Document ID: SEC-2008-1191-0001
Agency: sec
Document Type: Notice
Title: Public Company Accounting Oversight Board: Order Approving Proposed Ethics and Independence Rule 3526, Communication with Audit Committees Concerning Independence, etc.
Posted Date: 2008-08-28T04:00Z

[Federal Register: August 28, 2008 (Volume 73, Number 168)]
[Notices]               
[Page 50843-50845]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28au08-105]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58415; File No. PCAOB-2008-03]

 
Public Company Accounting Oversight Board; Order Approving 
Proposed Ethics and Independence Rule 3526, Communication With Audit 
Committees Concerning Independence, Amendment to Interim Independence 
Standards, and Amendment to Rule 3523, Tax Services for Persons in 
Financial Reporting Oversight Roles

August 22, 2008.

I. Introduction

    On April 24, 2008, the Public Company Accounting Oversight Board 
(the ``Board'' or the ``PCAOB'') filed with the Securities and Exchange 
Commission (the ``SEC'' or ``Commission'') proposed rule changes 
(PCAOB-2008-03) pursuant to Section 107(b) of the Sarbanes-Oxley Act of 
2002 (the ``Act''), relating to the Board's Ethics and Independence 
Rules. Notice of the proposed rule changes was published in the Federal 
Register on July 14, 2008.\1\ The Commission received three comment 
letters relating to the proposed rule changes. For the reasons 
discussed below, the Commission is granting approval of the proposed 
rule changes.
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    \1\ See SEC Release No. 34-58121 (Jul. 9, 2008); 73 FR 40418 
(Jul. 14, 2008).
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II. Description of Proposed Rule Changes

    Section 103(a) of the Act directs the PCAOB to establish auditing 
and related attestation standards, quality control standards, and 
ethics standards to be used by registered public accounting firms in 
the preparation and issuance of

[[Page 50844]]

audit reports as required by the Act or the rules of the Commission.
    In connection with its standards-setting function, the Board 
adopted in 2003 on an initial, transitional basis five temporary rules 
that incorporate the pre-existing professional standards of auditing, 
attestation, quality control and ethics and independence (the ``interim 
standards'').\2\ The interim standards include Independence Standards 
Board Standard No. 1, Independence Discussions with Audit Committees 
(``ISB No. 1''), ISB Interpretation 00-1, The Applicability of ISB 
Standard No. 1 When ``Secondary Auditors'' Are Involved in the Audit of 
a Registrant, and ISB Interpretation 00-2, The Applicability of ISB 
Standard No. 1 When ``Secondary Auditors'' Are Involved in the Audit of 
a Registrant, An Amendment of Interpretation 00-1.
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    \2\ The Commission approved the PCAOB's adoption of the interim 
standards in Release No. 34-47745 (April 25, 2003); 68 FR 23335 (May 
1, 2003).
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    On April 22, 2008, the PCAOB adopted proposed Ethics and 
Independence Rule 3526, Communication with Audit Committees Concerning 
Independence, which supersedes ISB No. 1, ISB Interpretation 00-1 and 
ISB Interpretation 00-2, and a proposed amendment to Rule 3523, Tax 
Services for Persons in Financial Reporting Oversight Roles, so that it 
will no longer apply to the provision of tax services to persons in 
financial reporting oversight roles during the portion of the audit 
period that precedes the professional engagement period.
    Proposed Rule 3526, Communication with Audit Committees Concerning 
Independence, is intended to build on the communication requirements in 
interim standard ISB No. 1 and provide audit committees with 
information that may be important to its determination about whether to 
hire a registered public accounting firm as the company's auditor. ISB 
No. 1 currently provides that, at least annually, an auditor shall: (a) 
Disclose to the audit committee of the company (or the board of 
directors if there is no audit committee), in writing, all 
relationships between the auditor and its related entities and the 
company and its related entities that in the auditor's professional 
judgment may reasonably be thought to bear on independence; (b) confirm 
in the letter that, in its professional judgment, it is independent of 
the company within the meaning of the ``Securities Acts administered by 
the'' SEC; and (c) discuss the auditor's independence with the audit 
committee.
    Similar to ISB No. 1, the new rule requires a registered firm on at 
least an annual basis after becoming the issuer's auditor to make a 
similar written communication and also affirm to the audit committee of 
the issuer, in writing, that the firm is independent. The PCAOB adopted 
this new rule in part because it believed that the accounting firm 
should discuss with the audit committee before accepting an initial 
engagement pursuant to the standards of the PCAOB any relationships the 
accounting firm has with the issuer that may reasonably be thought to 
bear on its independence. The new rule also includes a new requirement 
for the firm to document the substance of its discussion with the audit 
committee.
    The PCAOB adopted Ethics and Independence Rules Concerning 
Independence, Tax Services and Contingent Fees \3\ on July 26, 2005.\4\ 
These rules included, among others, Rule 3523, which added to the list 
of services an audit firm is prohibited from providing its audit 
clients in order to maintain its independence by prohibiting audit 
firms from providing any tax service to any person who fills a 
financial reporting oversight role at an audit client, or an immediate 
family member of such individual, unless such person is in that role 
solely because he or she is a member of the board of directors or 
similar management governing body. The Board adopted certain technical 
amendments to the rules on November 22, 2005 and adopted an additional 
amendment, delaying the implementation schedule for Rule 3523,\5\ on 
March 28, 2006.\6\
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    \3\ PCAOB Release No. 2005-014.
    \4\ On August 2, 2005, the PCAOB submitted its proposed rules to 
the Commission for approval.
    \5\ PCAOB Release No. 2006-001.
    \6\ The March 28, 2006 amendment was adopted after the 
Commission published the proposed rules for comment.
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    Rule 3523, as originally adopted, applies to all tax services 
performed for persons in a financial reporting oversight role during 
the ``audit and professional engagement period.'' The PCAOB's 
definition of the term ``audit and professional engagement period'' is 
consistent with the Commission's independence rules. The ``audit 
period'' is the period covered by any financial statements being 
audited or reviewed.\7\ The ``professional engagement period'' is the 
period beginning when the accounting firm either signs the initial 
engagement letter or begins audit procedures, whichever is earlier, and 
ends when the audit client or the accounting firm notifies the 
Commission that the client is no longer that firm's audit client.\8\
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    \7\ PCAOB Rule 3501(a)(iii)(1).
    \8\ PCAOB Rule 3501(a)(iii)(2).
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    Rule 3523 relates to services provided to individuals and not the 
audit clients. The Board adopted Rule 3523 because ``the provision of 
tax services by the auditor to the senior management responsible for 
the audit client's financial reporting creates an unacceptable 
appearance of the auditor and such senior management having a mutual 
interest.'' \9\ In discussing this concern, however, the Board's 
release did not explore whether the provision of these tax services 
during the audit period but before becoming the auditor of record 
presents the same appearance issues as the auditor's provision of such 
services while serving as the auditor of record. In addition, while the 
Board received comment on this rule, commenters did not explicitly 
address this matter. Since the PCAOB did not solicit comments relating 
to this matter, it adopted an amendment to the rule delaying the 
implementation of this part of the rule and issued a concept release to 
solicit comments to determine whether restrictions during this period 
unreasonably limit issuers' ability to change audit firms. On December 
14, 2006, the Commission issued a notice of the PCAOB's rule amendment 
for Rule 3523, as it applies to tax services provided during the period 
subject to the audit but before the professional engagement period, so 
that the Board could revisit this aspect of the rule.\10\
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    \9\ PCAOB Release No. 2005-014 .
    \10\ PCAOB Release No. 2006-006.
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    On April 3, 2007, the Board issued that concept release.\11\ The 
Board also adopted a rule amendment further delaying the implementation 
of Rule 3523 to apply to tax services provided on or before July 31, 
2007 when those services are provided during the audit period and are 
completed before the professional engagement period begins.
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    \11\ PCAOB Release No. 2007-001.
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    On July 24, 2007, the Board proposed an amendment to Rule 3523 \12\ 
to exclude the portion of the audit period that precedes the beginning 
of the professional engagement period, as well as a new ethics and 
independence rule regarding communication with audit committees. 
Concurrent with issuing the proposed rule and rule amendment, the Board 
also adopted a rule amendment to further delay the implementation of 
Rule 3523 to apply to tax services provided on or before April 30, 2008 
when those services are provided during the audit period and are 
completed

[[Page 50845]]

before the professional engagement period begins.
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    \12\ PCAOB Release No. 2007-008.
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    On April 22, 2008, the Board adopted the amendment to PCAOB Rule 
3523 to exclude the portion of the audit period that precedes the 
beginning of the professional engagement period and a rule amendment to 
further delay the implementation date for that portion of Rule 3523 
until December 31, 2008.
    The proposed amendment to PCAOB Rule 3523 provides that the Board 
will not apply Rule 3523 to tax services when those services are 
provided during the audit period and are completed before the 
professional engagement period begins. Rule 3523 continues to apply to 
tax services provided during the professional engagement period.
    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 PCAOB's proposed Ethics and 
Independence Rule 3526, Communication with Audit Committees Concerning 
Independence, conforming amendments to its interim standard ISB No. 1 
and two related interpretations, and amendment to Rule 3523, Tax 
Services for Persons in Financial Reporting Oversight Roles for public 
comment in the Federal Register on July 14, 2008.\13\
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    \13\ See SEC Release No. 34-58121 (Jul. 9, 2008); 73 FR 40418 
(Jul. 14, 2008).
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III. Discussion

    The Commission received two comment letters relating to proposed 
Rule 3526, both of which were generally supportive of the proposed 
rule.\14\ One of the firms, however, expressed concerns relating to the 
timing of the required communication of Rule 3526 and its effect on an 
auditor's participation in the activities associated with an initial 
public offering. The firm also expressed concerns about the difference 
between the ``audit and professional engagement period'' referenced in 
the SEC's independence rules and Rule 3526's requirement to communicate 
matters that may have existed outside of this time period. The firm 
requested that the Commission include clarifying commentary in its 
approval order regarding these matters and urged the PCAOB to issue 
additional interpretive guidance to aid in the consistent application 
of the rules.
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    \14\ Ernst & Young LLP and Deloitte & Touche LLP.
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    The PCAOB carefully considered the commenter's concerns before it 
adopted Rule 3526 and addressed those concerns in its adopting release. 
We do not believe that any clarifying commentary is necessary at this 
time. We encourage the PCAOB to carefully monitor the implementation of 
Rule 3526 and to provide appropriate guidance if it is needed in the 
future.
    The Commission received three comment letters relating to the 
proposed amendment to Rule 3523. Two of the commenters were supportive 
of the amendment to Rule 3523.\15\ The other commenter \16\ expressed 
concern that Rule 3523 ``put[s] a huge burden on smaller companies and 
larger tax firms'' because some companies could have large numbers of 
employees and chances are that some of those employees could be 
receiving tax services from potential external auditors. While 
purportedly outside the scope of the proposed amendment, which in fact 
limits the scope of the rule to a narrower period of just the 
professional engagement period, it should also be noted that Rule 3523 
applies only to persons in a financial reporting oversight role (FROR). 
This term is defined in PCAOB Rule 3501 as:

    \15\ Ernst & Young LLP and Deloitte & Touche LLP.
    \16\ Matthew L. Garzia, Student, Business Management, Tappan, 
New York.

    [A] role in which a person is in a position to or does exercise 
influence over the contents of the financial statements or anyone 
who prepares them, such as when the person is a member of the board 
of directors or similar management or governing body, chief 
executive officer, president, chief financial officer, chief 
operating officer, general counsel, chief accounting officer, 
controller, director of internal audit, director of financial 
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reporting, treasurer, or any equivalent position.

Rule 3523 is further limited to exclude persons (i) who are in a FROR 
only because he or she serves as a member of the board of directors or 
similar management or governing body of the audit client, (ii) who are 
in FROR at affiliates if the affiliate's financial statements are 
immaterial or audited by a different auditor and (iii) who received tax 
services before being hired or promoted into a FROR if the services are 
completed on or before 180 days after the hiring or promotion event.
    The PCAOB is not proposing to change the persons subject to Rule 
3523 in its proposing amendment. The PCAOB gave careful consideration 
to the issues raised by the commenter prior to Rule 3523's adoption by 
the Board.
    PCAOB Rules 3526 and 3523, including the proposed amendment to Rule 
3523 and the conforming amendments to the interim standards, are a 
reasonable exercise of the Board's rule-making authority under the Act.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
PCAOB's proposed Ethics and Independence Rule 3526, Communication with 
Audit Committees Concerning Independence, conforming amendments to its 
interim standard ISB No. 1 and two related interpretations, and 
amendment to Rule 3523, Tax Services for Persons in Financial Reporting 
Oversight Roles, 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 changes 
(File No. PCAOB-2008-03) be, and hereby are, approved.

    By the Commission.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-19989 Filed 8-27-08; 8:45 am]

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