Document ID: SEC-2009-0580-0001
Agency: sec
Document Type: Notice
Title: Public Company Accounting Oversight Board; Notice of Filing of Proposed Amendment to Board Rules Relating to Inspections
Posted Date: 2009-04-24T04:00Z

[Federal Register: April 24, 2009 (Volume 74, Number 78)]
[Notices]               
[Page 18753-18755]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24ap09-101]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59792; File No. PCAOB-2008-06]

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

April 20, 2009.
    Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the 
``Act''), notice is hereby given that on December 9, 2008, 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.

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

    On December 4, 2008, the Board adopted an amendment to its rule 
relating to the frequency of inspections. The proposed amendment adds a 
new paragraph (f) to existing Rule 4003. The text of the proposed 
amendment is set out below. Language added by the amendment is in 
italics.
Rule 4003. Frequency of Inspections
* * * * *
    (f) With respect to any foreign registered public accounting firm 
concerning which the preceding provisions of this Rule would set a 2008 
deadline for the first Board inspection, such deadline is extended to 
2009.

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
    The Sarbanes-Oxley Act of 2002 (``the Act'') directs the Board to 
conduct a continuing program of inspections to assess registered public 
accounting firms' compliance with certain requirements.\1\ The Act 
prescribes inspection frequency requirements but also authorizes the 
Board to adjust the frequency requirements by rule if the Board finds 
that an adjustment is consistent with the purposes of the Act, the 
public interest, and the protection of investors.\2\ Inspection 
frequency requirements adopted by the Board are set out in PCAOB Rule 
4003, ``Frequency of Inspections.''
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    \1\ See Section 104(a) of the Act.
    \2\ See Section 104(b) of the Act.
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    The Board began a regular cycle of inspections of U.S. firms in 
2004 and has conducted 911 such inspections, including repeat 
inspections of several firms. Inspections of non-U.S. firms began in 
2005, and the Board has inspected 123 non-U.S. firms that have issued 
audit reports while registered with the Board. Those firms are located 
in 24 jurisdictions.\3\ There are, however, 21 non-U.S. firms that have 
issued audit reports while registered and that Rule 4003 requires the 
Board to inspect by the end of 2008, but that the Board has not yet 
inspected. For the reasons described below, the Board has adopted Rule 
4003(f) to extend for one year the deadline for the Board to conduct 
the first inspections of non-U.S. firms that are otherwise required 
before the end of 2008.\4\
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    \3\ The Board has inspected non-U.S. firms located in Argentina, 
Australia, Bermuda, Brazil, Canada, Chile, Colombia, Greece, Hong 
Kong, India, Indonesia, Ireland, Israel, Japan, Kazakhstan, Mexico, 
New Zealand, Panama, Peru, Singapore, South Africa, South Korea, 
Taiwan R.O.C., and the United Kingdom.
    \4\ Existing Rule 4003 effectively sets deadlines for the 
Board's inspections not only of firms that issue audit reports, but 
also of firms that play a substantial role in the preparation or 
furnishing of an audit report (as defined in PCAOB Rule 
1001(p)(ii)). The Board has previously submitted for Commission 
approval amendments to Rules 4003(b) and 4003(d) that would 
eliminate from the Rule any frequency requirement or deadline for 
the Board to inspect a firm that plays a substantial role but does 
not issue an audit report. Unless and until the Commission approves 
such a rule change, however, the one-year extension in proposed rule 
4003(f) would (if approved by the Commission) apply to required 2008 
PCAOB inspections of non-U.S. firms that have played a substantial 
role as well as to required 2008 inspections of non-U.S. firms that 
have issued audit reports.
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    The PCAOB has recognized since the outset of its inspection program 
that inspections of non-U.S. firms pose

[[Page 18754]]

special issues.\5\ In its oversight of non-U.S. firms, the Board seeks, 
to the extent reasonably possible, to coordinate and cooperate with 
local authorities. Since 2003, when the PCAOB began operations, a 
number of jurisdictions have also developed their own auditor oversight 
authorities with inspection responsibilities or enhanced existing 
oversight systems.\6\ The Board has a specific framework for working 
cooperatively with its non-U.S. counterparts to conduct joint 
inspections and, to the extent deemed appropriate by the Board in any 
particular case, relying on inspection work performed by that 
counterpart.\7\ The Board has previously expressed the view that it is 
in the interests of the public and investors for the Board to develop 
efficient and effective cooperative arrangements with its non-U.S. 
counterparts.\8\ In jurisdictions that have their own inspection 
programs, this may include conducting joint inspections of firms that 
are subject to both regulators' authority. Even where the Board does 
not work with a local regulator to conduct joint inspections, the Board 
communicates with its counterpart or other local authorities (such as 
securities regulators or other government agencies and ministries) 
regarding its inspections to be conducted in the jurisdiction.
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    \5\ See Briefing Paper, Oversight of Non-U.S. Public Accounting 
Firms (October 28, 2003); Final Rules Relating to the Oversight of 
Non-U.S. Public Accounting Firms, PCAOB Release No. 2004-005 (June 
9, 2004) (hereinafter ``Oversight of Non-U.S. Firms'').
    \6\ In 2006, for instance, the European Union enacted a 
directive requiring the creation of an effective system of public 
oversight for statutory auditors and audit firms within each Member 
State. See The Directive 2006/43/EC of the European Parliament and 
the Council (May 17, 2006) (the ``Eighth Directive''). In addition, 
among others, Canada created the Canadian Public Accountability 
Board, and in Australia, the responsibilities of the Australian 
Securities and Investments Commission were expanded to include 
auditor oversight. In Asia, Japan created the Certified Public 
Accountants and Auditing Oversight Board, South Korea gave 
responsibility for auditor oversight to its Financial Supervisory 
Service, and Singapore created the Accounting and Corporate 
Regulatory Authority.
    \7\ See PCAOB Rules 4011 and 4012; see also Oversight of Non-
U.S. Firms at 2-3.
    \8\ See Oversight of Non-U.S. Firms at 2-3.
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    In some jurisdictions, the PCAOB's ability to conduct inspections, 
either by itself or jointly with a local regulator, is complicated by 
the need to address with local authorities potential legal obstacles 
and sovereignty concerns. The Board seeks to work with the home-country 
authorities to try to resolve potential conflicts of laws.\9\
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    \9\ See Oversight of Non-U.S. Firms at 3.
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    In addition, PCAOB Rule 4011 permits non-U.S. firms that are 
subject to Board inspection to formally request that the Board, in 
conducting its inspection, rely on a non-U.S. inspection to the extent 
deemed appropriate by the Board. If a Rule 4011 request is made, Rule 
4012 provides that the Board will, at an appropriate time before each 
inspection of the firm, determine the degree, if any, to which the 
Board may rely on the non-U.S. inspection. Rule 4012 describes aspects 
of the non-U.S. system that the Board will evaluate in making that 
determination.
    Where the need arises to try to resolve potential conflicts of law, 
or to evaluate a non-U.S. system in response to a Rule 4011 request, 
the effort can be substantial. The effort typically involves 
negotiating the principles of an arrangement for cooperation consistent 
with the inspection obligations that the Act imposes on the Board. It 
also involves the Board gaining a detailed understanding of the other 
jurisdiction's auditor oversight system in order for the Board to 
determine the degree of reliance it is willing to place on inspection 
work performed under that system in a particular inspection year.
    Additional effort is involved in coordinating the scheduling of 
specific inspections. Where possible, the Board seeks to conduct 
inspections jointly with local authorities both to take advantage of 
potential efficiencies and to avoid imposing unnecessary regulatory 
burdens on the firm. Like the PCAOB, several of these other authorities 
proceed according to inspection frequency requirements. While some of 
the Board's counterparts are established and have inspection programs, 
many are new organizations still building up their inspections 
resources. As a result, synchronizing the inspections schedules of 
these authorities and the PCAOB's requirements may sometimes require 
one-time scheduling adjustments by the PCAOB and/or the other 
authority.
    Notwithstanding these challenges, the Board has so far conducted 
123 non-U.S. inspections. Fifty-seven of those inspections, in five 
jurisdictions, have been conducted jointly with other auditor oversight 
authorities, while 66 have been conducted solely by the PCAOB.
    Because of the types of issues described above, however, the Board 
faces certain challenges related to conducting, in 2008, the 
inspections of 18 non-U.S. firms that have issued audit reports while 
registered and that the Board is currently required to inspect by the 
end of 2008.\10\ Those 18 inspections involve firms in nine 
jurisdictions, several of which have newly established auditor 
oversight entities that have just recently started their own 
inspections programs. In some of those nine jurisdictions, the auditor 
oversight authority's 2008 inspection schedules did not include some or 
any of the firms the PCAOB is required to inspect in 2008. In still 
other jurisdictions, local authorities have raised sovereignty concerns 
or potential legal conflicts, and efforts to resolve those issues are 
incomplete.
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    \10\ Inspections of three other non-U.S. firms that have issued 
audit reports while registered and that the Board is currently 
required to conduct by the end of 2008 will be delayed beyond 2008 
for reasons unrelated to the issues discussed above. In October 
2007, after soliciting public comment, the Board adopted and 
submitted for Commission approval an amendment to Rule 4003 that 
would give the Board discretion not to conduct an otherwise required 
inspection of a firm if, after the firm issued the audit report that 
gave rise to the inspection requirement, the firm went two 
consecutive calendar years without issuing an audit report. The 
three non-U.S. firms referred to here fall into that category and, 
although the Commission has not acted on that proposed rule 
amendment, the Board's planning for, and conduct of, 2008 
inspections did not include those three firms.
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    The Board has made an effort to resolve issues with authorities in 
the nine jurisdictions in time to conduct these inspections in 
2008.\11\ The Board remains hopeful that ongoing discussions with these 
authorities will result in the resolution of outstanding issues. It is 
now apparent, however, that this will not occur in time to conduct 
those inspections in 2008. Accordingly, the choice the Board now faces 
is whether to (1) postpone these inspections while continuing 
discussions on the outstanding issues or (2) proceed with inspections 
by making inspection demands on the individual firms over the objection 
of local authorities, including in circumstances where local 
authorities take the position that a firm's cooperation in a Board 
inspection would violate local law.
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    \11\ In two of these jurisdictions, the Board was able to 
arrange for and conduct some joint inspections in 2008, but, due to 
scheduling conflicts, could not conduct joint inspections of all 
firms with 2008 deadlines.
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    Neither option is ideal. While the Board sees value in cooperation 
and joint inspections, that value must be balanced against the 
statutory presumption that PCAOB-registered firms will be subject to 
timely PCAOB inspections in order to protect the interests of investors 
in U.S. markets. On balance, in light of the status of the ongoing 
discussions with authorities in the nine jurisdictions described above, 
the Board believes that a rule amendment allowing the Board to

[[Page 18755]]

postpone those inspections for up to one year is the appropriate 
course. For that reason, the Board is adopting a new paragraph (f) to 
Rule 4003, which extends for one year the deadline for the Board to 
conduct the first inspection of any non-U.S. firm that existing Rule 
4003 otherwise requires the Board to conduct by the end of 2008. The 
Board is adopting Rule 4003(f) to take effect upon Commission approval.
    In the Board's view, this adjustment to the inspection frequency 
requirement is consistent with the purposes of the Act, the public 
interest, and the protection of investors. The Board believes that its 
approach to implementing Rules 4011 and 4012, developing cooperative 
arrangements, and conducting joint inspections with foreign regulators 
is enhancing the Board's efforts to carry out its inspection 
responsibilities. 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. The Board 
recognizes that some non-U.S. firms may be reluctant to comply with 
PCAOB inspection demands because of a concern that doing so might 
violate local law. Up to a point, the purposes of the Act, the public 
interest, and the protection of investors are better served by delaying 
a first inspection to work toward a cooperative resolution than by 
precipitating legal disputes involving conflicts between U.S. and non-
U.S. law that could arise if the Board sought to enforce compliance 
with its preferred schedule without regard for the concerns of non-U.S. 
authorities.
    The Board will continue to work toward cooperation and coordination 
with authorities in all relevant jurisdictions. The Board does not 
intend, however, to make any further adjustments to the inspection 
frequency requirements applicable to firms whose first inspection was 
due no later than 2008.\12\
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    \12\ Nothing in this notice is inconsistent with the Board's 
willingness to place reliance on a non-U.S. inspection consistent 
with Rules 4011 and 4012, or suggests any position on the nature of 
the inspection process in circumstances in which the Board relies on 
a non-U.S. inspection to the maximum extent that would be consistent 
with the Board's responsibilities under the Act.
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(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 will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule imposes no 
burden beyond the burdens clearly imposed and contemplated by the Act.

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

    The Board did not solicit or receive comments before adopting the 
proposed rule.

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 
changes are 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-2008-06 on the subject line.

Paper Comments

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

All submissions should refer to File Number PCAOB-2008-06. 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 changes that are 
filed with the Commission, and all written communications relating to 
the proposed rule changes 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. 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-2008-06 and should be 
submitted on or before May 15, 2009.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-9367 Filed 4-23-09; 8:45 am]

BILLING CODE 8010-01-P