[Federal Register Volume 69, Number 172 (Tuesday, September 7, 2004)]
[Notices]
[Pages 54166-54167]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2072]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50291; File No. PCAOB-2004-04]


Public Company Accounting Oversight Board; Order Approving 
Proposed Rules Relating To Oversight of Non-U.S. Registered Public 
Accounting Firms

August 30, 2004.

I. Introduction

    On June 18, 2004, the Public Company Accounting Oversight Board 
(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 oversight of 
non-U.S. registered public accounting firms. Notice of the proposed 
rules was published in the Federal Register on July 26, 2004,\1\ and 
the period for public comment ended on August 16, 2004. 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. 34-50047 (July 20, 2004); 69 FR 44555 (July 26, 
2004).
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II. Description

    The Act directs the PCAOB to conduct a continuing program of 
inspections of registered public accounting firms and to investigate 
alleged violations of the Act, related securities laws, and auditing 
and related professional practice standards. Under the Act, non-U.S. 
registered public accounting firms are subject to PCAOB inspections and 
investigations to the same extent as U.S. registered public accounting 
firms.\2\ The PCAOB's proposed rules provide that, in conducting its 
inspections and investigations of non-U.S. firms, the PCAOB, in 
appropriate circumstances, may rely on the work of non-U.S. oversight 
systems, based on the PCAOB's analysis of the independence and rigor of 
that home country oversight system. The proposed rules supplement, 
rather than replace or supersede, the PCAOB's existing rules with 
respect to inspections and investigations of registered public 
accounting firms, which apply to both domestic and foreign registered 
public accounting firms.
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    \2\ Section 106(a) of the Act.
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    With respect to inspections, the proposed rules establish a 
cooperative framework that uses a ``sliding scale'' approach, in which 
the degree of reliance the PCAOB will place on a firm's home country 
oversight system will vary depending on the PCAOB's analysis of that 
system. The PCAOB will determine the degree, if any, to which it may 
rely on an inspection conducted pursuant to a non-U.S. firm's home 
country oversight system. After making that determination, the PCAOB, 
to the extent consistent with its responsibilities under the Act, will 
conduct its own inspection of the firm in question in a manner that 
relies on the non-U.S. oversight system to the degree the PCAOB has 
determined to be appropriate. In making its determination, the PCAOB 
will evaluate information concerning the home country oversight 
system's level of independence and rigor, including (1) the adequacy 
and integrity of the oversight system, (2) the independence of the 
system's operation from the auditing profession, (3) the nature of the 
system's source of funding, (4) the transparency of the system, and (5) 
the system's historical performance. The rules contain examples of the 
criteria the PCAOB might apply in determining the appropriate level of 
reliance to place on a non-U.S. oversight system. The rules also 
provide that the PCAOB's evaluation of the appropriate degree of 
reliance to place on a non-U.S. oversight system will be based on its 
discussions with the appropriate oversight authority within that 
system, including discussions concerning the specific inspection work 
program proposed for the firm in question.
    With respect to investigations of conduct that may violate laws in 
both the United States and a foreign jurisdiction, the proposed rules 
provide that, in appropriate circumstances, the PCAOB may rely on a 
non-U.S. oversight authority's investigation or sanction of that firm. 
The PCAOB's reliance would depend in part on its assessment of the 
independence and rigor of the non-U.S. oversight system and also may 
depend on the oversight authority's willingness to update the PCAOB 
regarding the investigation on a regular basis and its authority and 
willingness to share relevant evidence with the PCAOB.
    The PCAOB's proposed rules also provide that the PCAOB may, as it 
deems appropriate, provide assistance to non-U.S. oversight authorities 
that are conducting inspections or investigations of U.S. registered 
public accounting firms pursuant to a non-U.S. oversight system. The 
rules provide that, in determining the extent of the assistance it will 
provide, the PCAOB may consider the independence and rigor of the non-
U.S. oversight system that has requested the PCAOB's assistance.

III. Discussion

    The Commission received five comment letters regarding the PCAOB's 
proposed rules for oversight of non-U.S. registered accounting 
firms.\3\ The commenters generally supported the PCAOB's willingness to 
rely, to the extent possible, on inspections and investigations of non-
U.S. firms by their home country oversight bodies. Several commenters 
also recognized that the PCAOB already had made modifications to 
respond to certain of the comments the PCAOB received during its 
development of the proposed rules.
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    \3\ The comments were submitted by two accounting firms, a 
professional association of non-U.S. accountants and two non-U.S. 
governmental authorities.
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    Three of the commenters expressed concern with the PCAOB statement 
that,

[[Page 54167]]

in determining the degree of reliance it would place on another 
oversight system, it would consider the background, qualifications and 
independence of the persons involved in that oversight system. The 
PCAOB has stated, however, that it would consider a variety of factors 
with no single factor being determinative, and that its level of 
reliance will not depend on how similar the oversight system is to the 
PCAOB. One of these commenters also disagreed with the PCAOB's decision 
not to permit appeals of its determinations about reliance on other 
oversight systems, but welcomed the PCAOB's statement that it would 
discuss its determinations with the home country oversight body.
    One commenter expressed concern that the PCAOB-designated 
``expert'' on U.S. accounting and auditing matters might not be able to 
obtain full access to audit workpapers, due to conflicts with non-U.S. 
laws. That commenter encouraged the PCAOB to wait until it had more 
experience in working with non-U.S. oversight bodies before requiring 
that such an expert participate in each inspection, in order to avoid 
duplication of effort. The PCAOB's view is that using ``experts'' will 
help ensure that inspections of non-U.S. firms by foreign oversight 
bodies address compliance with U.S. requirements.
    Two commenters expressed concern with PCAOB participation in non-
U.S. oversight activities and argued for mutual recognition of other 
oversight systems if the U.S. and non-U.S. systems are equivalent. The 
PCAOB considered the possibility of instituting a mutual recognition 
system, but rejected that idea in favor of a system that gives the 
PCAOB more flexibility to determine how best to carry out its 
responsibilities under the Act. One of these commenters also noted the 
risk of multiple inspections and investigations of ``internationally 
active'' companies and the risk that such companies could be subject to 
duplicative sanctions for the same offense, but also welcomed the 
PCAOB's commitment to continued discussions of potential legal 
conflicts and its willingness to consider reciprocal assistance to 
other oversight bodies. A third commenter also suggested that the PCAOB 
take greater account of international law conflicts, which in some 
jurisdictions may prohibit or restrict the PCAOB from entering the 
jurisdiction to inspect or investigate local entities, unless there is 
an agreement with or cooperation from local authorities. We understand 
that the PCOAB is discussing these matters with its foreign 
counterparts.
    Under the proposed rules the PCAOB has broad discretion in 
determining the extent to which, in carrying out its statutory 
authority to inspect and investigate registered public accounting 
firms, it will rely on the work of non-U.S. oversight systems, and the 
extent to which it will provide assistance to non-U.S. oversight 
systems. Many of the issues relating to implementation of the proposed 
cooperative framework will be negotiated by the PCAOB on a case-by-case 
basis with non-U.S. oversight bodies in those jurisdictions where such 
an oversight body exists. Like the United States, other jurisdictions 
also are in the process of developing or strengthening their own 
systems for auditor oversight. We encourage the PCAOB to continue its 
discussions with non-U.S. oversight bodies and to consider ways it can 
work cooperatively with its foreign counterparts to carry out its 
responsibilities under the Act.

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 
oversight of non-U.S. registered public accounting firms (File No. 
PCAOB-2004-04) be and hereby are approved.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-2072 Filed 9-3-04; 8:45 am]
BILLING CODE 8010-01-P