Document ID: SEC-2010-0362-0001
Agency: sec
Document Type: Notice
Title: Public Company Accounting Oversight Board: Order Approving Proposed Amendment to Board Rules Relating to Inspections
Posted Date: 2010-03-10T05:00Z

[Federal Register: March 10, 2010 (Volume 75, Number 46)]
[Notices]               
[Page 11210-11211]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10mr10-130]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61649; File No. PCAOB-2009-01]

 
 Public Company Accounting Oversight Board; Order Approving 
Proposed Amendment to Board Rules Relating to Inspections

March 4, 2010.

I. Introduction

    On July 2, 2009, the Public Company Accounting Oversight Board (the 
``Board'' or the ``PCAOB'') filed with the Securities and Exchange 
Commission (the ``Commission'') a proposed rule amendment (PCAOB-2009-
01) pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the 
``Act'') relating to the Board's rules governing inspections of 
registered public accounting firms. Notice of the proposed rule 
amendment was published in the Federal Register on November 25, 
2009.\1\ The Commission did not receive any comment letters relating to 
the proposed rule amendment. For the reasons discussed below, the 
Commission is granting approval of the proposed rule amendment.
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    \1\ See SEC Release No. 34-61032 (November 19, 2009); 74 FR 
61722 (November 25, 2009).
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II. Description

    The PCAOB's proposed rule amendment would add paragraph (g) to 
existing PCAOB Rule 4003, Frequency of Inspections, to give the Board 
the ability to postpone, for up to three years, the current 2009 
deadline for the first inspection of 49 non-U.S. firms that are located 
in 24 jurisdictions in which the Board has not conducted an inspection 
prior to 2009. As discussed further below, under the proposed rule 
amendment, the Board would conduct these inspections in each of the 
years from 2009 through 2012 according to a sequencing based on the 
U.S. market capitalization of the aforementioned 49 firms' issuer audit 
clients. The proposed rule amendment does not affect inspection 
frequency requirements concerning any other first inspections or 
concerning any second, or later, inspections of a firm. Further, the 
proposed amendment itself does not limit the PCAOB's authority to 
conduct inspections at any time and does not affect registered firms' 
obligations under the Act.
    Pursuant to the requirements of Section 107(b) of the Act and 
Section 19(b) of the Securities Exchange Act of 1934 (the ``Exchange 
Act''), the Commission published the proposed rule amendment for public 
comment on November 25, 2009.

III. Discussion of Comments

    The Commission did not receive any comment letters relating to the 
proposed rule amendment.

IV. Discussion

    Section 104 of the Act requires the PCAOB 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 PCAOB, the rules of the Commission, and 
professional standards, in connection with its performance of audits, 
issuance of audit reports, and related maters involving issuers. Under 
current PCAOB rules, the PCAOB must conduct an inspection annually of 
each firm that issued audit reports for more than 100 issuers in the 
previous calendar year; and must conduct an inspection once every three 
years of each firm that, during any of the three prior calendar years, 
issued an audit report for at least one but not more than 100 issuers, 
or that played a substantial role in the preparation or furnishing of 
an audit report for at least one issuer.\2\ The Act authorizes the 
PCAOB, by rule and with SEC approval, to adjust these frequency 
requirements if the Board finds that different inspection schedules are 
consistent with the purpose of the Act, the public interest, and the 
protection of investors.\3\
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    \2\ See PCAOB Rule 4003.
    \3\ See section 104(b)(2) of the Act [15 U.S.C. 7214(b)].
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    As described by the PCAOB, there were 49 non-U.S. registered firms 
that, by virtue of when they first issued audit reports after 
registering with the PCAOB, the Board was required to inspect for the 
first time by the end of 2009, and that were located in 24 
jurisdictions where the Board had not conducted any inspections to 
date.\4\ The Board indicated that these inspections were not conducted 
because of issues that relate primarily to the coordination of 
inspections with local authorities and the resolution of potential 
conflicts of law.\5\
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    \4\ See PCAOB Release No. 2009-003 (June 25, 2009).
    \5\ Ibid.
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    In summarizing its rationale for the necessity of the proposed rule 
amendment, the Board noted its belief that most of the aforementioned 
24 jurisdictions have or soon will have a local auditor oversight 
authority with which the Board would seek to work toward cooperative 
arrangements before conducting inspections, and noted its concerns 
about proceeding as if such cooperative arrangements and other 
necessary steps could be completed for all 24 jurisdictions in time to 
conduct the required inspections by the end of 2009.\6\ To address 
these concerns, the Board adopted and submitted to the Commission for 
approval the proposed rule amendment, new paragraph (g) to Rule 4003, 
to allow it to defer these inspections for up to three years.
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    \6\ Ibid.

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[[Page 11211]]

    In the Commission's publication of the proposed rules for comment, 
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the notice indicated the following:

    In determining the schedule for completion of the inspections 
subject to new paragraph (g), the Board will implement its proposal 
to sequence these 49 inspections such that certain minimum 
thresholds will be satisfied in each of the years from 2009 to 2012. 
The minimum thresholds relate to U.S. market capitalization of 
firms' issuer audit clients. The Board will begin by ranking the 49 
firms according to the total U.S. market capitalization of a firm's 
foreign private issuer audit clients. Working from the top of the 
list (highest U.S. market capitalization total) down, the 49 firms 
will be distributed over 2009 to 2012 such that, at a minimum, the 
following criteria are satisfied:
     by the end of 2009, the Board will inspect firms whose 
combined issuer audit clients' U.S. market capitalization 
constitutes at least 35 percent of the aggregate U.S. market 
capitalization of the audit clients of all 49 firms;
     by the end of 2010, the Board will inspect firms whose 
combined issuer audit clients' U.S. market capitalization 
constitutes at least 90 percent of that aggregate;
     by the end of 2011, the Board will inspect firms whose 
combined issuer audit clients' U.S. market capitalization 
constitutes at least 99.9 percent of that aggregate; and
     the Board will inspect the remaining firms in 2012.
    In addition to meeting those market capitalization thresholds, 
the Board also will satisfy certain criteria concerning the number 
of those 49 firms that will be inspected in each year. Specifically, 
the Board will conduct at least four of the 49 inspections in 2009, 
at least 11 more in 2010, and at least 14 more in 2011. (footnotes 
omitted)

    On February 3, 2010, the PCAOB released new and updated information 
about the status of its inspections of registered non-U.S. accounting 
firms, including reporting on the PCAOB's progress in meeting the above 
target thresholds.\7\ Specifically, the PCAOB reported that, as of 
December 31, 2009, the PCAOB had inspected five firms that would meet 
the proposed Rule 4003(g) criteria for deferral. However, the PCAOB 
inspected only two of the four firms that the PCAOB had scheduled for 
inspection in 2009 based on their clients' U.S. market capitalization. 
As a result, the PCAOB did not meet the target threshold for U.S. 
market capitalization for 2009. The PCAOB was unable to conduct the 
inspections of the remaining two firms it intended to inspect in 2009 
because, on the basis of asserted restrictions under non-U.S. law, 
access to information necessary to conduct the inspections was denied.
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    \7\ See http://pcaobus.org/News/Releases/Pages/02032010_
Progress_IntlInspections.aspx. The PCAOB also noted that that it 
intends to update its progress report semiannually to reflect 
information current as of June 30 and December 31.
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    The PCAOB also reported that discussions are continuing with the 
relevant authorities in the affected jurisdictions in an effort to 
resolve their objections to PCAOB inspections. We agree that the PCAOB 
should continue to work toward cooperative arrangements with the 
appropriate local auditor oversight authorities where it is reasonably 
likely that appropriate cooperative arrangements can be obtained.\8\ We 
also recognize that formalization and finalization of such arrangements 
take time. However, as the Board has acknowledged, inspection is the 
cornerstone of the Board's regulatory oversight of audit firms.\9\ 
Public companies and investors rely on the integrity of the auditing 
work performed by firms registered with the PCAOB, and the salutary 
effects of briefly delaying inspection of certain of these firms 
decrease as the period of delay increases or there no longer appears to 
be a reasonable possibility of reaching appropriate cooperative 
arrangements.
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    \8\ Cf., PCAOB Release 2009-003 (June 25, 2009) (expressing the 
view that ``There is long-term value in accepting a limited delay in 
inspections to continue working toward cooperative arrangements 
where it appears reasonably possible to reach them.'').
    \9\ See, PCAOB Release 2009-003 (June 25, 2009) (stating that 
``[I]nspection is the Board's primary tool of oversight.'').
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    Accordingly, we encourage the PCAOB to continue to work with 
deliberate speed with its foreign counterparts to finalize these 
cooperative arrangements. We continue to expect the PCAOB to satisfy 
its announced inspection schedule for 2010-2012.\10\ We also direct the 
PCAOB to work closely with Commission staff in the PCAOB's ongoing 
discussions with relevant authorities and efforts to meet its non-U.S. 
audit firm inspection schedule.\11\
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    \10\ As part of its semiannual disclosures, the PCAOB also 
discloses a list of those registered firms where inspections have 
not been completed by the PCAOB, even though more than four years 
have passed since the end of the calendar year in which the firm 
first issued an auditor report while registered with the PCAOB.
    \11\ Separately, in the Commission's order approving the PCAOB's 
budget and annual accounting support fee for calendar year 2010, the 
Commission directed the PCAOB to include in its quarterly reports to 
the Commission information about the timing of the PCAOB's 
international inspection program and updates on the PCAOB's efforts 
to establish cooperative arrangements with respective non-U.S. 
authorities for inspections required in those countries. See SEC 
Release No. 34-61212 (December 22, 2009); 74 FR 68875 (December 29, 
2009).
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V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed amendment of the Board's rules governing inspections of 
registered public accounting firms are consistent with the requirements 
of the Act and the securities laws and are necessary or appropriate in 
the public interest or 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 rule amendment 
(File No. PCAOB 2009-01) be and hereby is approved.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-5046 Filed 3-9-10; 8:45 am]
BILLING CODE 8011-01-P