Document ID: SEC-2016-0637-0001
Agency: sec
Document Type: Notice
Title: Filings: Proposed Amendments to Board Rules Relating to Inspections
Posted Date: 2016-04-13T04:00Z

[Federal Register Volume 81, Number 71 (Wednesday, April 13, 2016)]
[Notices]
[Pages 21909-21914]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-08444]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77558; File No. PCAOB-2007-04]

Public Company Accounting Oversight Board; Notice of Filing of 
Proposed Amendments to Board Rules Relating to Inspections

April 7, 2016.
    Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the 
``Act'' or the ``Sarbanes-Oxley Act''),\1\ notice is hereby given that 
on March 24, 2016, 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, II, and III below, which items have been prepared 
by the Board. The Commission is publishing this notice to solicit 
comments on the proposed rule from interested persons.
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    \1\ 15 U.S.C. 7217(b).
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I. Board's Statement of the Terms of Substance of the Proposed Rule

    On October 16, 2007, the Board adopted amendments to its rules 
related to inspections. The proposed amendments included a new 
paragraph (e) added to existing Rule 4003 and amendments to paragraphs 
(b) and (d) of Rule 4003. On October 22, 2007, the Board filed the 
amendments with the Commission and requested Commission approval (``the 
original rule filing''). On February 26, 2016 the Board adopted 
revisions to those proposed amendments and, on March 24, 2016 amended 
the rule filing to reflect those revisions. The text of the revised 
proposed amendments is set out below. Language added to the Board's 
currently effective rules by these amendments is italicized. Language 
deleted from the Board's currently effective rules is 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

    * * *
    (b) At least once in every three calendar years, beginning with the 
three-year period following the calendar year in which its application 
for registration with the Board is approved, a registered public 
accounting firm that, during any of the three prior calendar years, 
issued an audit report, other than by consenting to an issuer's use of 
a previously issued audit report, with respect to at least one issuer, 
but no more than 100[,] issuers, [or that played a substantial role in 
the preparation or furnishing of an audit report with respect to at 
least one issuer,] shall be subject to a regular inspection.
    * * *
    (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 with 
respect to an issuer [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 with 
respect to an issuer [or played a substantial role in the preparation 
or furnishing of an audit report].
    (e) Notwithstanding any other provision of this Rule, if, in two 
consecutive calendar years, a registered public accounting firm issues 
no audit reports with respect to an issuer other than by consenting to 
an issuer's use of a previously issued audit report, the Board shall 
have the discretion to forego any inspection of that firm that would 
otherwise be required because of any audit report that the firm had 
issued with respect to an issuer prior to such calendar years.
    * * *
    (h) In each calendar year, the Board shall conduct regular 
inspections of some registered public accounting firms that reported on 
an annual report on Form 2 having played a substantial role in the 
preparation or furnishing of an audit report with respect to an issuer 
in any of the four most recent annual reporting periods through March 
31 of that calendar year without having reported on an annual report on 
Form 2 having issued an audit report with respect to an issuer in any 
of those reporting periods. The number of such registered public 
accounting firms that the Board shall inspect in any particular 
calendar year shall be at least five percent of the number of 
registered public accounting firms that, by June 30 of the preceding 
calendar year, reported on an annual report on Form 2 for the reporting 
period ending on March 31 of the preceding calendar year having played 
a substantial role in the preparation or furnishing of an audit report 
with respect to an issuer without having issued an audit report with 
respect to an issuer in that reporting period.

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

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

[[Page 21910]]

text of these statements may be examined at the places specified in 
Item IV below. The purpose of, and basis for, the proposed rule are 
also described in sections A, B, and C below.

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

(a) Purpose
    The Sarbanes-Oxley Act requires the Board to conduct a continuing 
program of inspections to assess the degree of compliance with certain 
requirements by registered public accounting firms and their associated 
persons in connection with the performance of audits, issuance of audit 
reports, and related matters involving issuers. In 2003, the Board 
adopted PCAOB Rule 4003, ``Frequency of Inspections.'' Rule 4003(b) 
provides that at least once every three years, any firm that, during 
any of the three prior calendar years, issues an audit report with 
respect to at least one issuer but no more than 100 issuers, or plays a 
substantial role in the preparation or furnishing of an audit report 
with respect to an issuer, shall be subject to a regular inspection. 
The Board has adopted amendments relating to Rule 4003(b) that are 
intended to facilitate the Board's ability to allocate its inspection 
resources in ways that better serve the public interest and protect 
investors.
1. Rules 4003(b) and (h)
    The Board has adopted amendments to eliminate Rule 4003(b)'s 
provision for triennial inspections of firms that play a substantial 
role in audits but do not issue audit reports and to provide instead 
that the Board will, every year, inspect at least five percent of such 
firms. The Board has also adopted an amendment to provide that no 
inspection requirement arises under Rule 4003(b) solely because a firm 
consents to an issuer's use of a previously issued audit report.
    The Board's experience in the inspection program has affected the 
Board's view on the appropriateness of devoting Board resources to 
inspecting one-third of all ``substantial role only'' firms every 
year.\2\ In 2007, the Board concluded that it would be better to direct 
a larger share of those resources toward addressing the policies, 
practices, and procedures of the firms that are ultimately responsible 
for the audit report on the issuer's financial statements, and that the 
Board's rules should not require the Board to devote so large a portion 
of its resources to inspections of ``substantial role only'' firms. 
This was consistent with the risk-based focus that the Board generally 
brings to bear in considering the most prudent allocation of its 
inspection resources. Accordingly, the Board adopted, and included in 
the original rule filing, an amendment to Rule 4003(b) to eliminate the 
requirement for triennial inspections of ``substantial role only'' 
firms.
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    \2\ The Board uses the phrase ``substantial role only'' to 
identify the relevant category of firms and to emphasize the 
distinction between this category of firms (which play a substantial 
role but do not issue audit reports with respect to issuers) and the 
separate category of firms that play a substantial role in some 
audits, but separately perform other audits in which they issue the 
audit report for the issuer (for example, a non-U.S. firm that plays 
a substantial role in the audit of a U.S. issuer by auditing a 
foreign subsidiary, but that separately has a foreign private issuer 
audit client for which it regularly provides audit reports). Even as 
amended, Rule 4003 will continue to provide for at least triennial 
inspections of all firms in the latter category by virtue of their 
regularly issuing audit reports. In any such inspection, the Board 
could review, among other things, the firm's work and its system of 
quality control in relation to audits of issuers in which the firm 
played a role, including a substantial role.
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    In annual reports on PCAOB Form 2 filed by registered firms for the 
12-month reporting period ended March 31, 2015, 571 firms reported 
having issued audit reports for one to 100 issuers, and 103 firms 
reported having played a substantial role in at least one issuer audit 
without having issued audit reports for any issuers. The Board 
continues to be of the view that it is appropriate to allocate the 
largest share of its inspection resources toward addressing the 
policies, practices, and procedures of the firms that are ultimately 
responsible for the audit report on the issuer's financial statements, 
and that the Board's rules should not require triennial inspections of 
``substantial role only'' firms. The Board therefore continues to 
propose eliminating Rule 4003(b)'s requirement for triennial 
inspections of ``substantial role only'' firms.
    In addition, however, having considered views expressed by SEC 
staff and taking into account that the Board's inspection staff has 
over time identified auditing deficiencies in some inspections of 
``substantial role only'' firms,\3\ the Board has determined to revise 
slightly the substance of its previously adopted approach to such 
firms. With the revision, the amendment to Rule 4003 would still 
eliminate the requirement to inspect all ``substantial role only'' 
firms, and it would still eliminate the requirement to inspect any such 
firm with a prescribed frequency.
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    \3\ As of February 1, 2016, the Board had issued reports on 
inspections of 38 ``substantial role only'' firms. In addition to 
identifying concerns about aspects of some of those firms' systems 
of quality control, the Board's inspection staff has, in 11 of those 
inspections, identified that the inspected firm had failed to 
perform sufficient procedures to fulfill the objectives of its role 
in an audit. While such failures by an auditor in a substantial role 
do not necessarily mean that the principal auditor's opinion on the 
issuer's consolidated financial statements was insufficiently 
supported, they present some risk of that result.
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    Unlike the amendment in the original rule filing, however, the 
revised proposed amendment provides that the Board will, in each year, 
select some ``substantial role only'' firms for inspection, with the 
number of firms to be a number that is at least five percent of the 
number of firms that reported being ``substantial role only'' firms in 
their annual reports on PCAOB Form 2 filed with the Board in the 
preceding year. Board rules require that all registered firms file an 
annual report. A firm that does not issue an audit report for an issuer 
during the period covered by an annual report must identify in that 
annual report any audit in which it played a substantial role in that 
period. Through its other processes, the Board may identify firms that 
fail to comply with this reporting requirement (and may impose 
sanctions for those failures), or the Board may identify that a firm 
has reported playing a substantial role when its role in fact fell 
below that level. But for purposes of identifying ``substantial role 
only'' firms, the required annual reports on Form 2 provide the most 
reasonable reference point.
    Based on the history of reporting on Form 2, the Board anticipates 
that the five percent threshold will translate to four to six firms 
each year, though it could fall above or below that range in a 
particular year, and the number actually inspected could exceed that 
threshold in any year as a result of risk-based judgments about how to 
allocate inspection resources. The revised proposed amendment provides 
that the firms to be inspected will be selected from among those that 
have reported playing a substantial role in audits in one of the four 
most recent Form 2 reporting periods without having reported issuing an 
audit report for an issuer in any of those periods. With that revision, 
Rule 4003's provision concerning ``substantial role only'' firms is now 
designated as paragraph (h).
    In adopting the amendment included in the original rule filing 
related to ``substantial role only'' firms, the Board noted that it had 
not up to that time inspected a ``substantial role only'' firm but also 
noted that it would retain discretion under the amended rule to inspect 
``substantial role only'' firms at any time. The Board's practice, 
since first inspecting ``substantial role only'' firms in 2009, has in 
fact been

[[Page 21911]]

essentially the practice described by proposed Rule 4003(h). The Board 
now sees value, however, in formally committing that at least a small 
portion of its inspection resources will regularly be directed toward 
``substantial role only'' firms and that the Board will maintain an 
active focus on whether it would be appropriate to direct a larger 
portion of its resources to those inspections. At present, the Board 
believes that the five percent threshold, with selections made on a 
risk basis, would involve review of ``substantial role only'' work that 
is appropriate and sufficient to provide for a useful, ongoing focus on 
that segment of the population of registered firms. The Board can 
always inspect a larger portion of that population in a given year 
without a rule. The Board has determined to commit to a minimum of five 
percent through a rule.
    By using the four most recent Form 2 reporting periods as the 
reference point, the Board would, for any given inspection year, be 
selecting ``substantial role only'' firms from a universe that includes 
firms that have reported playing a substantial role as recently as the 
year in which the inspection would occur and as far back as three 
previous years. This will allow the Board to select from among the most 
relevant universe, without limiting that universe to firms reporting in 
one specific year. In addition, by limiting that universe to firms 
that, in addition to playing a substantial role, have not issued an 
audit report in any of those years, the rule would exclude any 
possibility of counting, toward satisfaction of the ``substantial role 
only'' inspection requirement, firms that otherwise would be inspected, 
or recently have been inspected, because of the firm's relatively 
recent issuance of an audit report.
    The proposed rule also adds a provision to existing paragraph (b) 
specifying that no inspection requirement arises solely on the basis of 
the firm issuing an audit report by consenting to an issuer's use of a 
previously issued audit report. Since the act of originally issuing the 
audit report would have given rise to an inspection requirement, and 
the related audit would have been a candidate for review in that 
required inspection, it would be redundant to subject the registered 
firm to a separate, later inspection relating to the same audits in 
circumstances where the firm is no longer issuing audit reports other 
than by consenting to issuers' use of previously issued audit reports.
    The original rule filing also included a technical amendment that 
was intended to clarify an aspect of Rule 4003(b) without making any 
substantive change. The Board subsequently realized that the technical 
amendment could have provided the Board with flexibility that the Board 
did not intend regarding inspection frequency, and the Board has 
therefore revised its proposal to eliminate that technical amendment 
and retain the relevant existing wording. Specifically, the Board had 
revised the wording of Rule 4003(b) to provide that the Board must 
conduct at least one inspection of a firm in the three calendar-year 
period following any calendar year in which the firm issues an audit 
report with respect to an issuer. That wording would have given the 
Board flexibility that the Board did not intend. For example, if a firm 
issued an audit report in years 1, 2, 4, and 5, but not in year 3, a 
Board inspection of the firm in year 3 would satisfy the inspection 
requirement created by the audit reports in years 1 and 2, but the next 
inspection would not technically be required until year 7 (the third 
calendar year after the report issued in year 4), rather than within 
three years after the previous inspection, i.e., year 6.
2. Rule 4003(d)
    Existing Rule 4003(d) extends the Rule 4003(b) time period in which 
the Board must conduct the first and second inspections of firms that 
registered with the Board in 2003 or 2004. The Board has adopted an 
amendment to conform Rule 4003(d) to the Rule 4003(b) amendment 
concerning ``substantial role only'' firms. Consistent with the 
amendment to Rule 4003(b), the Board is amending Rule 4003(d) to 
eliminate from Rule 4003(d) the references to ``substantial role only'' 
firms.
    Separately, a development in the law since the original rule filing 
has led the Board to make a technical revision to Rule 4003(d). Rule 
4003(d) uses the term ``audit report'' in two places. When Rule 4003(d) 
took effect in 2006, ``audit report'' was, by definition, limited to 
reports with respect to issuers, and this was still the case at the 
time of the original rule filing proposing amendments to Rule 4003(d). 
That definition has since been broadened to include reports with 
respect to registered brokers and dealers and, as broadened, the 
unqualified use of the term ``audit report'' in Rule 4003(d) would 
change the meaning of the rule from what the Board originally intended 
and still intends. For that reason, the Board has added the language 
``with respect to an issuer'' to qualify ``audit report'' where that 
term appears in proposed Rule 4003(d).
    The original rule filing included an amendment that conformed Rule 
4003(d) to the Rule 4003(b) amendment that provides that no inspection 
requirement arises solely on the basis of a firm issuing an audit 
report by consenting to an issuer's use of a previously issued audit 
report. The operation of Rule 4003(d) is limited to firms that became 
registered in 2003 or 2004. At the time of the original rule filing in 
2007, it was possible for circumstances to arise that would have 
triggered the application of this amendment with respect to such firms. 
With the passage of time, however, those circumstances should no longer 
arise, and the Board has therefore made a technical revision to 
eliminate this amendment to Rule 4003(d).
3. Rule 4003(e)
    The Board's experience in the inspection program to date has 
affected the Board's view on the appropriateness of devoting Board 
resources to inspecting every firm that has issued an audit report, 
including firms that have not recently done so. This was another 
respect in which the Board observed that the existing rule sometimes 
requires the Board to deploy inspection resources in ways that do not 
represent the most effective use of those resources in furtherance of 
the public interest and the protection of investors. In particular, it 
sometimes happens that (1) a firm issues an audit report in year 1, 
opining on financial statements for the preceding year; (2) consistent 
with existing Rule 4003(b), the Board's long-range inspection planning 
sets that firm for inspection in year 4; and (3) the firm issues no 
audit reports in years 2 or 3. Under the current rule, the Board must 
then inspect the firm in year 4, even though the most recent audit 
report issued by the firm is three years old on financial statements 
that are four years old.
    In 2007, the Board concluded that it could better fulfill its 
public interest and investor protection mandates if it had the 
flexibility in that circumstance to focus its year 4 inspection 
resources on firms that are more regularly and recently engaged in 
preparing audit reports. Accordingly, the Board adopted a new paragraph 
(e) to Rule 4003 that would give the Board discretion to forego the 
otherwise required inspection in the scenario described above in 
determining how to deploy its inspection resources.
    The Board continues to view Rule 4003(e) as providing useful 
flexibility with respect to the allocation of inspection resources. The 
number of otherwise required inspections that the

[[Page 21912]]

Board would have discretion to forego under Rule 4003(e) would vary 
from year to year, but, had Rule 4003(e) been in effect, the number of 
otherwise required inspections that would have met its criteria would 
have been 10 in 2015, 10 in 2014 and eight in 2013. In addition, 
because of delays caused by obstacles to Board inspections of 
registered firms in certain countries, the current rule's deadline for 
the initial inspections of firms in those countries, on the basis of 
their having issued audit reports for issuers, has long since passed, 
and some of those firms have long since stopped issuing audit reports 
for issuers. Nineteen such firms have not issued audit reports since 
before 2012, and 13 of those firms have not issued audit reports since 
before 2010.
    Under proposed Rule 4003(e), the Board would have the flexibility 
to deploy its inspection resources in ways other than by inspecting 
such firms. Rule 4003(e) would allow the Board to forego an otherwise 
required inspection of a firm that issued an audit report if, in two 
consecutive years, the firm does not issue any audit reports. The rule 
would not require the Board to inspect such a firm unless and until the 
firm engaged in conduct that triggered the operation of Rule 4003(b) 
anew.\4\ This will give the Board useful and clearly defined 
flexibility to focus its inspection resources on firms more recently 
involved in issuing audit reports, rather than on relatively old audit 
work performed by firms that may not be currently engaged in issuing 
audit reports.
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    \4\ Rule 4003(e) also makes clear that a firm's issuance of an 
audit report solely by consenting to an issuer's use of a previously 
issued audit report would not preclude the operation of paragraph 
(e) in circumstances where paragraph (e) would otherwise apply.
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    Rule 4003(e) would not, however, prohibit the Board from inspecting 
any of those firms or in any way entitle those firms not to be 
inspected. There may be circumstances in which the Board would choose 
to inspect a firm even where Rule 4003(e) gave the Board the discretion 
to forego the inspection.
    The Board has made a technical amendment to proposed Rule 4003(e) 
since the original rule filing. Proposed Rule 4003(e) uses the term 
``audit report'' in two places. At the time of the original rule 
filing, ``audit report'' was, by definition, limited to reports with 
respect to issuers. That definition has since been broadened to include 
reports with respect to registered brokers and dealers and, as 
broadened, the unqualified use of the term ``audit report'' in Rule 
4003(e) would change the meaning of the rule from what the Board 
originally intended and still intends. For that reason, the Board has 
added the language ``with respect to an issuer'' to qualify ``audit 
report'' where that term appears in proposed Rule 4003(e).

B. Board's Statement on Burden on Competition

    Not applicable. The Board's consideration of the economic impacts 
of the proposed rule changes is discussed in Section D below.

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

    The Board solicited public comment before adopting the amendments 
to Rule 4003 that were included in the original rule filing. The Board 
received three comment letters, all of which were supportive of those 
amendments and, more generally, supportive of the Board's effort to 
increase its discretion to bring risk-based judgments to bear in 
allocating its inspection resources.\5\
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    \5\ See Letter from Deloitte Touche Tohmatsu (July 20, 2007) 
(``DTT letter''), Letter from PricewaterhouseCoopers LLP (July 23, 
2007) (``PwC letter''), and Letter from the New York State Society 
of Certified Public Accountants (July 24, 2007) (``NYSSCPA 
letter''), available at www.pcaobus.org/Rules/Docket_024.
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    The revised proposed amendments reflect certain technical 
corrections or updates described above, including undoing a non-
substantive amendment that was discovered to have an unintended 
substantive effect, qualifying the term ``audit report'' to remain 
consistent with the original meaning following intervening legislation 
that expanded the definition, and eliminating references to the effect 
of consenting to the use of a previously issued audit report where the 
passage of time had negated the potential applicability of those 
references. The Board made these revisions without seeking public 
comment.
    In addition, since the original rule filing, which included the 
amendment eliminating any periodic inspection requirement for all 
``substantial role only'' firms, the Board has determined to commit to 
a practice of conducting some inspections of such firms and to 
establish by rule a lower limit on the number of such inspections it 
will conduct each year. Such a practice is consistent with the Board's 
authority even in the absence of a rule, is consistent with the Board's 
description of its possible exercise of that authority in soliciting 
public comment on the amendments,\6\ and is consistent with the 
discretion and authority that the commenters recognized the Board 
retained.\7\ From the perspective of rights and obligations of 
registered firms and associated persons, there is no meaningful 
difference between the rule originally proposed for comment and the 
Board's current practice. The Board has committed itself by rule to 
that practice without seeking public comment specific to doing so.
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    \6\ See Proposed Amendments to Limit Board Rule 4003's Fixed 
Periodic Inspection Requirement to Firms that Regularly Issue Audit 
Reports, PCAOB Release No. 2007-007 (May 24, 2007), at 4 (noting 
that information that comes to the Board in various ways ``could 
lead the Board to exercise its discretion to inspect a particular 
`substantial role only' firm''), available at www.pcaobus.org/Rules/Docket_024.
    \7\ See DTT letter at 1, PwC letter at 1, NYSSCPA letter at 3.
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D. Economic Considerations and Application to Audits of Emerging Growth 
Companies

    In the Board's view, the proposed amendments to Rule 4003 are 
consistent with the purposes of the Act, the public interest, and the 
protection of investors.\8\ In reaching that conclusion, the Board has 
taken economic considerations into account.\9\
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    \8\ Section 104(b)(2) of the Act provides that the Board may, by 
rule, adjust the inspection schedules set by section 104(b)(1) if 
the Board finds that different inspection schedules are consistent 
with the purposes of the Act, the public interest, and the 
protection of investors. To the extent the Commission views any of 
the proposed amendments as constituting a change to an inspection 
schedule set by section 104(b)(1), the statement in the text 
reflects the Board's finding for purposes of section 104(b)(2).
    \9\ Section A, above, describes the need for the proposed 
amendments and the Board's key decisions in selecting this course of 
action. This section does not repeat the earlier discussion, but 
focuses on the costs and benefits, relative to an appropriate 
baseline, of the Board's proposal.
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1. Rules 4003(b) and 4003(h)
    It is anticipated that the proposed amendments to Rule 4003(b) and 
the addition of Rule 4003(h) will impose no new costs on the universe 
of registered firms relative to current practice.\10\ Those proposed 
amendments do not require registered public accounting firms to take 
any particular actions as part of their audits or otherwise. Rather, 
they merely conform the Board's rules to current practice.\11\ 
Accordingly, the

[[Page 21913]]

proposed amendments to Rule 4003(b) and the addition of Rule 4003(h) do 
not increase the costs imposed on the group of those registered firms 
that are subject to inspection because of playing a substantial role in 
an audit.
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    \10\ To assist the Commission's consideration of this proposal, 
this section discusses costs and benefits relative to current 
practice. It does not discuss costs and benefits relative to 
existing Rule 4003(b), under which, absent the proposed amendments 
discussed here, the PCAOB would in each year inspect approximately 
33 percent of ``substantial role only'' firms. The resulting 
analysis of costs and benefits here, however, should not be 
understood to suggest that a rule change conforming a rule to 
existing practice would in every case necessarily involve no costs 
or benefits.
    \11\ The Board's practice, since first inspecting ``substantial 
role only'' firms in 2009, has been to inspect each year 
approximately five percent of those firms and to reflect that 
allocation of inspection resources in its budget materials.
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    The Board has considered whether the proposed amendments might 
decrease audit quality in the work of the ``substantial role only'' 
firms by appearing to those firms to reduce the likelihood of their 
being inspected. On that question, the Board has considered that the 
proposed rules would not change those firms' perception of the fact 
that they might be inspected. The Board has also considered whether the 
proposed rules would be likely to change, in any meaningful way, those 
firms' current perception of the likelihood of being inspected. There 
is no direct evidence concerning what those firms' current perceptions 
are on that point, but it is reasonable to assume that firms in the 
``substantial role only'' category currently perceive the likelihood of 
their being inspected as something that is less than the existing 
rule.\12\ Because it appears most likely that the typical such firm's 
perception of the chance of inspection would be less than the current 
rule, and because the proposed rule would not change those firms' 
perception of the fact that they might be inspected, the Board does not 
anticipate that the proposed amendments would cause any significant 
change in the extent to which the potential for inspection currently 
provides an incentive for registered firms to perform audit work in 
compliance with PCAOB standards. Nor do the proposed amendments provide 
any incremental benefit relative to the current practice.
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    \12\ The Board inspected no ``substantial role only'' firms 
before 2009 and, as noted above, from 2009 on has inspected in each 
year approximately five percent of those firms. In addition, since 
2010 the Board's Web site has provided an overview of the Board's 
inspection practices that, among other things, contrasts the Board's 
practice of conducting triennial inspections of firms that issue 
audit reports for one to 100 issuers with the practice of 
inspecting, in each year, ``some'' firms that are not in that 
category but that play a role in issuer audits. See http://pcaobus.org/Inspections/Pages/InspectedFirms.aspx.
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2. Rule 4003(e)
    Proposed Rule 4003(e) will potentially reduce costs imposed on the 
universe of registered firms relative to current practice.\13\ Proposed 
Rule 4003(e) poses the possibility of fewer firms incurring inspection 
related costs because it provides the Board with discretion to forgo an 
otherwise required inspection of a firm if, after issuing an audit 
report in one year, the firm does not issue audit reports in the two 
succeeding years. To the extent that proposed Rule 4003(e) results in 
the Board forgoing any inspections, the firms that would otherwise have 
been inspected would not incur the inspection related costs.\14\
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    \13\ Current practice is consistent with existing Rule 4003's 
inspection frequency requirements for firms that issue audit 
reports. Of the 28 otherwise required inspections in 2013, 2014, and 
2015 that would have met the criteria of proposed Rule 4003(e), 16 
were in the U.S. or in non-U.S. jurisdictions where the Board was 
not blocked from conducting inspections, and the Board conducted all 
of those inspections within the period prescribed by current Rule 
4003.
    \14\ The number of otherwise required inspections that the Board 
would have discretion to forego under Rule 4003(e) would vary from 
year to year, but, as noted above, had Rule 4003(e) been in effect, 
the number of otherwise required inspections that would have met its 
criteria would have been 10 in 2015, 10 in 2014, and eight in 2013.
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    The Board has considered whether the benefit of potentially 
avoiding imposing regulatory burdens on those firms that might, under 
proposed Rule 4003(e), be less likely to be inspected than would be the 
case under current practice could reduce audit quality in the work of 
those firms. On that question, the Board has considered that firms that 
the Board could choose to forgo inspecting under proposed Rule 4003(e) 
typically would not be expected to realize, at the time they perform an 
audit, that future developments will make Rule 4003(e) applicable. 
Moreover, Rule 4003(e) would not, even if applicable, provide the firm 
with any assurance that it would not be inspected. For those reasons, 
the Board does not anticipate that proposed Rule 4003(e) would cause 
any significant change in the extent to which the potential for 
inspection provides an incentive for registered firms to perform audit 
work in compliance with PCAOB standards.
3. Emerging Growth Companies
    Before rules adopted by the Board can take effect, they must be 
approved by the Commission. Under Section 103(a)(3)(C) of the Act,\15\ 
any rules adopted by the Board after April 5, 2012, shall not apply 
``to an audit of'' any emerging growth company (``EGC'') (as defined in 
section 3(a)(80) of the Securities Exchange Act of 1934 \16\ (the 
``Exchange Act'')) 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.''
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    \15\ 15 U.S.C. 7213(a)(3)(C).
    \16\ 15 U.S.C. 78c(a)(80).
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    The proposed amendments do not change or add to the requirements 
that apply ``to an audit of'' an EGC or to any other audits. They do 
not affect requirements governing how a firm conducts or reports on 
audits under PCAOB standards, including audits of EGCs. In addition to 
not imposing any requirements that apply to an audit, the proposed 
amendments do not appear likely to significantly affect EGCs in other 
ways. Specifically, the Board does not anticipate that the proposed 
amendments will affect an auditor's perception, during the audit of an 
EGC, of the possibility of that audit eventually being reviewed in any 
inspection or the nature of any such review. Many factors affect the 
selection of audits that the Board reviews in the inspection of any 
particular firm, and the proposed rules would not affect the likelihood 
that any particular audit of an EGC will be reviewed in an inspection 
of the EGC's auditor. In addition, as noted above, firms that the Board 
could choose to forgo inspecting under proposed Rule 4003(e) typically 
would not be expected to realize, at the time they perform an audit, 
that future developments will make Rule 4003(e) applicable, and in any 
event they would have no assurance that the Board would forgo the 
inspection. Moreover, to the extent audits of EGCs are selected for 
review in an inspection, the proposed rules would have no effect on how 
that review is conducted, and they provide no reason for an auditor, at 
the time of the audit, to anticipate any different treatment of that 
audit in an inspection.
    It does not appear that the proposed amendments would have an 
effect on efficiency, competition, and capital formation with respect 
to EGCs. The Board defers to the Commission on the applicability of 
Section 103(a)(3)(C) to the proposed amendments. If the Commission 
determines that Section 103(a)(3)(C) applies to these amendments, the 
Board requests that the Commission determine that it 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, to apply the amendments to audits of EGCs. The 
Board stands ready to assist the Commission with any additional 
analysis that may become necessary.

[[Page 21914]]

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

    Pursuant to Section 19(b)(2)(A)(ii) of the Exchange Act,\17\ and 
based on its determination that an extension of the period set forth in 
Section 19(b)(2)(A)(i) of the Exchange Act \18\ is appropriate in light 
of the Commission's consideration of Section 103(a)(3)(C) of the 
Sarbanes-Oxley Act with respect to applicability of the proposed rules 
to audits of emerging growth companies, as defined in Section 3(a)(80) 
of the Exchange Act, the Commission has determined to extend to July 
12, 2016 the date by which the Commission should take action on the 
proposed rules.
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    \17\ 15 U.S.C. 78s(b)(2)(A)(ii).
    \18\ 15 U.S.C. 78s(b)(2)(A)(i).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed 
rules are consistent with the requirements of Title I of the Sarbanes-
Oxley 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 email to rule-comments@sec.gov. Please include 
File Number PCAOB-2007-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number PCAOB-2007-04. This file 
number should be included on the subject line if email 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 rules that are filed 
with the Commission, and all written communications relating to the 
proposed rules 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 Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549-1090, on official business days between the hours of 10:00 
a.m. and 3:00 p.m. Copies of such filing will also 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 No. PCAOB-2007-04 and should be 
submitted on or before May 4, 2016.

    For the Commission, by the Office of the Chief Accountant, by 
delegated authority.\19\
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    \19\ 17 CFR 200.30-11(b)(2).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-08444 Filed 4-12-16; 8:45 am]
 BILLING CODE 8011-01-P