Document ID: SEC-2009-1662-0001
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: 2009-11-25T05:00Z

[Federal Register: November 25, 2009 (Volume 74, Number 226)]
[Notices]               
[Page 61722-61726]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25no09-111]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61032; File No. PCAOB-2009-01]

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

November 19, 2009.
    Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the 
``Act''), notice is hereby given that on July 2, 2009, the Public 
Company Accounting Oversight Board (the ``Board'' or ``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 June 25, 2009, the Board adopted an amendment to its rule 
relating to the

[[Page 61723]]

frequency of inspections. The proposed amendment adds a new paragraph 
(g) 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
    * * * * *
    (g) With respect to any foreign registered public accounting firm 
concerning which the preceding provisions of this Rule, other than 
paragraphs (a) and (f), would set a 2009 deadline for the first Board 
inspection and that is headquartered in a country in which no foreign 
registered public accounting firm that the Board inspected before 2009 
is headquartered, such deadline is extended to 2012, provided, however, 
that from among the group of all such firms, the Board shall conduct 
some first inspections in each of the years from 2009 to 2012, 
scheduled according to such criteria as the Board shall publicly 
announce.

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 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 982 such inspections, including repeat 
inspections of several firms. Inspections of non-U.S. firms began in 
2005, and the Board has inspected 140 non-U.S. firms. Those firms are 
located in 26 jurisdictions.\3\ There are, however, currently 68 non-
U.S. firms that, by virtue of when they first issued audit reports 
after registering with the PCAOB, the Board is required to inspect for 
the first time by the end of 2009.\4\ For the reasons described below, 
the Board has adopted Rule 4003(g), which would affect the timing of a 
subset of those 68 inspections. Specifically, Rule 4003(g) will give 
the Board the ability to postpone, for up to three years, first 
inspections that the Board is currently required to conduct before the 
end of 2009 in jurisdictions where the Board conducted no inspections 
before 2009. The amendment does not affect inspection frequency 
requirements concerning any other first inspections, or concerning any 
second or later inspections, of firms that issue audit reports for 
issuers.\5\
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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, Norway, Panama, Peru, the Russian Federation, 
Singapore, South Africa, South Korea, Chinese-Taipei, and the United 
Kingdom.
    \4\ This discussion does not include, or apply to, 21 non-U.S. 
firms whose first inspection deadline has been moved from 2008 to 
2009 under Rule 4003(f).
    \5\ 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 extension in proposed rule 4003(g) 
would (if approved by the Commission) apply to required 2009 PCAOB 
inspections of non-U.S. firms (in jurisdictions encompassed by the 
rule's terms) that have played a substantial role as well as to 
required 2009 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 special issues.\6\ 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.\7\ The Board 
believes 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.
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    \6\ See Briefing Paper, Oversight of Non-U.S. Public Accounting 
Firms (October 28, 2003) (hereinafter ``Oversight of Non-U.S. 
Firms''); Final Rules Relating to the Oversight of Non-U.S. Public 
Accounting Firms, PCAOB Release No. 2004-005 (June 9, 2004).
    \7\ 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 established the Certified Public 
Accountants and Auditing Oversight Board, South Korea delegated 
responsibility for auditor oversight to its Financial Supervisory 
Service, and Singapore established the Accounting and Corporate 
Regulatory Authority.
    \8\ See Oversight of Non-U.S. Firms at 2-3.
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    Indeed, 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.\9\ 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. 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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    \9\ See PCAOB Rules 4011 and 4012; see also 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 concerns of local authorities about potential legal obstacles and 
sovereignty issues. The Board seeks to work with the home-country 
authorities to try to resolve these and any other concerns.\10\
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    \10\ See Oversight of Non-U.S. Firms at 3.
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    The effort involved in attempting to resolve potential conflicts of 
law, or to evaluate a non-U.S. system in response to a Rule 4011 
request, can be

[[Page 61724]]

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 firms. 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 have only recently begun inspections or are still building up 
their inspections resources. As a result, synchronizing the inspections 
schedules of these authorities and the PCAOB's requirements is 
sometimes difficult.
    Notwithstanding these challenges, the Board has so far conducted 
140 non-U.S. inspections. Moreover, 61 of those inspections, in six 
jurisdictions, have been conducted jointly with other auditor oversight 
authorities, while inspections in 20 jurisdictions have been conducted 
solely by the PCAOB.\11\
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    \11\ Joint inspections have been conducted in Australia, Canada, 
South Korea, Norway, Singapore and the United Kingdom.
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    As noted above, under existing Rule 4003, there are 68 non-U.S. 
firms that, by virtue of when they first issued audit reports after 
registering with the PCAOB, the Board is required to inspect for the 
first time by the end of 2009. Those firms are located in 36 
jurisdictions, including several jurisdictions in which the Board has 
already conducted first inspections of other firms. Of those firms, 49 
are located in 24 jurisdictions where the Board has not conducted any 
inspections to date. Most of those 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. Because of the steps involved in concluding such 
arrangements and to evaluate the local system, the Board has concerns 
about proceeding as if that work can be completed for all of the 
jurisdictions in which the PCAOB has not previously conducted 
inspections in time to conduct the required inspections by the end of 
2009.
    Accordingly, the Board is adopting a new paragraph (g) to Rule 4003 
to allow the Board to postpone, for up to three years, the first 
inspection of any non-U.S. firm that the Board is currently required to 
conduct by the end of 2009 and that is in a jurisdiction where the 
Board has not conducted an inspection before 2009.
    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.\12\ 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:
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    \12\ For purposes of the ranking described here, the Board will 
use the average monthly market capitalization on which each issuer's 
share of the Board's 2008 accounting support fee was based. Thus, 
the market capitalization figure used for the ranking does not 
include the value of any referred work performed by the firm.
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     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.\13\
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    \13\ Under existing provisions of Rule 4003 that are not 
affected by this amendment, 2012 would also be the deadline for the 
Board to conduct the second inspection of those of the 49 firms 
whose first inspection occurs in 2009.
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    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.\14\
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    \14\ The issuer audit client U.S. market capitalization 
currently associated with a significant number of the 49 firms is 
relatively low, and even zero in a number of cases where firms 
appear to have stopped issuing audit reports for issuers. As a 
result, approximately 92% of the relevant issuer market 
capitalization is associated with 15 of the 49 firms.
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    It is important to note that the distribution described above will 
not operate to prevent an inspection from occurring earlier than called 
for by the schedule. Any inspection may be moved to an earlier year for 
a variety of reasons, such as the presence of risk factors (including 
risk factors relating to referred work \15\ that the firm performs on 
audits for which it is not the principal auditor), synchronization of 
schedules with a local regulator for purposes of a joint inspection, or 
simply the opportunity and the availability of resources to do an 
inspection earlier (including availability of inspectors with 
specialized industry knowledge and relevant language skills). In 
addition, the Board will at least annually review updated market 
capitalization data and consider whether there have been any changes 
that warrant moving a particular inspection forward to an earlier year.
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    \15\ Because the PCAOB is still in the process of gathering 
information about each firm's referred work, the 2009 inspections 
will not use referred work as a risk factor for purposes of 
scheduling.
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    Conversely, the Board does not intend to make changes that would 
move an inspection of one of these 49 firms to a later year than in the 
initial distribution except as the result of a development relating to 
the market capitalization of the firm's issuer clients. Specifically, 
if a firm's issuer audit client market capitalization drops 
significantly and the firm performs no significant amount of referred 
work on audits, its inspection might be delayed to a later year. In any 
event, the Board will not, for any reason, move one of these 49 
inspections to a later year than in the initial distribution without 
publicly describing the change and the reason for it.
    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

[[Page 61725]]

cooperative arrangements where it appears reasonably possible to reach 
them. The Board also believes that the additional time to conduct 
certain inspections will have the added benefit of giving the Board 
more time to continue to enhance its inspection program, particularly 
in the areas of risk assessment and pre-inspection planning, and the 
Board intends to do so.
    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 or the sovereignty of their home country. The 
Board believes that the purposes of the Act, the public interest, and 
the protection of investors are better served, up to a point, by 
delaying some of the first inspections 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 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 2009. While the Board will 
continue to work toward cooperation and coordination with authorities 
in the relevant jurisdictions, the Board will make inspection demands 
on the firms early enough in the year in which they are scheduled for 
inspection according to the above described sequencing to allow the 
Board to conduct the inspections during that year.\16\
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    \16\ Apart from the proposed rule amendment, the Board has 
implemented certain practices to provide additional transparency 
with regard to the Board's international inspections program. These 
practices include (1) making a public announcement, near the 
beginning of each year until 2012, identifying all non-U.S. 
jurisdictions in which there are firms that the Board will inspect 
that year, (2) maintaining a public list of all registered firms 
that have not yet had their first Board inspection even though more 
than four years have passed since the end of the calendar year in 
which they first issued an audit report while registered with the 
Board, and (3) making biannual public announcements of the Board's 
progress toward meeting the thresholds described above with respect 
to the number of firms to be inspected and the aggregate market 
capitalization of firm clients. The Board also maintains on its Web 
site a list of all jurisdictions in which there are registered firms 
that the Board has inspected. Additional details concerning these 
practices are provided in PCAOB Release No. 2009-003, available on 
the Board's Web site at http://www.pcaobus.org/Rules/Docket_027.
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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 released the proposed rule amendment for public comment 
in Release No. 2008-007 (December 4, 2008). A copy of Release No. 2008-
007 and the comment letters received in response to the PCAOB's request 
for comment are available on the PCAOB's Web site at http://
www.pcaobus.org/Rules/Docket_027. The Board received twenty-four 
written comment letters. The Board has carefully considered the comment 
letters, as discussed below.
    Several commenters suggested that the Board exercise its authority 
under Section 106 of the Act to exempt firms that cannot cooperate with 
PCAOB inspections due to legal conflicts or sovereignty-based 
opposition from their local governments. The Board believes that it is 
not in the interests of investors or the public to exempt non-U.S. 
firms from the Act's inspection requirement given that the Board has 
previously determined not to exempt non-U.S. firms from the Act's 
registration requirements and given that an inspection is the Board's 
primary tool of oversight.\17\
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    \17\ When it first became operational, the Board considered 
whether to exempt non-U.S. firms from registration with the Board. 
The Board determined that exempting non-U.S. firms would not protect 
the interests of investors or further the public interest given that 
registration is the predicate to all of the Board's other oversight 
programs. See Registration System for Public Accounting Firms, PCAOB 
Release No. 2003-007 (May 6, 2003) at 13.
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    The Board also received several comment letters addressing the 
length of the proposed extension for certain firms with 2009 deadlines. 
Some comment letters expressed concern about the inspection delay of up 
to three years but ultimately expressed qualified support for the 
Board's decision. These comments urged the Board to permit no further 
delays and to proceed as described above by sequencing the inspection 
of firms subject to the extension based on certain thresholds relating 
to the U.S. market capitalization of firms' issuer audit clients. Some 
comments also suggested that the Board should utilize the additional 
time provided by the proposed extension to enhance its international 
inspections program, particularly in the areas of risk assessment and 
pre-inspection planning.
    Other comment letters supported the Board's decision to extend the 
inspection deadlines, but some qualified their support by noting that 
three years may not be enough time to overcome the legal conflicts and 
sovereignty concerns in all relevant jurisdictions. Several comments 
expressed support for the Board's plan to sequence the deferred 
inspections in time based on the U.S. market capitalization of the 
firms' clients, but some also noted that this plan did not adequately 
take into account the varying degree of legal conflicts present in the 
different jurisdictions and might have the effect of requiring early on 
during the three year period the inspection of firms in jurisdictions 
with legal obstacles that cannot be overcome quickly.
    As explained above, the Board believes that an extension of up to 
three years for the relevant firms is the appropriate course. 
Distributing the affected firms across three years strikes the proper 
balance between avoiding unnecessary delays in the inspection of 
registered firms and allowing reasonable time for the Board to continue 
its efforts to reach cooperative arrangements with the relevant home-
country regulators. The Board believes that any longer or further 
extension would not be in the interests of investors or the public.

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

    Within 60 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:

[[Page 61726]]

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-2009-01 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-2009-01. 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 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-2009-01 and should be 
submitted on or before December 16, 2009.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-28239 Filed 11-24-09; 8:45 am]

BILLING CODE 8011-01-P