Document ID: SEC-2007-1527-0001
Agency: sec
Document Type: Notice
Title: Public Company Accounting Oversight Board: Inspection frequency requirements for registered public accounting firms; proposed rule filing
Posted Date: 2007-11-08T05:00Z

[Federal Register: November 8, 2007 (Volume 72, Number 216)]
[Notices]               
[Page 63215-63216]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08no07-78]                         

[[Page 63215]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56738; File No. PCAOB-2006-03]

 
Public Company Accounting Oversight Board; Order Approving 
Proposed Rule Change and Amendment No. 1 Thereto Relating to 
Inspections

November 2, 2007.

I. Introduction

    On December 20, 2006, the Public Company Accounting Oversight Board 
(the ``Board'' or the ``PCAOB'') filed with the Securities and Exchange 
Commission (the ``Commission'') proposed rule amendments (PCAOB-2006-
03) 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. On May 31, 2007, the Board amended 
its filing because certain of the information described in the original 
filing had changed. Notice of the proposed rule amendments, including 
Amendment No. 1 to the proposed amendments, was published in the 
Federal Register on October 1, 2007.\1\ The Commission received no 
comment letters relating to the proposed rule amendments. For the 
reasons discussed below, the Commission is granting approval of the 
proposed rule amendments.
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    \1\ See SEC Release No. 34-56517 (Sep. 25, 2007); 72 FR 55839 
(October 1, 2007).
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II. Description

    The PCAOB adopted its initial inspection rules at its public 
meeting on October 7, 2003, and authorized filing the rules with the 
Commission. After the appropriate comment period, the Commission 
approved the rules on June 1, 2004. On December 19, 2006, the PCAOB 
adopted amendments to its inspection rules to temporarily adjust the 
inspection frequency requirements for firms with 100 or fewer issuer 
audit clients and to provide for technical amendments to PCAOB Rule 
4006, Duty to Cooperate with Inspectors, and PCAOB Rule 4009, Firm 
Response to Quality Control Defects. The PCAOB solicited public 
comments on the proposed amendments at that time. After reviewing the 
public comments received on the proposed amendments, the PCAOB adopted 
Amendment No. 1 to the proposed amendments and submitted an amended 
Form 19b-4 proposed rule change to the Commission. 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 amendments for public comment on October 1, 
2007.

III. Discussion

    The Commission received no public comments relating to the PCAOB's 
proposed amendments relating to its rules governing inspections of 
registered public accounting firms. 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 
matters involving issuers. Section 104(b)(1)(B) of the Act requires the 
PCAOB 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 PCAOB to 
adopt rules adjusting that frequency.
    In 2003, the PCAOB adopted Rule 4003(b), which provides that the 
PCAOB 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 plays 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 Board explained that 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. 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.
    On December 19, 2006, the PCAOB adopted a proposed amendment to its 
Rule 4003 to temporarily adjust the minimum inspection frequency 
requirement applicable to certain firms. The Board explained that the 
proposed amendment 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.
    The proposed amendment to PCAOB Rule 4003 provides that, with 
respect to firms that became registered in 2003 or 2004, (1) the PCAOB 
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 in an audit, and (2) the PCAOB 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. Amendment No. 1 to the proposed amendments removes a 
sunset provision relating to Rule 4003 from the proposed amendments, 
which would have caused the proposed amendment to Rule 4003 to expire 
on June 30, 2007. The proposed amendments also include technical 
amendments to make corrections to PCAOB Rules 4006 and 4009.
    The proposed amendments do not limit the PCAOB's authority to 
conduct inspections at any time, and do not affect registered firms' 
obligations under the Act. Even with this adjustment, the Board expects 
that each U.S. firm that issued an original 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. As the Board explained, 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 year to year. The adjustment will 
accomplish this while delaying only a relatively small portion

[[Page 63216]]

of inspections, and delaying them only for a short period.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed amendments to 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 and appropriate in 
the public interest and for the protection of investors.
    It is therefore ordered, pursuant to section 107 of the Act and 
section 19(b)(2) of the Exchange Act, that the proposed rule amendments 
(File No. PCAOB-2006-03) be and hereby are approved.

    By the Commission.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-21910 Filed 11-7-07; 8:45 am]

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