Document ID: SEC-2007-1352-0001
Agency: sec
Document Type: Notice
Title: Public Company Accounting Oversight Board: Inspection frequency requirements for registered public accounting firms;  proposed rule filing
Posted Date: 2007-10-01T04:00Z

[Federal Register: October 1, 2007 (Volume 72, Number 189)]
[Notices]               
[Page 55839-55841]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01oc07-102]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56517; File No. PCAOB-2006-03]

 
Public Company Accounting Oversight Board; Notice of Filing of 
Proposed Rule Change and Amendment No. 1 Thereto Relating to 
Inspections

 September 25, 2007.
    Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the 
``Act''), notice is hereby given that on December 20, 2006, the Public 
Company Accounting Oversight Board (the ``Board'' or the ``PCAOB'') 
filed with the Securities and Exchange Commission (the ``SEC'' or 
``Commission'') the proposed rule changes described in Items I and II 
below, which items have been prepared by the Board. On May 31, 2007, 
the Board amended its filing because certain of the information 
described in the original filing had changed. The Commission is 
publishing this notice to solicit comments on the proposed rule from 
interested persons.

I. Board's Statement of the Terms of Substance of the Proposed Rule

    On December 19, 2006, the Board adopted amendments to its rules 
related to inspections. The proposed amendments include a new paragraph 
(d) added to existing Rule 4003 and include technical amendments to 
nonsubstantive points in existing rules 4006 and 4009. The text of the 
proposed amendments are set out below. Language added by these 
amendments is in italics. Deleted paragraph references are in brackets. 
Other text in Section 4 of the Board's Rules, including notes to the 
Rules, remains unchanged and is indicated by `` * * * * * '' in the 
text below.

SECTION 4. INSPECTIONS

* * * * *
Rule 4003. Frequency of Inspections
* * * * *
    (d) Notwithstanding paragraph (b) of this Rule, with respect to any 
registered public accounting firm that became registered in 2003 or 
2004--
    (1) this Rule does not require the first inspection of the firm 
sooner than the fourth calendar year following the first calendar year 
in which the firm, while registered, issued an audit report or played a 
substantial role in the preparation or furnishing of an audit report; 
and
    (2) this Rule does not require the second inspection of the firm 
sooner than the fifth calendar year following the first calendar year 
in which the firm, while registered, issued an audit report or played a 
substantial role in the preparation or furnishing of an audit report.
* * * * *
Rule 4006. Duty to Cooperate With Inspectors
    Every registered public accounting firm, and every associated 
person of a registered public accounting firm, shall cooperate with the 
Board in the performance of any Board inspection. Cooperation shall 
include, but is not limited to, cooperating and complying with any 
request, made in furtherance of the Board's authority and 
responsibilities under the Act, to--
    ([1]a) provide access to, and the ability to copy, any record in 
the possession, custody, or control of such firm or person, and

[[Page 55840]]

    ([2]b) provide information by oral interviews, written responses, 
or otherwise.
* * * * *
Rule 4009. Firm Response to Quality Control Defects
* * * * *
    (d) The portions of the Board's inspection report that deal with 
criticisms of or potential defects in quality control systems that the 
firm has not addressed to the satisfaction of the Board shall be made 
public by the Board--
* * * * *
    (2) upon the expiration of the period in which the firm may seek 
Commission review of any Board determination made under paragraph 
([b]c) of this rule, if the firm does not seek Commission review of the 
Board determination;
* * * * *

II. Board's Statement of the Purpose of, and Statutory Basis for, the 
Proposed Rule

    In its filing with the Commission, the Board included statements 
concerning the purpose of, and basis for, the proposed rule. 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 Rule

(a) Purpose
    Section 104 of the Act requires the Board to conduct a continuing 
program of inspections to assess the degree of compliance of each 
registered public accounting firm and associated persons of that firm 
with the Act, the rules of the Board, the rules of the Commission, or 
professional standards, in connection with its performance of audits, 
issuance of audit reports, and related matters involving issuers. The 
Board has adopted an amendment to its Rule 4003 to temporarily adjust 
minimum inspection frequency requirement applicable to certain firms. 
The Board has adopted technical amendments to its Rules 4006 and 4009 
to correct non-substantive points. The proposed amendments are 
discussed below.
    Section 104(b)(1)(B) of the Act requires the Board to conduct an 
inspection, at least once every three years, of each registered firm 
that regularly provides audit reports for 100 or fewer issuers, and 
Section 104(b)(2) of the Act authorizes the Board to adopt rules 
adjusting that frequency. In 2003, the Board adopted Rule 4003(b), 
which provides that the Board will conduct inspections, on a triennial 
basis, not only of each firm that regularly provides audit reports for 
100 or fewer issuers, but also of any firm that issues any audit report 
or that play a substantial role in the preparation or furnishing of an 
audit report.
    In the course of inspection planning, including in connection with 
the Board's budget process, the Board identified a way in which a 
temporary adjustment to Rule 4003 would, over time, maximize the 
Board's ability to allocate its inspection resources more evenly, 
consistently, and effectively year-to-year. The issue arises because 
the first three years of inspections, 2004 to 2006, coincided with the 
Board's initial growth period and, as a consequence, the resources 
available for and devoted to the inspections of firms with 100 or fewer 
issuer audit clients increased from year to year. The resources 
available in each year necessarily informed the extent of the 
inspection work performed in that year, including with respect to both 
the numbers of firms inspected and the size of firms inspected.\1\ This 
resulted in a year-to-year fluctuation that, because of the minimum 
frequency requirements of Rule 4003(b), the Board would to some extent 
be locked into repeating in succeeding three-year periods.
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    \1\ In 2004, the Board inspected 91 firms with 100 or fewer 
issuer audit clients. In 2005, the Board inspected 272 such firms. 
In 2006, the Board inspected 163 such firms. Because variations in 
the nature and size of firms' audit practices result in different 
inspection resource requirements, mere comparison of the numbers of 
inspected firms does not reflect fully the related resource issues.
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    To avoid that consequence, the Board is adding to Rule 4003 a new 
paragraph that will temporarily adjust aspects of the inspection cycle 
requirement. Paragraph (d) will allow the Board to approach long-term 
inspection planning with the flexibility to eliminate the fluctuation 
generated in the start-up cycle, including the flexibility to make 
adjustments that will result in a relatively consistent, from year to 
year, mix of firms in terms of the size and nature of audit 
practice.\2\ Paragraph (d) accomplishes that result by providing that, 
with respect to firms that became registered in 2003 or 2004,\3\ (1) 
the Board need not conduct the firm's first inspection sooner than the 
fourth year after the firm, while registered, first issues an audit 
report or plays a substantial role, and (2) the Board need not conduct 
the firm's second inspection sooner than the fifth year after the firm, 
while registered, first issues an audit report or plays a substantial 
role.
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    \2\ This point should not be understood to suggest that the 
Board envisions rigid adherence to a fixed triennial inspection 
schedule for each firm once a particular year-to-year mix of firms 
is established. For a variety of reasons--including to address 
specific risks or to enhance the value of the inspection process by 
reducing the predictability of the timing of any firm's next 
inspection--the Board may sometimes inspect a firm sooner than three 
years after the firm's previous inspection.
    \3\ On October 22, 2003, it became unlawful for any U.S. public 
accounting firm to issue, or to play a substantial role in the 
preparation or furnishing of, an audit report with respect to any 
issuer unless the firm was registered with the Board. The same 
registration requirement took effect for non-U.S. firms on July 19, 
2004. See Section 102(a) of the Act and PCAOB Rule 2100.
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    Even with this adjustment, the Board expects that each U.S. firm 
that issued an original audit report (as distinct from a consent to use 
a previously issued audit report) in 2003 or 2004 after registering 
with the Board will have its first inspection within the three-year 
period after first issuing an original audit report. The flexibility 
provided by the adjustment would come into play principally with 
respect to the timing of the second inspection of some of those firms, 
the timing of the first two inspections of some non-U.S. firms, and the 
timing of inspections of firms that play a substantial role but do not 
issue audit reports. The adjustment would have no continuing effect on 
the timing of any inspections after the second inspections of firms 
that registered in 2003 and 2004, and would have no effect on the 
timing of any inspection of any firm that registered after 2004.
    It is important to note that Rule 4003 does not limit the Board's 
authority to conduct inspections at any time, and that registered 
firms' own obligations are not affected by Rule 4003 or the amendment. 
Rule 4003 establishes a minimum inspection frequency governing how the 
Board carries out its inspection program. Rule 4003 does not preclude 
the Board from inspecting any firm more frequently than the schedule 
set out in the rule. A firm's obligation is to cooperate in any Board 
inspection at any time that the Board determines to inspect the firm, 
regardless of the provisions of Rule 4003.
    The temporary adjustment to the inspection frequency requirement is 
consistent with the purposes of the Act, the public interest, and the 
protection of investors. The adjustment will facilitate the reduction 
of certain year-to-year fluctuations in the inspection program, which 
otherwise could interfere with the Board's ability to implement a 
program consistently and effectively with relatively stable resources 
from

[[Page 55841]]

year to year. The adjustment will accomplish this while delaying only a 
relatively small portion of inspections, and delaying them only for a 
short period.
    The Board adopted Rule 4003(d) before obtaining public comment 
because of the nature of the rule, which involves a temporary 
adjustment, for administrative and programmatic reasons, to an element 
of an existing rule to which the Board is not making any permanent 
change. Nevertheless, the Board invited public comment on Rule 4003(d), 
and the Board provided that Rule 4003(d) would expire on June 30, 2007 
unless the Board, after considering any public comment, acted to adopt 
the rule for a longer period. The Board received two comment letters, 
each expressing general support for Rule 4003(d) and neither raising 
any issues concerning the rule. On May 24, 2007, the Board approved 
retaining Rule 4003(d) indefinitely beyond the tentative June 30, 2007 
expiration date.
    The Board has also adopted technical amendments to two aspects of 
the rules relating to inspections. In Rule 4006, the Board is revising 
the numbering of the paragraphs from ``(1)'' and ``(2)'' to ``(a)'' and 
``(b)'' to conform to the convention in the Board's rules generally. In 
Rule 4009(d)(2), the Board is correcting a cross-reference. Rule 
4009(d)(2)'s cross-reference to ``paragraph (b) of this rule'' dates to 
the Board's originally proposed Rule 4009. The substance of paragraph 
(b) in the proposed rule was moved to paragraph (c) in the final rule 
adopted by the Board, and the cross-reference in paragraph (d)(2) 
should have been revised to cross-reference paragraph (c) at that time. 
The Board has now corrected that cross-reference.
(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 rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. With respect to 
the firms subject to an inspection requirement, the proposed rules 
impose no burden beyond the burdens clearly imposed and contemplated by 
the Act, and the proposed rules do not change the obligations of those 
firms as already set out in the Act and in existing Board rules.

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

    The Board solicited comment on Rule 4003(d) when the Board adopted 
that rule on December 19, 2006. Since the filing of Form 19b-4 on 
December 20, 2006, the Board has received two comment letters on Rule 
4003(d). Each comment letter expressed general support for Rule 
4003(d), and neither comment letter raised any significant issues about 
the rule change. The Board did not solicit or receive comment on the 
other proposed rule changes described in Section I above.

III. Date of Effectiveness of the Proposed Rule 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 as (i) 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 rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change 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 
change is consistent with the requirements of Title I of the Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/pcaob.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number PCAOB 2006-03 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number PCAOB 2006-03. 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 change 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, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the 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-2006-03 and should be 
submitted on or before October 22, 2007.

    By the Commission.
Nancy M. Morris,
Secretary
[FR Doc. E7-19275 Filed 9-28-07; 8:45 am]

BILLING CODE 8011-01-P