[Federal Register Volume 72, Number 216 (Thursday, November 8, 2007)]
[Notices]
[Pages 63215-63216]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-21910]
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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]
BILLING CODE 8011-01-P