. investors or 
the public.
    Several commenters criticized the principles and related criteria 
that the Board would consider in evaluating the independence and rigor 
of a non-U.S. system as disproportionately based on the principles and 
related criteria that underlie the oversight system in the United 
States. These commenters suggested that the Board would place a high 
level of reliance only on those non-U.S. systems that were identical or 
substantially similar to the Board.
    The Board has previously stated that it believes that the ``sliding 
scale'' approach can accommodate a variety of oversight systems. The 
Board does not intend to require that non-U.S. systems be identical or 
even substantially similar to the PCAOB in order for the Board to place 
a high level of reliance on them.
    That said, the Act and its creation of an independent public 
oversight entity for auditors (the PCAOB) reflect the view of the U.S. 
Congress that the self-regulatory system used to ensure high quality 
audits for U.S. issuers was not adequate. Thus, in determining the 
degree to which the Board may rely on a non-U.S. regulator to conduct 
inspections of firms located abroad that audit companies whose 
securities trade in U.S. markets, it is appropriate for the Board to 
evaluate that regulator in light of the principles that underlie the 
creation of the PCAOB. As explained in the proposing release, however, 
the listed criteria are not exhaustive, and the presence or absence of 
any one of the criteria would not necessarily be dispositive. The Board 
intends to assess the structure and operation of a non-U.S. system as a 
whole, and not base its decision on whether that system meets a certain 
number of the criteria.
Comments on Board's Assessment--Application of Principles and Criteria
    In response to comments, the illustrative criteria the Board may 
consider in evaluating a non-U.S. system has been moved from the body 
of the release into the text of PCAOB Rule 4012.
    With regard to the application of the principles and criteria, some 
commenters urged the Board to evaluate a non-U.S. system's independence 
and rigor on a country-by-country basis rather than firm-by-firm. Those 
commenters expressed concern that the Board may draw different 
conclusions with respect to foreign registered public accounting firms 
that are subject to the same non-U.S. system.
    The Board intends to evaluate a non-U.S. system's independence and 
rigor on a country-by-country basis so that the conclusion regarding 
its independence and rigor will be the same for all non-U.S. registered 
public accounting firms within that system. Of course, each time a firm 
is selected for inspection, the Board would reconfirm that assessment 
in light of any changes that may have occurred to the non-U.S. system. 
In addition to the Board's consideration of the independence and rigor 
of a non-U.S. system, however, the Board must also consider the 
discussions with the non-U.S. regulator regarding the inspection work 
program for the individual non-U.S. registered public accounting firm 
selected for inspection. Because an inspection work program is specific 
to an individual non-U.S. registered public accounting firm, the 
Board's ultimate determination under PCAOB Rule 4012 can be made only 
on a firm-by-firm basis.
    Some commenters urged the Board to describe precisely how the Board 
would weigh each of the listed criteria. Others urged the Board to 
avoid weighing certain criteria too heavily, including (1) whether 
members that govern the oversight system were appointed by the 
government, and (2) whether a majority of members hold licenses to 
practice public accounting.
    The proposing release stated that the listed criteria are not 
intended to be exhaustive, and that the presence or

[[Page 44559]]

absence of any one of the criteria would not necessarily be 
dispositive. The Board continues to believe that it should not, in the 
abstract, specify a weight for individual criterion. Assigning a rigid 
weight to each criterion would create a ``check-the-box'' process that 
could result in the form and structure of an oversight system (rather 
than the substance within the system) having an inappropriate role in 
the Board's determination. Oversight systems may differ in form, 
structure and complexity and therefore meet different criteria in 
different ways, but they nevertheless may achieve the principles in 
PCAOB Rule 4012 in an equally effective manner. Consequently, the Board 
does not believe it is appropriate to create a rigid evaluation process 
that inadvertently penalizes an independent and rigorous system as a 
result of the Board's use of predetermined weights for the listed 
criteria. Instead, as explained above, the Board's rule permits the 
Board to analyze a non-U.S. system as a whole.
    Other commenters requested that the Board define the term ``any 
other information,'' as used in proposed PCAOB Rule 4011(c)(2). The 
Board's modification of the proposed rule no longer includes those 
specific words. However, the Board's rule indicates the Board will 
evaluate any information that comes to its attention concerning the 
level of the non-U.S. system's independence and rigor. In other words, 
the Board does not intend to exclude any information due to its source. 
Of course, the Board will take into account the source of the 
information in considering the probative value of the information.
    Several commenters argued that the proposed rule permits the Board 
unlimited discretion and therefore creates an unacceptable level of 
uncertainty with respect to the application of the rule in practice. 
The Board has decided against modifying the rule in response to these 
comments. While the Board retains the discretion to design inspection 
programs under the Act, the Board believes that the stated principles 
and criteria allow interested parties enough information to estimate 
reasonably the extent of reliance on a home-country inspection. In 
addition, the Board expects the level of uncertainty in a specific 
jurisdiction to subside as the Board begins to implement the rule.
    A few commenters expressed concern that the criteria did not 
include consideration of whether those that govern have appropriate 
qualifications and expertise. The Board agrees and has included 
criteria related to the qualifications and expertise of persons within 
the non-U.S. system.
    Another commenter suggested that the Board's criteria do not 
address financial, business or personal independence risks. As stated 
in the proposing release, the Board would consider whether an entity 
within the system has the authority to establish and enforce ethics 
rules and standards of conduct for an individual or a group of 
individuals that govern the system and associated staff. The Board 
believes this criterion captures the risks related to independence. As 
part of its assessment process, the Board could consider certain points 
raised by the specific policies of a code of ethics or a code of 
conduct and their impact on the independence of the system.
Comments on the Board's Assessment--Process
    In addition to the substance of the Board's assessment under the 
proposed rule, several commenters argued that the Board should make 
changes to the process surrounding the Board's reliance determination.
    First, a number of commenters urged the Board to allow an appeal of 
its reliance determination. The Board has decided against permitting an 
appeal of the Board's determination. Under the Act, the design and 
implementation of an inspection work program is within the discretion 
of the Board. It follows that, because the Board's decision regarding 
the appropriate degree of reliance, if any, is essentially a decision 
regarding the design and implementation of inspection work programs for 
non-U.S. registered public accounting firms, such decision is also 
properly within the Board's discretion. The Act does not provide for an 
appeal of the Board's design of such programs. In addition, allowing 
such an appeal would potentially permit a non-U.S. registered public 
accounting firm to impede the Board's ability to discharge its 
obligation under the Act to assess the compliance of that firm with 
U.S. laws and standards.
    Some commenters asserted that the Board should be required to 
communicate the basis for the Board's determination to the public and 
representatives of the non-U.S. system. In response to these comments, 
the Board intends to provide a general description of its activities 
with representatives of non-U.S. systems either as part of its annual 
report to the public or in a separate public report to make the Board's 
processes under its framework more transparent. As a practical matter, 
representatives of the non-U.S. system will be informed of the basis 
for the Board's assessment as a natural part of the dialogue between 
the Board and those representatives. Under the framework for 
cooperation created by the Board's rules, a dialogue will take place 
between the Board and representatives of the non-U.S. system regarding 
the structure and operation of such system as well as the content of 
the inspection work programs for the non-U.S. registered public 
accounting firms within that system.
    Another commenter urged that the Board require itself to maintain 
its initial assessment unless a formal request to change the assessment 
is made by the non-U.S. registered public accounting firm or 
alternatively that the Board provides advance notice of its intent to 
change its assessment determination. PCAOB Rule 4012 provides that the 
Board will conduct its inspection under PCAOB Rule 4000 in accordance 
with its reliance determination to the extent consistent with the 
Board's responsibilities under the Act. The Board intends to maintain 
its initial assessment unless there is a change in circumstances 
subsequent to such determination that necessitates a review of that 
determination. Generally, such circumstances would include changes in 
the non-U.S. system that affects the system's independence or rigor or 
changes in the willingness or ability of a non-U.S. regulator to 
cooperate with the Board in the inspection of a non-U.S. registered 
public accounting firm. It would not be in the interest of U.S. 
investors or the public for the Board to wait, notwithstanding a change 
in the system, until a non-U.S. registered public accounting firm 
requested a new assessment. If the Board determines that a change in 
its prior assessment is warranted, the non-U.S. regulator will be 
informed, again, as a part of the dialogue between that regulator and 
the Board.
    Another commenter suggested that the Board should be required to 
provide a non-U.S. registered public accounting firm a copy of any 
written correspondence between the Board and the non-U.S. regulator. 
The Board disagrees. Providing the subject of the inspection process 
(i.e., the registered firm) access to such correspondence could permit 
the firm subject to inspection an opportunity to be aware of the 
certain details regarding the inspection work program to be used during 
the inspection of such firm, as well as inhibit frank and open 
discussions between the Board and the non-U.S. regulator.
    One commenter urged the Board to require that its reliance 
determination

[[Page 44560]]

be made within a specified time frame. First, PCAOB Rule 4012 already 
contains a deadline in that it requires that the Board complete 
discussions and make a determination at an appropriate time before the 
inspection of a registered non-U.S. firm begins. Second, otherwise 
permitting flexibility in the amount of time allowed is necessary for 
the Board to engage in a constructive regulator-to-regulator dialogue 
about the structure and operation of the non-U.S. system and the 
requirements of a specific firm's inspection. Thus, the Board has 
declined to modify the rule to require the Board to make its 
determination within a shorter or more specific time frame.
    Some commenters stressed that the Board should not weigh 
unfavorably a non-U.S. regulator's ``willingness'' to provide access to 
information when they are prevented from doing so by an asserted 
conflict of law. As discussed in more detail below, the cooperative 
framework implemented through these rules may not resolve all potential 
legal conflicts. Thus, if a non-U.S. regulator is unable to share 
information, then that factor must be taken into account in the Board's 
decision on whether it is in the interest of U.S. investors and the 
public to rely on that regulator. Whether the regulator's inability to 
share information is weighed ``heavily'' will depend on the facts and 
circumstances at hand. Under the Act, the Board must assess each 
registered public accounting firm's compliance with U.S. laws and 
standards. A regulator's inability to share information could prevent 
the Board from making such assessment, which in turn, would prevent the 
Board from discharging its responsibilities under the Act.
    Other commenters noted specifically that potential conflicts of law 
remain unresolved under the Board's proposed rules and urged the Board 
to adopt a rule similar to PCAOB Rule 2105 for inspections and 
investigations of foreign registered public accounting firms. Another 
commenter requested clarification regarding whether a submission made 
pursuant to PCAOB Rule 2105 in connection with a registration 
application applies to potential conflicts of law that may arise 
subsequent to registration and whether a non-U.S. registered public 
accounting firm's inability to cooperate due to those subsequent 
conflicts could subject such firm to disciplinary action. The commenter 
also requested clarification regarding whether a submission made 
pursuant to PCAOB Rule 2105 is also valid for the so-called ``deemed 
consent'' under Section 106 of the Act.
    First, to clarify, PCAOB Rule 2105 provides the requirements for 
applicants that wish to withhold information from their applications 
for registration with the Board. The rule does not apply to potential 
conflicts of law that may arise subsequent to registration and does not 
affect the deemed consent under Section 106 of the Act.
    Second, the Board recognizes that its rules relating to the 
oversight of non-U.S. registered public accounting firms do not 
conclusively resolve potential conflicts of law. Preserving the Board's 
ability to access audit work papers and other documents or information 
maintained by registered public accounting firms, including non-U.S. 
registered public accounting firms, is critical to the Board carrying 
out its obligations under the Act. Consequently, the Board does not 
believe that it is in the interests of U.S. investors or the public for 
the Board to adopt a rule of general application that would limit its 
ability to access such documents or information regardless of the 
circumstances or need for those documents or information.
    Instead, as explained in the Briefing Paper, the Board envisages 
that potential conflicts of law that may arise in connection with an 
inspection or an investigation can be addressed through the cooperative 
approach. The Board continues to believe that most conflicts of law can 
be resolved through an approach in which the Board works in the first 
instance with the non-U.S. regulator or through the use of special 
procedures such as voluntary consents and waivers. As previously 
explained, the Board believes that it is appropriate that a cooperative 
approach respect the laws of other jurisdictions, to the extent 
possible. At the same time, every jurisdiction must be able to protect 
the participants in, and the integrity of, its capital markets as it 
deems necessary and appropriate. The Board believes that working with 
non-U.S. regulators in the first instance to overcome asserted 
conflicts of law reflects the appropriate balance between the interests 
of different systems and their laws.
    The comments urging the Board to adopt a rule similar to PCAOB Rule 
2105 for inspections and investigations seem to reflect the view that 
PCAOB Rule 2105 offers an opportunity for resolution to conflicts of 
law that are asserted during the registration process. Such 
interpretation is not correct. If the Board decides to treat a 
registration application in which information is withheld pursuant to 
PCAOB Rule 2105 as complete, such action by the Board would not 
constitute a concession that the non-U.S. law does in fact prohibit the 
applicant from supplying the information and would not preclude the 
Board from contesting that assertion in other contexts.
    In other words, PCAOB Rule 2105 does not offer an absolute safe-
harbor for public accounting firms that assert a conflict of laws. 
PCAOB Rule 2105 provides an opportunity for the public accounting firm 
to be heard on an asserted conflict of law in the context of 
registration. Although not set out in a separate rule, a similar 
opportunity to be heard regarding asserted conflicts of law that may 
arise in the context of inspections and investigations is already 
provided under the Act and the Board's rules regarding disciplinary 
hearings.
    For those asserted conflicts of law that arise during an inspection 
or investigation and cannot be resolved by working with the appropriate 
non-U.S. regulator, by the use of voluntary waivers or consents, or by 
other means,\1\ the Board's rules provide the registered public 
accounting firm with an opportunity to present its position to the 
Board regarding the asserted legal conflict before any action is taken 
by the Board. If the Board cannot fully conduct an inspection or 
investigation in a timely manner due to an asserted conflict of law, 
the Board may consider whether the non-U.S. registered public 
accounting firm should be sanctioned by the Board for non-cooperation. 
Under the Act and the Board's rules regarding disciplinary proceedings 
and hearing procedures, before any sanction may be imposed, a 
registered public accounting firm will have an opportunity to be heard 
before an independent hearing officer regarding the asserted conflict 
of law and whether revocation of its registration is an appropriate 
sanction. The registered public accounting firm's rights under the Act 
and the Board's rules include appeal of the hearing officer's decision 
to the Board, appeal of the Board's decision to the Commission and 
appeal of the Commission's decision to the court of appeals.
---------------------------------------------------------------------------

    \1\ The Board hopes to resolve potential conflicts of law as 
part of its discussions with a non-U.S. regulator under PCAOB Rule 
4012 before the inspection of a non-U.S. registered public 
accounting firm.
---------------------------------------------------------------------------

    To be clear, the Board is not suggesting that it would in all cases 
commence a non-cooperation proceeding when a firm asserts a conflict of 
law that cannot be resolved. As previously explained, the Board expects 
that most conflicts of laws can be resolved by working with the 
appropriate non-U.S. regulator, through the use of voluntary waivers or 
consents, or other means. The point is that a rule like PCAOB Rule 2105 
is not

[[Page 44561]]

needed in the context of inspections and investigations because a 
similar opportunity to be heard is already provided.
    Finally, some commenters sought clarification about the 
participation of ``experts'' who are designated by the Board in 
inspections where the Board has determined that a high level of 
reliance is appropriate. The Board expects that the participation of at 
least one Board-designated expert in U.S. Generally Accepted Accounting 
Principles, PCAOB standards and other U.S. professional standards and 
law will be necessary on all inspections of non-U.S. registered public 
accounting firms. After the Board has conducted initial inspections 
through the cooperative framework with the cooperation of the non-U.S. 
regulator, however, the Board may designate an outside expert who is 
not a PCAOB employee to participate in the inspection.
Rule 5113--Reliance on the Investigations of Non-U.S. Authorities
    PCAOB Rule 5113 provides that the Board may, in appropriate 
circumstances, rely upon the investigation or sanction, if any, of a 
non-U.S. registered public accounting firm by a non-U.S. authority. The 
Board's reliance would depend, in part, on the independence and rigor 
of the non-U.S. authority. Reliance also may depend on the non-U.S. 
authority's willingness to update the Board regarding the investigation 
on a regular basis and its willingness and authority to share the 
relevant evidence gathered with the Board.\2\
---------------------------------------------------------------------------

    \2\ Of course, PCAOB Rule 5113 does not apply to investigations 
or sanctions carried out by the Securities and Exchange Commission.
---------------------------------------------------------------------------

    Circumstances may require, however, that the Board conduct an 
investigation relating to the audit work of a non-U.S. registered 
public accounting firm, or an associated person of such a firm, in 
connection with the financial statements of an issuer. PCAOB Rule 5113 
does not limit the Board's authority under PCAOB Rule 5200 to commence 
disciplinary proceedings whenever it appears to the Board that such 
action is warranted.
    Some commenters noted that, because PCAOB Rule 5113 does not 
definitively limit the Board's authority to initiate an investigation 
or impose sanctions, it poses the risk that a non-U.S. registered 
public accounting firm may be subject to an investigation and sanction 
by both the Board and a non-U.S. authority. One commenter suggested 
that, because of this risk, the Board should limit its authority and 
defer to the non-U.S. regulator in matters of investigation and 
sanction.
    The Board has declined to change the rule in response to these 
comments. As explained earlier, the Board's mission is to oversee the 
auditors of issuers in order to protect the interests of investors and 
further the public interest in the preparation of informative, fair, 
and independent audit reports. Because non-U.S. regulatory authorities 
do not have the same mission, restricting the Board's authority to 
conduct investigations or impose sanctions on non-U.S. registered 
public accounting firms by deferring to non-U.S. authorities--in every 
case--would not be consistent with the Board's obligations under 
Section 105 of the Act.
    In any event, the Board does not believe that PCAOB Rule 5113 poses 
a risk of ``double jeopardy'' for a registered firm. The Board has the 
authority to investigate and discipline registered public accounting 
firms only for potential violations of U.S. laws, regulations and 
professional standards. To the extent that a foreign registered public 
accounting firm's conduct violates laws in two separate jurisdictions, 
the foreign registered public accounting firm has chosen to subject 
itself to the laws of those jurisdictions by choosing to operate in 
multiple jurisdictions.
    That said, as the Board explained in the Briefing Paper, when a 
non-U.S. disciplinary regime provides for appropriate sanctions of non-
U.S. registered public accounting firms and individuals and that regime 
adequately serves the public interest and protects investors, the Board 
intends to rely, as appropriate, on the work of the other disciplinary 
system. Certain circumstances, however, may require the PCAOB to 
conduct the investigation of a non-U.S. registered public accounting 
firm relating to its audit of an issuer or to impose sanctions beyond 
those imposed by the non-U.S. system. In doing so, the Board may 
consider the sanctions of the non-U.S. system when determining the 
appropriate sanction in the United States.
    Several commenters requested that the Board clarify the meaning of 
the phrase ``in appropriate circumstances'' in PCAOB Rule 5113 or 
otherwise provide more detail regarding the circumstances under which 
the Board would choose to rely on a non-U.S. authority in the context 
of an investigation. Similarly, one commenter suggested that the 
Board's approach to inspections and investigations of non-U.S. 
registered firms should be identical, and therefore that the Board 
should define the conditions for relying on a non-U.S. authority under 
PCAOB Rule 5113.
    While the request for more detail is understandable, the Board has 
declined to define the phrase ``in appropriate circumstances'' as the 
facts and circumstances of any investigation are not predictable. The 
Board believes it is necessary to preserve a high level of flexibility 
to decide whether reliance on a non-U.S. authority in an investigation 
context is in the interest of U.S. investors and the public and would 
otherwise permit the Board to satisfy its responsibilities under the 
Act.
    In addition, the Board does not believe that its approach to 
investigations is ``inconsistent'' with its approach to inspections of 
non-U.S. registered public accounting firms. Investigations and 
inspections are different in nature and are governed under different 
sections of the Act and, therefore, warrant different approaches. 
Investigations, which are addressed by Section 105 of the Act, are 
premised on a possible violation of U.S. law, regulation or 
professional standard. Inspections, on the other hand, are governed by 
Section 104 of the Act and do not involve perceived violations of law. 
Rather, inspections, the timing of which is mandated by the Act, are 
designed to review periodically and, where necessary, encourage 
improvements in, a registered public accounting firm's compliance with 
the relevant U.S. laws, regulations and professional standards.
    Finally, some commenters asked that the Board ensure that non-U.S. 
registered public accounting firms are afforded certain rights whenever 
the Board relies on a non-U.S. authority in the context of 
investigations or sanctions. This comment reflects a misunderstanding 
about the nature of the Board's ``reliance'' on non-U.S. authorities in 
the context of investigations and sanctions. With regard to 
investigations, the Board expects that its participation in an 
investigation when it ``relies'' on a non-U.S. authority could take one 
of two forms: the Board will either (1) decline to initiate an 
investigation of its own and simply rely on the fact that a non-U.S. 
regulator is conducting the investigation pursuant to its own 
authority; or (2) initiate an investigation to gather information 
itself but also accept information gathered by a non-U.S. regulator 
pursuant to its own authority. In both cases, the non-U.S. regulator is 
acting pursuant to its own authority, not the authority of the PCAOB or 
the Act. Therefore, the Board cannot ensure that non-U.S. registered 
public accounting firms being

[[Page 44562]]

investigated by a home-country regulator acting under the authority of 
non-U.S. law are afforded certain rights. The Board can ensure only 
that registered public accounting firms, including non-U.S. registered 
public accounting firms, are afforded certain rights with respect to 
the investigation being conducted by the Board acting pursuant to the 
authority of the Act and the Board's rules.
    In the context of sanctions, the Board's ``reliance'' (if any) on a 
sanction imposed by a non-U.S. authority could also take one of two 
forms: the Board will either (1) decline to initiate a disciplinary 
hearing and impose no sanction of its own, and simply rely on the fact 
that a non-U.S. authority is sanctioning pursuant to its own authority; 
or (2) initiate a disciplinary hearing by relying (at least in part) on 
an investigative record compiled by a non-U.S. regulator that led to a 
sanction being imposed by that regulator.
    In the first scenario, the Board would be ``relying'' on a sanction 
imposed by a non-U.S. regulator by not imposing a sanction itself. 
Because no sanction is being imposed by the Board, there is no need for 
a Section 105(c) disciplinary proceeding.
    In the second scenario, the Board would be using an investigatory 
record compiled, at least in part, by a non-U.S. regulator. In that 
case, however, the Board has initiated a disciplinary proceeding 
pursuant to Section 105(c) and the Board's rules. As a result, before 
the Board imposes any sanction, the foreign registered public 
accounting firm will be afforded the same rights under the Act and the 
Board's rules as if the Board had compiled the record itself.
Rule 6001--Assisting Non-U.S. Authorities in Inspections
    PCAOB Rule 6001 provides that the Board may, as it deems 
appropriate, provide assistance in an inspection of a registered public 
accounting firm conducted pursuant to the laws and/or regulations of a 
non-U.S. jurisdiction. The rule also provides that the Board may 
consider the independence and rigor of the non-U.S. system in 
determining the extent of the Board's assistance.
    In response to comments suggesting that the Board adopt a rule 
reflecting its willingness to assist non-U.S. authorities in their 
inspection of U.S. firms that audit companies whose securities trade 
outside the United States, the Board has decided to adopt PCAOB Rule 
6001. This rule reflects the Board's previous statements that it is 
willing to assist in the inspection of U.S. firms that audit or play a 
substantial role in the audit of public companies in non-U.S. 
jurisdictions.\3\ Because the interests and needs of non-U.S. 
regulators will differ across jurisdictions, the Board intends to work 
out the details of its assistance on the basis of discussions with 
individual regulators.
---------------------------------------------------------------------------

    \3\ See PCAOB Release No. 2003-020, Oversight of Non-U.S. Public 
Accounting Firms (October 28, 2003).
---------------------------------------------------------------------------

    Some commenters questioned whether the Act confers authority upon 
the Board to assist in such inspections. Section 101(c)(5) of the Act 
grants the Board the authority necessary to assist non-U.S. regulators. 
Section 101(c)(5) provides that ``[t]he Board shall * * * (5) perform 
such other duties or functions as the Board (or the Commission, by rule 
or order) determines are necessary or appropriate to promote high 
professional standards among, and improve the quality of audit services 
offered by, registered public accounting firms and associated persons 
thereof, or otherwise to carry out this Act, in order to protect 
investors, or to further the public interest.''
    To satisfy the confidentiality requirements under Section 105 of 
the Act, the Board intends to establish the necessary and appropriate 
safeguards so that information gathered through its assistance of non-
U.S. regulators is maintained separately from the information gathered 
during a regular or special inspection under Section 104.
    Some commenters requested that the Board require, as a condition of 
its assistance, that the non-U.S. regulator provide a level of 
confidentiality for information gathered during inspections comparable 
to that provided by the Act. Because an inspection by a non-U.S. 
regulator may be conducted pursuant to the authority of non-U.S. law, 
the Board cannot require or ensure that the non-U.S. regulator will 
provide a level of confidentiality comparable to that provided by the 
Act. The level of confidentiality provided by the non-U.S. regulator 
will be determined by the level allowed under the applicable law of the 
non-U.S. jurisdiction.
    Also consistent with the Board's previous statements regarding 
cooperation, PCAOB Rule 6001 reflects the Board's intention to provide 
a level of assistance that is consistent with the Board's determination 
regarding the non-U.S. oversight system's independence and rigor. In 
other words, the Board intends to be available to assist in the 
inspection of U.S. public accounting firms where, by virtue of their 
participation in non-U.S. markets, the U.S. public accounting firm is 
subject to regulation by a non-U.S. independent public oversight 
system. However, the Board does not believe it would be appropriate to 
assist non-U.S. professional associations in their reviews of U.S. 
public accounting firms.
    Because the Board does not believe that local regulators of public 
accounting firms should impede the efforts of foreign regulators who 
are taking the necessary steps, as determined by those regulators, to 
meet their objectives and responsibilities, the Board would not take 
any steps to hinder a non-U.S. regulator's oversight of a U.S. 
accounting firm that operates in that regulator's jurisdiction, 
including obtaining information directly from that firm.
Rule 6002--Assisting Non-U.S. Authorities in Investigations
    PCAOB Rule 6002 provides that the Board may, as it deems 
appropriate, provide assistance in an investigation of a registered 
public accounting firm conducted pursuant to the laws and/or 
regulations of a non-U.S. jurisdiction. The rule also provides that the 
Board may consider the independence and rigor of the non-U.S. system in 
determining the extent of the Board's assistance.
    With respect to investigations, the Board would assist, to the 
extent permitted by law in investigations by non-U.S. authorities of 
U.S. public accounting firms that audit or play a substantial role in 
the audit of public companies in non-U.S. jurisdictions.

III. Date of Effectiveness of the Proposed Rules and Timing for 
Commission Action

    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 rule 
is consistent with the requirements of Title I of the Act. Comments may 
be submitted by any of the following methods:

[[Page 44563]]

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/pcaob.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number PCAOB-2004-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, 
Washington, DC 20549-0609.
    All submissions should refer to File Number PCAOB-2004-04. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/pcaob.shtml). Copies of the submission, all subsequent 
amendments, all written statements with respect to the proposed rule 
that are filed with the Commission, and all written communications 
relating to the proposed rule change 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 Section, 
450 Fifth Street, NW, Washington, DC 20549. Copies of such filing also 
will be available for inspection and copying at the principal office of 
PCAOB. All comments received will be posted without change; we do not 
edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number PCAOB-2004-04 and should be 
submitted on or before August 16, 2004.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-16921 Filed 7-23-04; 8:45 am]
BILLING CODE 8010-01-P