[Federal Register Volume 73, Number 168 (Thursday, August 28, 2008)]
[Notices]
[Pages 50843-50845]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-19989]
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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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