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[Federal Register Volume 90, Number 4 (Tuesday, January 7, 2025)]
[Notices]
[Pages 1212-1215]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-00119]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-102074; File No. PCAOB-2024-05]

Public Company Accounting Oversight Board; Order Granting 
Approval on Constructive Requests To Withdraw From Registration

January 2, 2025.

I. Introduction

    On November 14, 2024, the Public Company Accounting Oversight Board 
(the ``PCAOB'') filed with the Securities and Exchange Commission (the 
``Commission''), pursuant to section 107(b) \1\ of the Sarbanes-Oxley 
Act of 2002 (``SOX'') and section 19(b) \2\ of the Securities Exchange 
Act of 1934 (the ``Exchange Act''), a proposed amendment to PCAOB Rule 
2107, Withdrawal from Registration (the ``Amendment'').\3\
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    \1\ 15 U.S.C. 7217(b).
    \2\ 15 U.S.C. 78s(b).
    \3\ See Public Company Accounting Oversight Board; Notice of 
Filing of Proposed Rules on Constructive Requests to Withdraw from 
Registration, Release No. 34-101644 (Nov. 15, 2024) [89 FR 92213 
(Nov. 21, 2024)] (``Notice of Filing of Proposed Rules''), available 
at https://www.sec.gov/files/rules/pcaob/2024/34-101644.pdf.
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    The Amendment was published for comment in the Federal Register on 
November 21, 2024.\4\ The Commission received one comment letter from 
the public regarding the Amendment.\5\ This order approves the 
Amendment, which we find to be consistent with the requirements of 
Title I of SOX and the rules and regulations issued thereunder and 
necessary or appropriate in the public interest or for the protection 
of investors.\6\ The Amendment and the Commission's findings with 
respect thereto are discussed in further detail below.
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    \4\ Id.
    \5\ A copy of the comment letter received on the Commission 
notice of the Amendment is available on the Commission's website at 
https://www.sec.gov/comments/pcaob-2024-05/pcaob202405.htm.
    \6\ See section 107(b)(4)(A) through (B) of SOX, 15 U.S.C. 
7217(b)(4)(A) through (B).
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II. Description of the Amendment

    On November 14, 2024, the PCAOB adopted the Amendment.\7\ The 
Amendment was preceded by a proposal on February 27, 2024, ``Proposals 
Regarding False and Misleading Statements Concerning PCAOB Registration 
and Oversight and Constructive Requests to Withdraw from Registration'' 
(the ``Proposing Release'').\8\ The PCAOB's process to develop the 
Amendment included consideration of the comments received on the 
Proposing Release.
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    \7\ See Constructive Requests to Withdraw from Registration, 
PCAOB Release No. 2024-011 (Nov. 14, 2024) (``Adopting Release''), 
available at https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-054/2024-011-registration.pdf?sfvrsn=35f8b138_2.
    \8\ See Proposals Regarding False or Misleading Statements 
Concerning PCAOB Registration and Oversight and Constructive 
Requests to Withdraw from Registration, PCAOB Release No. 2024-001 
(Feb. 27, 2024), available at https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-054/2024-001-registration.pdf?sfvrsn=51869da_2.
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    In the Notice of Filing of Proposed Rules,\9\ the PCAOB stated that 
it was proposing the Amendment to enhance its registration program by 
creating a more accurate public record of registered public accounting 
firms in operation that wish to remain registered.\10\ Under current 
rules, a registered public accounting firm can be removed from PCAOB 
registration only if the PCAOB either: (1) authorizes a withdrawal from 
registration based on a firm-initiated withdrawal request \11\ or (2) 
imposes a disciplinary sanction revoking the firm's registration.\12\ 
The

[[Page 1213]]

Amendment establishes a new procedural mechanism to address situations 
in which a registered firm has ceased to exist, is nonoperational, or 
no longer wishes to remain registered, as demonstrated by its failures, 
for at least two consecutive reporting years, to both (1) file annual 
reports (PCAOB Form 2, Annual Report) and (2) pay annual fees.
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    \9\ Public Company Accounting Oversight Board; Notice of Filing 
of Proposed Rules on Constructive Requests to Withdraw from 
Registration, Release No. 34-101644 (Nov. 15, 2024) [89 FR 92213] 
(Nov. 21, 2024) (``Notice of Filing of Proposed Rules''), available 
at https://www.sec.gov/files/rules/pcaob/2024/34-101644.pdf.
    \10\ Notice of Filing of Proposed Rules at 7.
    \11\ Rule 2107 provides that a registered firm may request leave 
to withdraw from registration at any time by filing Form 1-WD.
    \12\ See Adopting Release at 2.
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    The PCAOB explains that, despite repeated reminders, a consistent 
group of firms neither files annual reports nor pays annual fees each 
year.\13\ The presence of continuously delinquent firms on its list of 
registered firms hinders several regulatory objectives, including the 
PCAOB's ability to maintain an accurate public record of registered 
public accounting firms in operation and that wish to remain 
registered; to ensure that the information required on annual reports 
is being reported to the public and the PCAOB; to collect mandatory 
annual fees; and to efficiently use staff time and resources.\14\ With 
the Amendment, the PCAOB aims to have a reasonable, efficient, and 
equitable way of identifying and removing from registration firms that 
have ceased to exist, are nonoperational, or no longer wish to remain 
registered.\15\
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    \13\ Id. at 3.
    \14\ Id. at 4.
    \15\ Id. at 5.
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    The Amendment, which adds paragraph (h) to existing Rule 2107, 
allows the PCAOB to treat failures to both (1) file annual reports 
(PCAOB Form 2, Annual Report) and (2) pay annual fees, for at least two 
consecutive reporting years, as a constructive request to withdraw from 
registration, and to initiate a process to deem the firm's registration 
withdrawn. To initiate the constructive withdrawal process, the PCAOB 
would furnish the firm with a written Notice of Delinquency and 
Impending Withdrawal (the ``Notice''), designed to provide the firm 
with notice of the process, the reason for commencement of the process, 
and its significance for the firm's registration.\16\ The Notice would 
provide that the firm has 60 days to contact the PCAOB's registration 
staff by email to avoid withdrawal.\17\ The Notice would be sent to the 
firm's primary contact, as identified in the firm's most recent filing 
with the PCAOB on Forms 1, 2, 3, or 4, via mail or commercial courier 
service, and the PCAOB would obtain a confirmation of actual or 
attempted delivery.\18\ In addition to the mailed Notice, the PCAOB 
would also publish notice of the impending withdrawal on its public 
website.\19\
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    \16\ Id. at 14.
    \17\ Id. at 16.
    \18\ Id. at 15.
    \19\ Id.
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III. Effective Date

    The Amendment will be effective initially for annual reports and 
annual fees that are due in 2025. This means that a registered firm 
that does not file an annual report and does not pay an annual fee in 
2025 and 2026 could have its registration deemed withdrawn under Rule 
2107(h) beginning in the fall of 2026.

IV. Discussion and Commission Findings

a. Existing Requirements and Current Non-Compliance

    Section 102(d) of SOX requires each registered firm to submit an 
annual report to the PCAOB, while section 102(f) directs the PCAOB to 
assess and collect annual fees from each registered firm. Registration 
of firms and collecting annual fees to recover the cost of processing 
and reviewing registration applications and annual reports \20\ are 
important components of the framework that enables the PCAOB to fulfill 
its investor protection mandate. Despite the express statutory 
requirements set forth in SOX, and repeated reminders from the PCAOB, 
however, a consistent group of firms neither files annual reports nor 
pays annual fees each year.\21\ Moreover, PCAOB data indicate that, 
over time, a number of firms have persistently failed to fulfill both 
annual obligations, with more than 50 firms in noncompliance for at 
least six consecutive years and 13 firms in noncompliance for 14 
consecutive reporting years.\22\ The PCAOB states that this pattern of 
delinquency may be a result of firms that have ceased to exist, are 
non-operational, or otherwise do not wish to remain registered.\23\
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    \20\ See SOX section 102(f), 15 U.S.C. 7212(f).
    \21\ See Adopting Release at 3.
    \22\ Id. at 10.
    \23\ Id. at 3.
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    The presence on PCAOB's registration list of firms that 
continuously fail to meet their basic obligations to maintain 
registration hinders several important PCAOB regulatory objectives: 
maintaining an accurate public record of registered public accounting 
firms in operation that wish to remain registered; ensuring that the 
public has access to information required by the annual report; 
collecting fees to support operation of its registration program; and 
efficiently using staff time and resources.\24\ We note that the PCAOB 
currently has only two mechanisms for removing a registered public 
accounting firm from PCAOB registration: (1) authorizing a withdrawal 
from registration based on a firm-initiated withdrawal request \25\ or 
(2) imposing a disciplinary sanction revoking the firm's 
registration.\26\ Both mechanisms require some active engagement with 
the firms--they begin with either the firm initiating a request for 
withdrawal or the PCAOB's Office of Secretary providing notice of an 
Order Instituting Disciplinary Proceedings to the firm, which may not 
be possible in circumstances where the firm has ceased to exist, is 
non-operational, or for some other reason fails to comply with the 
basic requirements of registration.\27\ By allowing the PCAOB to deem a 
firm's registration withdrawn under specified conditions and subject to 
certain procedural safeguards, the Amendment will help the PCAOB use 
its resources more efficiently and enhance its registration program by 
maintaining an accurate public record.
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    \24\ Id. at 4.
    \25\ Id. at 2.
    \26\ Id.
    \27\ Id. at 6. To initiate withdrawal from registration, a 
registered firm must file a Form 1-WD. See Rule 2107(d), while a 
revocation begins with the PCAOB's Office of the Secretary providing 
notice of an Order Instituting Proceedings to the firm. See PCAOB 
Rule 5201, Notification of Commencement of Disciplinary Proceedings.
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b. Rule 2107(h) Mechanism for Constructive Withdrawal and Procedural 
Protections

    Under the new procedural mechanism in Rule 2107(h), the PCAOB would 
be able to deem a firm to have made a constructive request to withdraw 
if the firm has, for at least two consecutive reporting years, failed 
to both (1) file annual reports (PCAOB Form 2, Annual Report) and (2) 
pay annual fees.
    Given that these represent two of the primary obligations of 
registered firms, we believe it is appropriate for the PCAOB to deem 
such failures as a constructive request to withdraw, and that in these 
circumstances the PCAOB should, with adequate procedural protections, 
take steps to withdraw such firm from registration. We note that the 
Rule 2107(h) process is discretionary, and the PCAOB has stated that 
its staff will continue to send warning letters each year to delinquent 
registered firms.\28\
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    \28\ See Adopting Release at 14.
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    The PCAOB concluded that the two-year benchmark is an appropriate 
proxy for firms that have ceased to exist, are non-operational, or no 
longer wish to remain registered, whereas one reporting year of 
delinquency was an

[[Page 1214]]

insufficient basis upon which to infer that a firm no longer wished to 
remain registered, and three or more years may unduly delay appropriate 
regulatory action.\29\ We agree that two years of delinquencies in 
complying with the basic obligations for registration of paying fees 
and filing reports strikes the appropriate balance of regulatory 
efficiency and fairness to firms.
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    \29\ Id. at 13.
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    As described above in more detail, to initiate the constructive 
withdrawal process, the PCAOB would furnish the firm with a written 
Notice of Delinquency and Impending Withdrawal (the ``Notice''), to the 
firm's primary contact as identified in the firm's most recent PCAOB 
filing on Forms 1, 2, 3, or 4.\30\ In addition to written notice, the 
PCAOB will also publish notice of the impending withdrawal on its 
public website.\31\ We believe that these two methods are reasonably 
designed to provide firms with notice of the constructive withdrawal 
process, particularly in light of the fact that firms are required to 
maintain updated contact information.\32\
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    \30\ Id. at 15.
    \31\ Id.
    \32\ Id.
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    After the date the PCAOB sends the Notice, the firm has a 60-day 
period in which to send the PCAOB's registration staff an email 
indicating that it wishes to remain registered to stop the constructive 
withdrawal process. In evaluating the sufficiency of the procedural 
protections, we note that a firm will have approximately two months to 
evaluate and respond to the Notice and that it is not required to 
become current in its filings or fees to stop the constructive 
withdrawal process; the firm need only send an email to the staff to 
stop the constructive withdrawal process. This relatively low barrier 
to stopping the process should help ensure that firms that are in 
existence, operational, and wish to remain registered are not removed 
pursuant to this procedural mechanism, which is intended principally to 
address delinquencies that are due to firms ceasing to exist or 
operate, or otherwise no longer wishing to remain registered. In 
reaching this conclusion, however, we reiterate that, as observed by 
the PCAOB, violations of the PCAOB's reporting and fee requirements 
remain subject to enforcement.\33\
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    \33\ Id. at 13.
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c. Withdrawal From Registration

    If a firm does not notify the PCAOB that it wishes to remain 
registered in the 60-day period, the PCAOB is able to treat its 
consecutive failures for two years to file an annual report and pay 
annual fees as a constructive request to withdraw and to deem the 
firm's registration withdrawn. We note that, as a withdrawal-based 
mechanism, Rule 2107(h) is not a disciplinary proceeding or process, 
and, accordingly, withdrawal pursuant to this provision is not reported 
as a disciplinary sanction to any interested authorities.\34\ Further, 
a firm whose registration is withdrawn, if it were in existence and 
operational notwithstanding the consecutive delinquencies triggering 
constructive withdrawal, would retain eligibility to perform work on 
audits of issuers or broker-dealers, provided such work remains below 
the substantial role threshold established by Rule 1001(p)(ii) and 
PCAOB Rule 2100.\35\ Finally, a firm that has withdrawn from 
registration is permitted to reissue or give consent to the use of a 
prior audit report issued by the firm while registered with the 
PCAOB.\36\
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    \34\ Id. at 7.
    \35\ Id.
    \36\ Id.
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    The comment period closed on the Amendment on December 12, 2024. We 
received one comment letter, from an accounting firm. The commenter 
supported the Amendment, stating that the Amendment would create a more 
accurate public record of registered public accounting firms in 
operation that wish to remain registered.

V. Effect on Emerging Growth Companies

    Section 103(a)(3)(C) of SOX requires that any rules of the PCAOB 
requiring mandatory audit firm rotation or a supplement to the 
auditor's report in which the auditor would be required to provide 
additional information about the audit and the financial statements of 
the issuer (auditor discussion and analysis) shall not apply to an 
audit of Emerging Growth Companies (``EGCs'').\37\ The provisions of 
the Amendment do not fall into these categories.
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    \37\ 15 U.S.C. 7213(a)(3)(C). The term ``emerging growth 
company'' is defined in section 3(a)(80) of the Exchange Act (15 
U.S.C. 78c(a)(80)). See also Inflation Adjustments under Titles I 
and III of the JOBS Act, Release No. 33-11098 (Sept. 9, 2022) [87 FR 
57394 (Sept. 20, 2022)], available at https://www.sec.gov/files/rules/final/2022/33-11098.pdf.
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    Section 103(a)(3)(C) further provides that ``[a]ny additional 
rules'' adopted by the PCAOB after April 5, 2012, do not apply to 
audits of EGCs ``unless the Commission determines that the application 
of such additional requirements is necessary or appropriate in the 
public interest, after considering the protection of investors and 
whether the action will promote efficiency, competition, and capital 
formation.'' \38\ In the Notice of Filing of Proposed Rules, the Board 
expressed its view that section 103(a)(3)(C) does not apply to the 
Amendment because the Amendment does not compose any additional 
requirements on audits. To the extent that section 103(a)(3)(C) does 
apply, however, the Board recommended that the Commission determine 
that the Amendment apply to audits of EGCs.\39\
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    \38\ Id.
    \39\ See Notice of Filing of Proposed Rules, Special 
Considerations for Audits of Emerging Growth Companies.
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    With respect to the Commission's determination of whether the 
Amendment will apply to audits of EGCs, the PCAOB provided information, 
including data and analysis of EGCs, that sets forth its views as to 
why it believes the Amendment should apply to audits of EGCs. The PCAOB 
stated that an annual white paper prepared by its staff concluded that 
there were 3,031 companies that self-identified with the Commission as 
EGCs and filed audited financial statements in the preceding 18 
months.\40\ The PCAOB further stated that EGCs are likely to be newer 
companies, with audit committees having more limited experience in 
managing the process for finding and selecting a PCAOB-registered 
public accounting firm. Removal of consecutively delinquent firms, that 
are likely to be non-existent, non-operational, or no longer wish to be 
registered, could help reduce the search costs associated with making 
this decision. Further, the PCAOB indicated that it had no reason to 
believe that registered firms providing services to EGCs will incur 
costs that are greater than those incurred by firms providing services 
to non-EGCs, which are, in either case, likely to be incremental for 
operating firms that wish to remain registered. The PCAOB also noted 
that commenters agreed that the proposals generally should apply to 
audits of EGCs and that excluding the application of the proposals from 
audits of EGCs would be inconsistent with protecting the public 
interest.
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    \40\ See Notice of Filing of Proposed Rules (citing PCAOB Office 
of Economic and Risk Analysis, Characteristics of Emerging Growth 
Companies and Their Audit Firms at November 15, 2022 (Feb. 20, 
2024), available at https://assets.pcaobus.org/pcaob-dev/docs/default-source/economicandriskanalysis/projectsother/documents/white-paper-on-characteristics-of-emerging-growth-companies-as-of-nov-15-2022.pdf?sfvrsn=a8294f3_4).

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    We agree with the PCAOB's assessment as to the costs and benefits 
of the Amendment to EGCs. In particular, we agree that the Amendment 
may be of particular benefit to EGCs where audit committees may have 
less experience searching for and engaging audit firms, and may stand 
to benefit most from improved data quality as it relates to auditors. 
Accordingly, to the extent that section 103(a)(3)(C) applies, and after 
considering the protection of investors and whether the action will 
promote efficiency, competition, and capital formation, we believe 
there is a sufficient basis to determine that applying the Amendment to 
the audits of EGCs is necessary or appropriate in the public interest.

VI. Conclusion

    The Commission has reviewed and considered the Amendment, the 
information submitted therewith by the PCAOB, the comment letter 
received, and the recommendation of the Commission's staff. The 
Commission concludes that the determinations made by the PCAOB as 
described in the Adopting Release are reasonable. The Amendment 
establishes an efficient procedural mechanism for the PCAOB to remove 
from registration firms that have ceased to exist, are non-operational, 
or no longer wish to remain registered. We agree that, as the PCAOB 
explains, the presence of continuously delinquent firms on the PCAOB's 
list of registered firms hinders several regulatory objectives, 
including its ability to maintain an accurate public record of 
registered public accounting firms in operation and that wish to remain 
registered; to ensure that the information required on annual reports 
is being reported to the public and the PCAOB; to collect mandatory 
annual fees; and to efficiently use PCAOB staff time and resources.\41\ 
The Amendment will provide the PCAOB with an efficient mechanism to 
achieve these regulatory goals, while, through various procedural 
safeguards, balancing the need for reasonable and fair notice to firms 
that do indeed wish to maintain their registration.
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    \41\ See Adopting Release at 4.
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    Therefore, in connection with the PCAOB's filing and the 
Commission's review,
    A. The Commission finds that the Amendment is consistent with the 
requirements of Title I of SOX and the rules and regulations thereunder 
and are necessary or appropriate in the public interest or for the 
protection of investors; and
    B. Separately, to the extent that section 103(a)(3)(C) of SOX 
applies, the Commission finds that the application of the Amendment to 
the audits of EGCs is necessary or appropriate in the public interest, 
after considering the protection of investors and whether the action 
will promote efficiency, competition, and capital formation.
    It is therefore ordered, pursuant to section 107 of SOX and section 
19(b)(2) of the Exchange Act, that the Amendment (File No. PCAOB-2024-
05) be and hereby is approved.

    By the Commission.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2025-00119 Filed 1-6-25; 8:45 am]
BILLING CODE 8011-01-P
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