Public Company Accounting Oversight Board; Notice of Filing of Proposed Amendments to Board Rules Relating to Inspections, 21909-21914 [2016-08444]
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Federal Register / Vol. 81, No. 71 / Wednesday, April 13, 2016 / Notices
1. The Commission establishes Docket
No. MC2016–118 to consider the
matters raised in the Request.
2. Pursuant to 39 U.S.C. 505, Katalin
K. Clendenin is appointed to serve as an
officer of the Commission to represent
the interests of the general public in this
proceeding (Public Representative).
3. Comments are due no later than
April 15, 2016.
4. The Secretary shall arrange for
publication of this order in the Federal
Register.
or the ‘‘Sarbanes-Oxley Act’’),1 notice is
hereby given that on March 24, 2016,
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.
By the Commission.
Stacy L. Ruble,
Secretary.
I. Board’s Statement of the Terms of
Substance of the Proposed Rule
[FR Doc. 2016–08522 Filed 4–12–16; 8:45 am]
BILLING CODE 7710–FW–P
POSTAL SERVICE
Temporary Emergency Committee of
the Board of Governors; Sunshine Act
Meeting
Tuesday, April 19,
2016, at 11:00 a.m.
PLACE: Los Angeles, California.
STATUS: Closed.
MATTERS TO BE CONSIDERED:
DATES AND TIMES:
Tuesday, April 19, 2016, at 11:00 a.m.
1. Strategic Issues.
2. Financial Matters.
3. Executive Session—Discussion of
prior agenda items and Board
governance.
GENERAL COUNSEL CERTIFICATION: The
General Counsel of the United States
Postal Service has certified that the
meeting may be closed under the
Government in the Sunshine Act.
On October 16, 2007, the Board
adopted amendments to its rules related
to inspections. The proposed
amendments included a new paragraph
(e) added to existing Rule 4003 and
amendments to paragraphs (b) and (d) of
Rule 4003. On October 22, 2007, the
Board filed the amendments with the
Commission and requested Commission
approval (‘‘the original rule filing’’). On
February 26, 2016 the Board adopted
revisions to those proposed
amendments and, on March 24, 2016
amended the rule filing to reflect those
revisions. The text of the revised
proposed amendments is set out below.
Language added to the Board’s currently
effective rules by these amendments is
italicized. Language deleted from the
Board’s currently effective rules is in
brackets. Other text in Section 4 of the
Board’s Rules, including notes to the
Rules, remains unchanged and is
indicated by ‘‘ * * * ’’ in the text
below.
SECTION 4. INSPECTIONS
* * *
CONTACT PERSON FOR MORE INFORMATION:
Requests for information about the
meeting should be addressed to the
Secretary of the Board, Julie S. Moore,
at 202–268–4800.
Julie S. Moore.
Secretary, Board of Governors.
[FR Doc. 2016–08581 Filed 4–11–16; 11:15 am]
BILLING CODE 7710–12–P
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77558; File No. PCAOB–
2007–04]
Public Company Accounting Oversight
Board; Notice of Filing of Proposed
Amendments to Board Rules Relating
to Inspections
April 7, 2016.
Pursuant to Section 107(b) of the
Sarbanes-Oxley Act of 2002 (the ‘‘Act’’
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Rule 4003.
Frequency of Inspections
* * *
(b) At least once in every three
calendar years, beginning with the
three-year period following the calendar
year in which its application for
registration with the Board is approved,
a registered public accounting firm that,
during any of the three prior calendar
years, issued an audit report, other than
by consenting to an issuer’s use of a
previously issued audit report, with
respect to at least one issuer, but no
more than 100[,] issuers, [or that played
a substantial role in the preparation or
furnishing of an audit report with
respect to at least one issuer,] shall be
subject to a regular inspection.
* * *
(d) Notwithstanding paragraph (b) of
this Rule, with respect to any registered
1 15
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public accounting firm that became
registered in 2003 or 2004—
(1) this Rule does not require the first
inspection of the firm sooner than the
fourth calendar year following the first
calendar year in which the firm, while
registered, issued an audit report with
respect to an issuer [or played a
substantial role in the preparation or
furnishing of an audit report]; and
(2) this Rule does not require the
second inspection of the firm sooner
than the fifth calendar year following
the first calendar year in which the firm,
while registered, issued an audit report
with respect to an issuer [or played a
substantial role in the preparation or
furnishing of an audit report].
(e) Notwithstanding any other
provision of this Rule, if, in two
consecutive calendar years, a registered
public accounting firm issues no audit
reports with respect to an issuer other
than by consenting to an issuer’s use of
a previously issued audit report, the
Board shall have the discretion to forego
any inspection of that firm that would
otherwise be required because of any
audit report that the firm had issued
with respect to an issuer prior to such
calendar years.
* * *
(h) In each calendar year, the Board
shall conduct regular inspections of
some registered public accounting firms
that reported on an annual report on
Form 2 having played a substantial role
in the preparation or furnishing of an
audit report with respect to an issuer in
any of the four most recent annual
reporting periods through March 31 of
that calendar year without having
reported on an annual report on Form
2 having issued an audit report with
respect to an issuer in any of those
reporting periods. The number of such
registered public accounting firms that
the Board shall inspect in any particular
calendar year shall be at least five
percent of the number of registered
public accounting firms that, by June 30
of the preceding calendar year, reported
on an annual report on Form 2 for the
reporting period ending on March 31 of
the preceding calendar year having
played a substantial role in the
preparation or furnishing of an audit
report with respect to an issuer without
having issued an audit report with
respect to an issuer in that reporting
period.
II. Board’s Statement of the Purpose of,
and Statutory Basis for, the Proposed
Rule
In its amended filing with the
Commission, the Board included
statements concerning the purpose of,
and basis for, the proposed rule. The
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text of these statements may be
examined at the places specified in Item
IV below. The purpose of, and basis for,
the proposed rule are also described in
sections A, B, and C below.
A. Board’s Statement of the Purpose of,
and Statutory Basis for, the Proposed
Rule
(a) Purpose
The Sarbanes-Oxley Act requires the
Board to conduct a continuing program
of inspections to assess the degree of
compliance with certain requirements
by registered public accounting firms
and their associated persons in
connection with the performance of
audits, issuance of audit reports, and
related matters involving issuers. In
2003, the Board adopted PCAOB Rule
4003, ‘‘Frequency of Inspections.’’ Rule
4003(b) provides that at least once every
three years, any firm that, during any of
the three prior calendar years, issues an
audit report with respect to at least one
issuer but no more than 100 issuers, or
plays a substantial role in the
preparation or furnishing of an audit
report with respect to an issuer, shall be
subject to a regular inspection. The
Board has adopted amendments relating
to Rule 4003(b) that are intended to
facilitate the Board’s ability to allocate
its inspection resources in ways that
better serve the public interest and
protect investors.
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1. Rules 4003(b) and (h)
The Board has adopted amendments
to eliminate Rule 4003(b)’s provision for
triennial inspections of firms that play
a substantial role in audits but do not
issue audit reports and to provide
instead that the Board will, every year,
inspect at least five percent of such
firms. The Board has also adopted an
amendment to provide that no
inspection requirement arises under
Rule 4003(b) solely because a firm
consents to an issuer’s use of a
previously issued audit report.
The Board’s experience in the
inspection program has affected the
Board’s view on the appropriateness of
devoting Board resources to inspecting
one-third of all ‘‘substantial role only’’
firms every year.2 In 2007, the Board
2 The Board uses the phrase ‘‘substantial role
only’’ to identify the relevant category of firms and
to emphasize the distinction between this category
of firms (which play a substantial role but do not
issue audit reports with respect to issuers) and the
separate category of firms that play a substantial
role in some audits, but separately perform other
audits in which they issue the audit report for the
issuer (for example, a non-U.S. firm that plays a
substantial role in the audit of a U.S. issuer by
auditing a foreign subsidiary, but that separately
has a foreign private issuer audit client for which
it regularly provides audit reports). Even as
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concluded that it would be better to
direct a larger share of those resources
toward addressing the policies,
practices, and procedures of the firms
that are ultimately responsible for the
audit report on the issuer’s financial
statements, and that the Board’s rules
should not require the Board to devote
so large a portion of its resources to
inspections of ‘‘substantial role only’’
firms. This was consistent with the riskbased focus that the Board generally
brings to bear in considering the most
prudent allocation of its inspection
resources. Accordingly, the Board
adopted, and included in the original
rule filing, an amendment to Rule
4003(b) to eliminate the requirement for
triennial inspections of ‘‘substantial role
only’’ firms.
In annual reports on PCAOB Form 2
filed by registered firms for the 12month reporting period ended March
31, 2015, 571 firms reported having
issued audit reports for one to 100
issuers, and 103 firms reported having
played a substantial role in at least one
issuer audit without having issued audit
reports for any issuers. The Board
continues to be of the view that it is
appropriate to allocate the largest share
of its inspection resources toward
addressing the policies, practices, and
procedures of the firms that are
ultimately responsible for the audit
report on the issuer’s financial
statements, and that the Board’s rules
should not require triennial inspections
of ‘‘substantial role only’’ firms. The
Board therefore continues to propose
eliminating Rule 4003(b)’s requirement
for triennial inspections of ‘‘substantial
role only’’ firms.
In addition, however, having
considered views expressed by SEC staff
and taking into account that the Board’s
inspection staff has over time identified
auditing deficiencies in some
inspections of ‘‘substantial role only’’
firms,3 the Board has determined to
revise slightly the substance of its
amended, Rule 4003 will continue to provide for at
least triennial inspections of all firms in the latter
category by virtue of their regularly issuing audit
reports. In any such inspection, the Board could
review, among other things, the firm’s work and its
system of quality control in relation to audits of
issuers in which the firm played a role, including
a substantial role.
3 As of February 1, 2016, the Board had issued
reports on inspections of 38 ‘‘substantial role only’’
firms. In addition to identifying concerns about
aspects of some of those firms’ systems of quality
control, the Board’s inspection staff has, in 11 of
those inspections, identified that the inspected firm
had failed to perform sufficient procedures to fulfill
the objectives of its role in an audit. While such
failures by an auditor in a substantial role do not
necessarily mean that the principal auditor’s
opinion on the issuer’s consolidated financial
statements was insufficiently supported, they
present some risk of that result.
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previously adopted approach to such
firms. With the revision, the amendment
to Rule 4003 would still eliminate the
requirement to inspect all ‘‘substantial
role only’’ firms, and it would still
eliminate the requirement to inspect any
such firm with a prescribed frequency.
Unlike the amendment in the original
rule filing, however, the revised
proposed amendment provides that the
Board will, in each year, select some
‘‘substantial role only’’ firms for
inspection, with the number of firms to
be a number that is at least five percent
of the number of firms that reported
being ‘‘substantial role only’’ firms in
their annual reports on PCAOB Form 2
filed with the Board in the preceding
year. Board rules require that all
registered firms file an annual report. A
firm that does not issue an audit report
for an issuer during the period covered
by an annual report must identify in
that annual report any audit in which it
played a substantial role in that period.
Through its other processes, the Board
may identify firms that fail to comply
with this reporting requirement (and
may impose sanctions for those
failures), or the Board may identify that
a firm has reported playing a substantial
role when its role in fact fell below that
level. But for purposes of identifying
‘‘substantial role only’’ firms, the
required annual reports on Form 2
provide the most reasonable reference
point.
Based on the history of reporting on
Form 2, the Board anticipates that the
five percent threshold will translate to
four to six firms each year, though it
could fall above or below that range in
a particular year, and the number
actually inspected could exceed that
threshold in any year as a result of riskbased judgments about how to allocate
inspection resources. The revised
proposed amendment provides that the
firms to be inspected will be selected
from among those that have reported
playing a substantial role in audits in
one of the four most recent Form 2
reporting periods without having
reported issuing an audit report for an
issuer in any of those periods. With that
revision, Rule 4003’s provision
concerning ‘‘substantial role only’’ firms
is now designated as paragraph (h).
In adopting the amendment included
in the original rule filing related to
‘‘substantial role only’’ firms, the Board
noted that it had not up to that time
inspected a ‘‘substantial role only’’ firm
but also noted that it would retain
discretion under the amended rule to
inspect ‘‘substantial role only’’ firms at
any time. The Board’s practice, since
first inspecting ‘‘substantial role only’’
firms in 2009, has in fact been
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essentially the practice described by
proposed Rule 4003(h). The Board now
sees value, however, in formally
committing that at least a small portion
of its inspection resources will regularly
be directed toward ‘‘substantial role
only’’ firms and that the Board will
maintain an active focus on whether it
would be appropriate to direct a larger
portion of its resources to those
inspections. At present, the Board
believes that the five percent threshold,
with selections made on a risk basis,
would involve review of ‘‘substantial
role only’’ work that is appropriate and
sufficient to provide for a useful,
ongoing focus on that segment of the
population of registered firms. The
Board can always inspect a larger
portion of that population in a given
year without a rule. The Board has
determined to commit to a minimum of
five percent through a rule.
By using the four most recent Form 2
reporting periods as the reference point,
the Board would, for any given
inspection year, be selecting
‘‘substantial role only’’ firms from a
universe that includes firms that have
reported playing a substantial role as
recently as the year in which the
inspection would occur and as far back
as three previous years. This will allow
the Board to select from among the most
relevant universe, without limiting that
universe to firms reporting in one
specific year. In addition, by limiting
that universe to firms that, in addition
to playing a substantial role, have not
issued an audit report in any of those
years, the rule would exclude any
possibility of counting, toward
satisfaction of the ‘‘substantial role
only’’ inspection requirement, firms that
otherwise would be inspected, or
recently have been inspected, because of
the firm’s relatively recent issuance of
an audit report.
The proposed rule also adds a
provision to existing paragraph (b)
specifying that no inspection
requirement arises solely on the basis of
the firm issuing an audit report by
consenting to an issuer’s use of a
previously issued audit report. Since the
act of originally issuing the audit report
would have given rise to an inspection
requirement, and the related audit
would have been a candidate for review
in that required inspection, it would be
redundant to subject the registered firm
to a separate, later inspection relating to
the same audits in circumstances where
the firm is no longer issuing audit
reports other than by consenting to
issuers’ use of previously issued audit
reports.
The original rule filing also included
a technical amendment that was
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intended to clarify an aspect of Rule
4003(b) without making any substantive
change. The Board subsequently
realized that the technical amendment
could have provided the Board with
flexibility that the Board did not intend
regarding inspection frequency, and the
Board has therefore revised its proposal
to eliminate that technical amendment
and retain the relevant existing wording.
Specifically, the Board had revised the
wording of Rule 4003(b) to provide that
the Board must conduct at least one
inspection of a firm in the three
calendar-year period following any
calendar year in which the firm issues
an audit report with respect to an issuer.
That wording would have given the
Board flexibility that the Board did not
intend. For example, if a firm issued an
audit report in years 1, 2, 4, and 5, but
not in year 3, a Board inspection of the
firm in year 3 would satisfy the
inspection requirement created by the
audit reports in years 1 and 2, but the
next inspection would not technically
be required until year 7 (the third
calendar year after the report issued in
year 4), rather than within three years
after the previous inspection, i.e., year
6.
2. Rule 4003(d)
Existing Rule 4003(d) extends the
Rule 4003(b) time period in which the
Board must conduct the first and second
inspections of firms that registered with
the Board in 2003 or 2004. The Board
has adopted an amendment to conform
Rule 4003(d) to the Rule 4003(b)
amendment concerning ‘‘substantial
role only’’ firms. Consistent with the
amendment to Rule 4003(b), the Board
is amending Rule 4003(d) to eliminate
from Rule 4003(d) the references to
‘‘substantial role only’’ firms.
Separately, a development in the law
since the original rule filing has led the
Board to make a technical revision to
Rule 4003(d). Rule 4003(d) uses the
term ‘‘audit report’’ in two places. When
Rule 4003(d) took effect in 2006, ‘‘audit
report’’ was, by definition, limited to
reports with respect to issuers, and this
was still the case at the time of the
original rule filing proposing
amendments to Rule 4003(d). That
definition has since been broadened to
include reports with respect to
registered brokers and dealers and, as
broadened, the unqualified use of the
term ‘‘audit report’’ in Rule 4003(d)
would change the meaning of the rule
from what the Board originally intended
and still intends. For that reason, the
Board has added the language ‘‘with
respect to an issuer’’ to qualify ‘‘audit
report’’ where that term appears in
proposed Rule 4003(d).
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The original rule filing included an
amendment that conformed Rule
4003(d) to the Rule 4003(b) amendment
that provides that no inspection
requirement arises solely on the basis of
a firm issuing an audit report by
consenting to an issuer’s use of a
previously issued audit report. The
operation of Rule 4003(d) is limited to
firms that became registered in 2003 or
2004. At the time of the original rule
filing in 2007, it was possible for
circumstances to arise that would have
triggered the application of this
amendment with respect to such firms.
With the passage of time, however,
those circumstances should no longer
arise, and the Board has therefore made
a technical revision to eliminate this
amendment to Rule 4003(d).
3. Rule 4003(e)
The Board’s experience in the
inspection program to date has affected
the Board’s view on the appropriateness
of devoting Board resources to
inspecting every firm that has issued an
audit report, including firms that have
not recently done so. This was another
respect in which the Board observed
that the existing rule sometimes requires
the Board to deploy inspection
resources in ways that do not represent
the most effective use of those resources
in furtherance of the public interest and
the protection of investors. In particular,
it sometimes happens that (1) a firm
issues an audit report in year 1, opining
on financial statements for the
preceding year; (2) consistent with
existing Rule 4003(b), the Board’s longrange inspection planning sets that firm
for inspection in year 4; and (3) the firm
issues no audit reports in years 2 or 3.
Under the current rule, the Board must
then inspect the firm in year 4, even
though the most recent audit report
issued by the firm is three years old on
financial statements that are four years
old.
In 2007, the Board concluded that it
could better fulfill its public interest
and investor protection mandates if it
had the flexibility in that circumstance
to focus its year 4 inspection resources
on firms that are more regularly and
recently engaged in preparing audit
reports. Accordingly, the Board adopted
a new paragraph (e) to Rule 4003 that
would give the Board discretion to
forego the otherwise required inspection
in the scenario described above in
determining how to deploy its
inspection resources.
The Board continues to view Rule
4003(e) as providing useful flexibility
with respect to the allocation of
inspection resources. The number of
otherwise required inspections that the
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Board would have discretion to forego
under Rule 4003(e) would vary from
year to year, but, had Rule 4003(e) been
in effect, the number of otherwise
required inspections that would have
met its criteria would have been 10 in
2015, 10 in 2014 and eight in 2013. In
addition, because of delays caused by
obstacles to Board inspections of
registered firms in certain countries, the
current rule’s deadline for the initial
inspections of firms in those countries,
on the basis of their having issued audit
reports for issuers, has long since
passed, and some of those firms have
long since stopped issuing audit reports
for issuers. Nineteen such firms have
not issued audit reports since before
2012, and 13 of those firms have not
issued audit reports since before 2010.
Under proposed Rule 4003(e), the
Board would have the flexibility to
deploy its inspection resources in ways
other than by inspecting such firms.
Rule 4003(e) would allow the Board to
forego an otherwise required inspection
of a firm that issued an audit report if,
in two consecutive years, the firm does
not issue any audit reports. The rule
would not require the Board to inspect
such a firm unless and until the firm
engaged in conduct that triggered the
operation of Rule 4003(b) anew.4 This
will give the Board useful and clearly
defined flexibility to focus its inspection
resources on firms more recently
involved in issuing audit reports, rather
than on relatively old audit work
performed by firms that may not be
currently engaged in issuing audit
reports.
Rule 4003(e) would not, however,
prohibit the Board from inspecting any
of those firms or in any way entitle
those firms not to be inspected. There
may be circumstances in which the
Board would choose to inspect a firm
even where Rule 4003(e) gave the Board
the discretion to forego the inspection.
The Board has made a technical
amendment to proposed Rule 4003(e)
since the original rule filing. Proposed
Rule 4003(e) uses the term ‘‘audit
report’’ in two places. At the time of the
original rule filing, ‘‘audit report’’ was,
by definition, limited to reports with
respect to issuers. That definition has
since been broadened to include reports
with respect to registered brokers and
dealers and, as broadened, the
unqualified use of the term ‘‘audit
report’’ in Rule 4003(e) would change
the meaning of the rule from what the
4 Rule 4003(e) also makes clear that a firm’s
issuance of an audit report solely by consenting to
an issuer’s use of a previously issued audit report
would not preclude the operation of paragraph (e)
in circumstances where paragraph (e) would
otherwise apply.
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Board originally intended and still
intends. For that reason, the Board has
added the language ‘‘with respect to an
issuer’’ to qualify ‘‘audit report’’ where
that term appears in proposed Rule
4003(e).
B. Board’s Statement on Burden on
Competition
Not applicable. The Board’s
consideration of the economic impacts
of the proposed rule changes is
discussed in Section D below.
C. Board’s Statement on Comments on
the Proposed Rule Received From
Members, Participants or Others
The Board solicited public comment
before adopting the amendments to Rule
4003 that were included in the original
rule filing. The Board received three
comment letters, all of which were
supportive of those amendments and,
more generally, supportive of the
Board’s effort to increase its discretion
to bring risk-based judgments to bear in
allocating its inspection resources.5
The revised proposed amendments
reflect certain technical corrections or
updates described above, including
undoing a non-substantive amendment
that was discovered to have an
unintended substantive effect,
qualifying the term ‘‘audit report’’ to
remain consistent with the original
meaning following intervening
legislation that expanded the definition,
and eliminating references to the effect
of consenting to the use of a previously
issued audit report where the passage of
time had negated the potential
applicability of those references. The
Board made these revisions without
seeking public comment.
In addition, since the original rule
filing, which included the amendment
eliminating any periodic inspection
requirement for all ‘‘substantial role
only’’ firms, the Board has determined
to commit to a practice of conducting
some inspections of such firms and to
establish by rule a lower limit on the
number of such inspections it will
conduct each year. Such a practice is
consistent with the Board’s authority
even in the absence of a rule, is
consistent with the Board’s description
of its possible exercise of that authority
in soliciting public comment on the
amendments,6 and is consistent with
5 See Letter from Deloitte Touche Tohmatsu (July
20, 2007) (‘‘DTT letter’’), Letter from
PricewaterhouseCoopers LLP (July 23, 2007) (‘‘PwC
letter’’), and Letter from the New York State Society
of Certified Public Accountants (July 24, 2007)
(‘‘NYSSCPA letter’’), available at www.pcaobus.org/
Rules/Docket_024.
6 See Proposed Amendments to Limit Board Rule
4003’s Fixed Periodic Inspection Requirement to
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the discretion and authority that the
commenters recognized the Board
retained.7 From the perspective of rights
and obligations of registered firms and
associated persons, there is no
meaningful difference between the rule
originally proposed for comment and
the Board’s current practice. The Board
has committed itself by rule to that
practice without seeking public
comment specific to doing so.
D. Economic Considerations and
Application to Audits of Emerging
Growth Companies
In the Board’s view, the proposed
amendments to Rule 4003 are consistent
with the purposes of the Act, the public
interest, and the protection of
investors.8 In reaching that conclusion,
the Board has taken economic
considerations into account.9
1. Rules 4003(b) and 4003(h)
It is anticipated that the proposed
amendments to Rule 4003(b) and the
addition of Rule 4003(h) will impose no
new costs on the universe of registered
firms relative to current practice.10
Those proposed amendments do not
require registered public accounting
firms to take any particular actions as
part of their audits or otherwise. Rather,
they merely conform the Board’s rules
to current practice.11 Accordingly, the
Firms that Regularly Issue Audit Reports, PCAOB
Release No. 2007–007 (May 24, 2007), at 4 (noting
that information that comes to the Board in various
ways ‘‘could lead the Board to exercise its
discretion to inspect a particular ‘substantial role
only’ firm’’), available at www.pcaobus.org/Rules/
Docket_024.
7 See DTT letter at 1, PwC letter at 1, NYSSCPA
letter at 3.
8 Section 104(b)(2) of the Act provides that the
Board may, by rule, adjust the inspection schedules
set by section 104(b)(1) if the Board finds that
different inspection schedules are consistent with
the purposes of the Act, the public interest, and the
protection of investors. To the extent the
Commission views any of the proposed
amendments as constituting a change to an
inspection schedule set by section 104(b)(1), the
statement in the text reflects the Board’s finding for
purposes of section 104(b)(2).
9 Section A, above, describes the need for the
proposed amendments and the Board’s key
decisions in selecting this course of action. This
section does not repeat the earlier discussion, but
focuses on the costs and benefits, relative to an
appropriate baseline, of the Board’s proposal.
10 To assist the Commission’s consideration of
this proposal, this section discusses costs and
benefits relative to current practice. It does not
discuss costs and benefits relative to existing Rule
4003(b), under which, absent the proposed
amendments discussed here, the PCAOB would in
each year inspect approximately 33 percent of
‘‘substantial role only’’ firms. The resulting analysis
of costs and benefits here, however, should not be
understood to suggest that a rule change conforming
a rule to existing practice would in every case
necessarily involve no costs or benefits.
11 The Board’s practice, since first inspecting
‘‘substantial role only’’ firms in 2009, has been to
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Federal Register / Vol. 81, No. 71 / Wednesday, April 13, 2016 / Notices
proposed amendments to Rule 4003(b)
and the addition of Rule 4003(h) do not
increase the costs imposed on the group
of those registered firms that are subject
to inspection because of playing a
substantial role in an audit.
The Board has considered whether
the proposed amendments might
decrease audit quality in the work of the
‘‘substantial role only’’ firms by
appearing to those firms to reduce the
likelihood of their being inspected. On
that question, the Board has considered
that the proposed rules would not
change those firms’ perception of the
fact that they might be inspected. The
Board has also considered whether the
proposed rules would be likely to
change, in any meaningful way, those
firms’ current perception of the
likelihood of being inspected. There is
no direct evidence concerning what
those firms’ current perceptions are on
that point, but it is reasonable to assume
that firms in the ‘‘substantial role only’’
category currently perceive the
likelihood of their being inspected as
something that is less than the existing
rule.12 Because it appears most likely
that the typical such firm’s perception
of the chance of inspection would be
less than the current rule, and because
the proposed rule would not change
those firms’ perception of the fact that
they might be inspected, the Board does
not anticipate that the proposed
amendments would cause any
significant change in the extent to
which the potential for inspection
currently provides an incentive for
registered firms to perform audit work
in compliance with PCAOB standards.
Nor do the proposed amendments
provide any incremental benefit relative
to the current practice.
2. Rule 4003(e)
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Proposed Rule 4003(e) will
potentially reduce costs imposed on the
universe of registered firms relative to
current practice.13 Proposed Rule
inspect each year approximately five percent of
those firms and to reflect that allocation of
inspection resources in its budget materials.
12 The Board inspected no ‘‘substantial role only’’
firms before 2009 and, as noted above, from 2009
on has inspected in each year approximately five
percent of those firms. In addition, since 2010 the
Board’s Web site has provided an overview of the
Board’s inspection practices that, among other
things, contrasts the Board’s practice of conducting
triennial inspections of firms that issue audit
reports for one to 100 issuers with the practice of
inspecting, in each year, ‘‘some’’ firms that are not
in that category but that play a role in issuer audits.
See https://pcaobus.org/Inspections/Pages/
InspectedFirms.aspx.
13 Current practice is consistent with existing
Rule 4003’s inspection frequency requirements for
firms that issue audit reports. Of the 28 otherwise
required inspections in 2013, 2014, and 2015 that
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Jkt 238001
4003(e) poses the possibility of fewer
firms incurring inspection related costs
because it provides the Board with
discretion to forgo an otherwise
required inspection of a firm if, after
issuing an audit report in one year, the
firm does not issue audit reports in the
two succeeding years. To the extent that
proposed Rule 4003(e) results in the
Board forgoing any inspections, the
firms that would otherwise have been
inspected would not incur the
inspection related costs.14
The Board has considered whether
the benefit of potentially avoiding
imposing regulatory burdens on those
firms that might, under proposed Rule
4003(e), be less likely to be inspected
than would be the case under current
practice could reduce audit quality in
the work of those firms. On that
question, the Board has considered that
firms that the Board could choose to
forgo inspecting under proposed Rule
4003(e) typically would not be expected
to realize, at the time they perform an
audit, that future developments will
make Rule 4003(e) applicable.
Moreover, Rule 4003(e) would not, even
if applicable, provide the firm with any
assurance that it would not be
inspected. For those reasons, the Board
does not anticipate that proposed Rule
4003(e) would cause any significant
change in the extent to which the
potential for inspection provides an
incentive for registered firms to perform
audit work in compliance with PCAOB
standards.
3. Emerging Growth Companies
Before rules adopted by the Board can
take effect, they must be approved by
the Commission. Under Section
103(a)(3)(C) of the Act,15 any rules
adopted by the Board after April 5,
2012, shall not apply ‘‘to an audit of’’
any emerging growth company (‘‘EGC’’)
(as defined in section 3(a)(80) of the
Securities Exchange Act of 1934 16 (the
‘‘Exchange Act’’)) unless the
Commission ‘‘determines that the
application of such additional
requirements is necessary or appropriate
in the public interest, after considering
would have met the criteria of proposed Rule
4003(e), 16 were in the U.S. or in non-U.S.
jurisdictions where the Board was not blocked from
conducting inspections, and the Board conducted
all of those inspections within the period
prescribed by current Rule 4003.
14 The number of otherwise required inspections
that the Board would have discretion to forego
under Rule 4003(e) would vary from year to year,
but, as noted above, had Rule 4003(e) been in effect,
the number of otherwise required inspections that
would have met its criteria would have been 10 in
2015, 10 in 2014, and eight in 2013.
15 15 U.S.C. 7213(a)(3)(C).
16 15 U.S.C. 78c(a)(80).
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Frm 00078
Fmt 4703
Sfmt 4703
21913
the protection of investors and whether
the action will promote efficiency,
competition, and capital formation.’’
The proposed amendments do not
change or add to the requirements that
apply ‘‘to an audit of’’ an EGC or to any
other audits. They do not affect
requirements governing how a firm
conducts or reports on audits under
PCAOB standards, including audits of
EGCs. In addition to not imposing any
requirements that apply to an audit, the
proposed amendments do not appear
likely to significantly affect EGCs in
other ways. Specifically, the Board does
not anticipate that the proposed
amendments will affect an auditor’s
perception, during the audit of an EGC,
of the possibility of that audit
eventually being reviewed in any
inspection or the nature of any such
review. Many factors affect the selection
of audits that the Board reviews in the
inspection of any particular firm, and
the proposed rules would not affect the
likelihood that any particular audit of
an EGC will be reviewed in an
inspection of the EGC’s auditor. In
addition, as noted above, firms that the
Board could choose to forgo inspecting
under proposed Rule 4003(e) typically
would not be expected to realize, at the
time they perform an audit, that future
developments will make Rule 4003(e)
applicable, and in any event they would
have no assurance that the Board would
forgo the inspection. Moreover, to the
extent audits of EGCs are selected for
review in an inspection, the proposed
rules would have no effect on how that
review is conducted, and they provide
no reason for an auditor, at the time of
the audit, to anticipate any different
treatment of that audit in an inspection.
It does not appear that the proposed
amendments would have an effect on
efficiency, competition, and capital
formation with respect to EGCs. The
Board defers to the Commission on the
applicability of Section 103(a)(3)(C) to
the proposed amendments. If the
Commission determines that Section
103(a)(3)(C) applies to these
amendments, the Board requests that
the Commission determine that it is
necessary or appropriate in the public
interest, after considering the protection
of investors and whether the action will
promote efficiency, competition, and
capital formation, to apply the
amendments to audits of EGCs. The
Board stands ready to assist the
Commission with any additional
analysis that may become necessary.
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Federal Register / Vol. 81, No. 71 / Wednesday, April 13, 2016 / Notices
III. Date of Effectiveness of the
Proposed Rules and Timing for
Commission Action
Pursuant to Section 19(b)(2)(A)(ii) of
the Exchange Act,17 and based on its
determination that an extension of the
period set forth in Section 19(b)(2)(A)(i)
of the Exchange Act 18 is appropriate in
light of the Commission’s consideration
of Section 103(a)(3)(C) of the SarbanesOxley Act with respect to applicability
of the proposed rules to audits of
emerging growth companies, as defined
in Section 3(a)(80) of the Exchange Act,
the Commission has determined to
extend to July 12, 2016 the date by
which the Commission should take
action on the proposed rules.
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rules
are consistent with the requirements of
Title I of the Sarbanes-Oxley Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/pcaob.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number
PCAOB–2007–04 on the subject line.
Paper Comments
asabaliauskas on DSK3SPTVN1PROD with NOTICES
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number PCAOB–2007–04. This file
number should be included on the
subject line if email 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 (https://www.sec.gov/
rules/pcaob.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rules that
are filed with the Commission, and all
written communications relating to the
proposed rules 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 Web
site viewing and printing in the
Commission’s Public Reference Room,
100 F Street NE., Washington, DC
18 15
U.S.C. 78s(b)(2)(A)(ii).
U.S.C. 78s(b)(2)(A)(i).
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17:41 Apr 12, 2016
Jkt 238001
For the Commission, by the Office of the
Chief Accountant, by delegated authority.19
Brent J. Fields,
Secretary.
[FR Doc. 2016–08444 Filed 4–12–16; 8:45 am]
IV. Solicitation of Comments
17 15
20549–1090, on official business days
between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing will also
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 No. PCAOB–2007–
04 and should be submittedon or before
May 4, 2016.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77551; File No. SR–FINRA–
2016–007]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving a
Proposed Rule Change To Require
Registration as Securities Traders of
Associated Persons Primarily
Responsible for the Design,
Development, Significant Modification
of Algorithmic Trading Strategies or
Responsible for the Day-to-Day
Supervision of Such Activities
April 7, 2016.
I. Introduction
On February 11, 2016, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to amend NASD
Rule 1032 (Categories of Representative
Registration) to require registration as
Securities Traders of associated persons
primarily responsible for the design,
development or significant modification
of algorithmic trading strategies, or who
are responsible for the day-to-day
supervision or direction of such
activities. The proposed rule change
was published for comment in the
Federal Register on February 24, 2016.3
19 17
CFR 200.30–11(b)(2).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 77175
(February 18, 2016), 81 FR 9235 (‘‘Notice’’). The
Notice contains a detailed description of the
proposal.
1 15
PO 00000
Frm 00079
Fmt 4703
Sfmt 4703
The Commission received one comment
on the proposal.4 This order approves
the proposed rule change.
II. Description of the Proposed Rule
Change
FINRA’s rules generally require each
person associated with a member
included within the definition of a
representative to register with FINRA as
a Securities Trader if, with respect to
transactions in equity, preferred or
convertible debt securities effected
otherwise than on a securities exchange,
such person is engaged in proprietary
trading, the execution of transactions on
an agency basis, or the direct
supervision of such activities.5 FINRA
proposes to expand the registration
requirement so that associated persons
who are (i) primarily responsible for the
design, development or significant
modification 6 of algorithmic trading
strategies, or (ii) responsible for the dayto-day supervision or direction of such
activities, be required to register as
Securities Traders with FINRA.7
For purposes of the proposal, FINRA
defines an ‘‘algorithmic trading
strategy’’ as an automated system that
generates or routes orders or orderrelated messages—such as routes or
cancellations—but does not include an
automated system that solely routes
orders received in their entirety to a
market center. The proposed registration
requirement applies to orders and order
related messages whether ultimately
routed or sent to be routed to an
exchange or over the counter.8 An order
router alone would not constitute an
algorithmic trading strategy. However,
an order router that performs any
additional functions would be
considered an algorithmic trading
strategy.9 An algorithm that solely
4 See Letter from Michele Van Tassel, President,
Association of Registration Management, to Marcia
E. Asquith, Office of the Corporate Secretary,
Financial Industry Regulatory Authority, dated
March 15, 2016 (‘‘ARM Letter’’).
5 NASD Rule 1032(f).
6 FINRA notes that a ‘‘significant modification’’ to
an algorithmic trading strategy generally would be
any change to the code of the algorithm that affects
the logic and functioning of the trading strategy
employed by the algorithm. Therefore, for example,
a data feed/data vendor change generally would not
be considered a ‘‘significant modification,’’ whereas
a change to a benchmark (such as an index) used
by the strategy generally would be considered a
‘‘significant modification.’’ See Notice, supra note
3, at 9237 n. 5.
7 Id. at 9237. FINRA notes, for example, while an
equity trader involved in the design of an
algorithmic trading strategy would currently be
required to register pursuant to NASD Rule 1032(f),
the developer with which the trader collaborates to
create an algorithmic trading strategy, however,
may not be. Id.
8 Id.
9 See Notice, supra note 3, at 9236–37.
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]]>Agencies
[Federal Register Volume 81, Number 71 (Wednesday, April 13, 2016)]
[Notices]
[Pages 21909-21914]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-08444]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77558; File No. PCAOB-2007-04]
Public Company Accounting Oversight Board; Notice of Filing of
Proposed Amendments to Board Rules Relating to Inspections
April 7, 2016.
Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the
``Act'' or the ``Sarbanes-Oxley Act''),\1\ notice is hereby given that
on March 24, 2016, 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 7217(b).
---------------------------------------------------------------------------
I. Board's Statement of the Terms of Substance of the Proposed Rule
On October 16, 2007, the Board adopted amendments to its rules
related to inspections. The proposed amendments included a new
paragraph (e) added to existing Rule 4003 and amendments to paragraphs
(b) and (d) of Rule 4003. On October 22, 2007, the Board filed the
amendments with the Commission and requested Commission approval (``the
original rule filing''). On February 26, 2016 the Board adopted
revisions to those proposed amendments and, on March 24, 2016 amended
the rule filing to reflect those revisions. The text of the revised
proposed amendments is set out below. Language added to the Board's
currently effective rules by these amendments is italicized. Language
deleted from the Board's currently effective rules is in brackets.
Other text in Section 4 of the Board's Rules, including notes to the
Rules, remains unchanged and is indicated by `` * * * '' in the text
below.
SECTION 4. INSPECTIONS
* * *
Rule 4003. Frequency of Inspections
* * *
(b) At least once in every three calendar years, beginning with the
three-year period following the calendar year in which its application
for registration with the Board is approved, a registered public
accounting firm that, during any of the three prior calendar years,
issued an audit report, other than by consenting to an issuer's use of
a previously issued audit report, with respect to at least one issuer,
but no more than 100[,] issuers, [or that played a substantial role in
the preparation or furnishing of an audit report with respect to at
least one issuer,] shall be subject to a regular inspection.
* * *
(d) Notwithstanding paragraph (b) of this Rule, with respect to any
registered public accounting firm that became registered in 2003 or
2004--
(1) this Rule does not require the first inspection of the firm
sooner than the fourth calendar year following the first calendar year
in which the firm, while registered, issued an audit report with
respect to an issuer [or played a substantial role in the preparation
or furnishing of an audit report]; and
(2) this Rule does not require the second inspection of the firm
sooner than the fifth calendar year following the first calendar year
in which the firm, while registered, issued an audit report with
respect to an issuer [or played a substantial role in the preparation
or furnishing of an audit report].
(e) Notwithstanding any other provision of this Rule, if, in two
consecutive calendar years, a registered public accounting firm issues
no audit reports with respect to an issuer other than by consenting to
an issuer's use of a previously issued audit report, the Board shall
have the discretion to forego any inspection of that firm that would
otherwise be required because of any audit report that the firm had
issued with respect to an issuer prior to such calendar years.
* * *
(h) In each calendar year, the Board shall conduct regular
inspections of some registered public accounting firms that reported on
an annual report on Form 2 having played a substantial role in the
preparation or furnishing of an audit report with respect to an issuer
in any of the four most recent annual reporting periods through March
31 of that calendar year without having reported on an annual report on
Form 2 having issued an audit report with respect to an issuer in any
of those reporting periods. The number of such registered public
accounting firms that the Board shall inspect in any particular
calendar year shall be at least five percent of the number of
registered public accounting firms that, by June 30 of the preceding
calendar year, reported on an annual report on Form 2 for the reporting
period ending on March 31 of the preceding calendar year having played
a substantial role in the preparation or furnishing of an audit report
with respect to an issuer without having issued an audit report with
respect to an issuer in that reporting period.
II. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rule
In its amended filing with the Commission, the Board included
statements concerning the purpose of, and basis for, the proposed rule.
The
[[Page 21910]]
text of these statements may be examined at the places specified in
Item IV below. The purpose of, and basis for, the proposed rule are
also described in sections A, B, and C below.
A. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rule
(a) Purpose
The Sarbanes-Oxley Act requires the Board to conduct a continuing
program of inspections to assess the degree of compliance with certain
requirements by registered public accounting firms and their associated
persons in connection with the performance of audits, issuance of audit
reports, and related matters involving issuers. In 2003, the Board
adopted PCAOB Rule 4003, ``Frequency of Inspections.'' Rule 4003(b)
provides that at least once every three years, any firm that, during
any of the three prior calendar years, issues an audit report with
respect to at least one issuer but no more than 100 issuers, or plays a
substantial role in the preparation or furnishing of an audit report
with respect to an issuer, shall be subject to a regular inspection.
The Board has adopted amendments relating to Rule 4003(b) that are
intended to facilitate the Board's ability to allocate its inspection
resources in ways that better serve the public interest and protect
investors.
1. Rules 4003(b) and (h)
The Board has adopted amendments to eliminate Rule 4003(b)'s
provision for triennial inspections of firms that play a substantial
role in audits but do not issue audit reports and to provide instead
that the Board will, every year, inspect at least five percent of such
firms. The Board has also adopted an amendment to provide that no
inspection requirement arises under Rule 4003(b) solely because a firm
consents to an issuer's use of a previously issued audit report.
The Board's experience in the inspection program has affected the
Board's view on the appropriateness of devoting Board resources to
inspecting one-third of all ``substantial role only'' firms every
year.\2\ In 2007, the Board concluded that it would be better to direct
a larger share of those resources toward addressing the policies,
practices, and procedures of the firms that are ultimately responsible
for the audit report on the issuer's financial statements, and that the
Board's rules should not require the Board to devote so large a portion
of its resources to inspections of ``substantial role only'' firms.
This was consistent with the risk-based focus that the Board generally
brings to bear in considering the most prudent allocation of its
inspection resources. Accordingly, the Board adopted, and included in
the original rule filing, an amendment to Rule 4003(b) to eliminate the
requirement for triennial inspections of ``substantial role only''
firms.
---------------------------------------------------------------------------
\2\ The Board uses the phrase ``substantial role only'' to
identify the relevant category of firms and to emphasize the
distinction between this category of firms (which play a substantial
role but do not issue audit reports with respect to issuers) and the
separate category of firms that play a substantial role in some
audits, but separately perform other audits in which they issue the
audit report for the issuer (for example, a non-U.S. firm that plays
a substantial role in the audit of a U.S. issuer by auditing a
foreign subsidiary, but that separately has a foreign private issuer
audit client for which it regularly provides audit reports). Even as
amended, Rule 4003 will continue to provide for at least triennial
inspections of all firms in the latter category by virtue of their
regularly issuing audit reports. In any such inspection, the Board
could review, among other things, the firm's work and its system of
quality control in relation to audits of issuers in which the firm
played a role, including a substantial role.
---------------------------------------------------------------------------
In annual reports on PCAOB Form 2 filed by registered firms for the
12-month reporting period ended March 31, 2015, 571 firms reported
having issued audit reports for one to 100 issuers, and 103 firms
reported having played a substantial role in at least one issuer audit
without having issued audit reports for any issuers. The Board
continues to be of the view that it is appropriate to allocate the
largest share of its inspection resources toward addressing the
policies, practices, and procedures of the firms that are ultimately
responsible for the audit report on the issuer's financial statements,
and that the Board's rules should not require triennial inspections of
``substantial role only'' firms. The Board therefore continues to
propose eliminating Rule 4003(b)'s requirement for triennial
inspections of ``substantial role only'' firms.
In addition, however, having considered views expressed by SEC
staff and taking into account that the Board's inspection staff has
over time identified auditing deficiencies in some inspections of
``substantial role only'' firms,\3\ the Board has determined to revise
slightly the substance of its previously adopted approach to such
firms. With the revision, the amendment to Rule 4003 would still
eliminate the requirement to inspect all ``substantial role only''
firms, and it would still eliminate the requirement to inspect any such
firm with a prescribed frequency.
---------------------------------------------------------------------------
\3\ As of February 1, 2016, the Board had issued reports on
inspections of 38 ``substantial role only'' firms. In addition to
identifying concerns about aspects of some of those firms' systems
of quality control, the Board's inspection staff has, in 11 of those
inspections, identified that the inspected firm had failed to
perform sufficient procedures to fulfill the objectives of its role
in an audit. While such failures by an auditor in a substantial role
do not necessarily mean that the principal auditor's opinion on the
issuer's consolidated financial statements was insufficiently
supported, they present some risk of that result.
---------------------------------------------------------------------------
Unlike the amendment in the original rule filing, however, the
revised proposed amendment provides that the Board will, in each year,
select some ``substantial role only'' firms for inspection, with the
number of firms to be a number that is at least five percent of the
number of firms that reported being ``substantial role only'' firms in
their annual reports on PCAOB Form 2 filed with the Board in the
preceding year. Board rules require that all registered firms file an
annual report. A firm that does not issue an audit report for an issuer
during the period covered by an annual report must identify in that
annual report any audit in which it played a substantial role in that
period. Through its other processes, the Board may identify firms that
fail to comply with this reporting requirement (and may impose
sanctions for those failures), or the Board may identify that a firm
has reported playing a substantial role when its role in fact fell
below that level. But for purposes of identifying ``substantial role
only'' firms, the required annual reports on Form 2 provide the most
reasonable reference point.
Based on the history of reporting on Form 2, the Board anticipates
that the five percent threshold will translate to four to six firms
each year, though it could fall above or below that range in a
particular year, and the number actually inspected could exceed that
threshold in any year as a result of risk-based judgments about how to
allocate inspection resources. The revised proposed amendment provides
that the firms to be inspected will be selected from among those that
have reported playing a substantial role in audits in one of the four
most recent Form 2 reporting periods without having reported issuing an
audit report for an issuer in any of those periods. With that revision,
Rule 4003's provision concerning ``substantial role only'' firms is now
designated as paragraph (h).
In adopting the amendment included in the original rule filing
related to ``substantial role only'' firms, the Board noted that it had
not up to that time inspected a ``substantial role only'' firm but also
noted that it would retain discretion under the amended rule to inspect
``substantial role only'' firms at any time. The Board's practice,
since first inspecting ``substantial role only'' firms in 2009, has in
fact been
[[Page 21911]]
essentially the practice described by proposed Rule 4003(h). The Board
now sees value, however, in formally committing that at least a small
portion of its inspection resources will regularly be directed toward
``substantial role only'' firms and that the Board will maintain an
active focus on whether it would be appropriate to direct a larger
portion of its resources to those inspections. At present, the Board
believes that the five percent threshold, with selections made on a
risk basis, would involve review of ``substantial role only'' work that
is appropriate and sufficient to provide for a useful, ongoing focus on
that segment of the population of registered firms. The Board can
always inspect a larger portion of that population in a given year
without a rule. The Board has determined to commit to a minimum of five
percent through a rule.
By using the four most recent Form 2 reporting periods as the
reference point, the Board would, for any given inspection year, be
selecting ``substantial role only'' firms from a universe that includes
firms that have reported playing a substantial role as recently as the
year in which the inspection would occur and as far back as three
previous years. This will allow the Board to select from among the most
relevant universe, without limiting that universe to firms reporting in
one specific year. In addition, by limiting that universe to firms
that, in addition to playing a substantial role, have not issued an
audit report in any of those years, the rule would exclude any
possibility of counting, toward satisfaction of the ``substantial role
only'' inspection requirement, firms that otherwise would be inspected,
or recently have been inspected, because of the firm's relatively
recent issuance of an audit report.
The proposed rule also adds a provision to existing paragraph (b)
specifying that no inspection requirement arises solely on the basis of
the firm issuing an audit report by consenting to an issuer's use of a
previously issued audit report. Since the act of originally issuing the
audit report would have given rise to an inspection requirement, and
the related audit would have been a candidate for review in that
required inspection, it would be redundant to subject the registered
firm to a separate, later inspection relating to the same audits in
circumstances where the firm is no longer issuing audit reports other
than by consenting to issuers' use of previously issued audit reports.
The original rule filing also included a technical amendment that
was intended to clarify an aspect of Rule 4003(b) without making any
substantive change. The Board subsequently realized that the technical
amendment could have provided the Board with flexibility that the Board
did not intend regarding inspection frequency, and the Board has
therefore revised its proposal to eliminate that technical amendment
and retain the relevant existing wording. Specifically, the Board had
revised the wording of Rule 4003(b) to provide that the Board must
conduct at least one inspection of a firm in the three calendar-year
period following any calendar year in which the firm issues an audit
report with respect to an issuer. That wording would have given the
Board flexibility that the Board did not intend. For example, if a firm
issued an audit report in years 1, 2, 4, and 5, but not in year 3, a
Board inspection of the firm in year 3 would satisfy the inspection
requirement created by the audit reports in years 1 and 2, but the next
inspection would not technically be required until year 7 (the third
calendar year after the report issued in year 4), rather than within
three years after the previous inspection, i.e., year 6.
2. Rule 4003(d)
Existing Rule 4003(d) extends the Rule 4003(b) time period in which
the Board must conduct the first and second inspections of firms that
registered with the Board in 2003 or 2004. The Board has adopted an
amendment to conform Rule 4003(d) to the Rule 4003(b) amendment
concerning ``substantial role only'' firms. Consistent with the
amendment to Rule 4003(b), the Board is amending Rule 4003(d) to
eliminate from Rule 4003(d) the references to ``substantial role only''
firms.
Separately, a development in the law since the original rule filing
has led the Board to make a technical revision to Rule 4003(d). Rule
4003(d) uses the term ``audit report'' in two places. When Rule 4003(d)
took effect in 2006, ``audit report'' was, by definition, limited to
reports with respect to issuers, and this was still the case at the
time of the original rule filing proposing amendments to Rule 4003(d).
That definition has since been broadened to include reports with
respect to registered brokers and dealers and, as broadened, the
unqualified use of the term ``audit report'' in Rule 4003(d) would
change the meaning of the rule from what the Board originally intended
and still intends. For that reason, the Board has added the language
``with respect to an issuer'' to qualify ``audit report'' where that
term appears in proposed Rule 4003(d).
The original rule filing included an amendment that conformed Rule
4003(d) to the Rule 4003(b) amendment that provides that no inspection
requirement arises solely on the basis of a firm issuing an audit
report by consenting to an issuer's use of a previously issued audit
report. The operation of Rule 4003(d) is limited to firms that became
registered in 2003 or 2004. At the time of the original rule filing in
2007, it was possible for circumstances to arise that would have
triggered the application of this amendment with respect to such firms.
With the passage of time, however, those circumstances should no longer
arise, and the Board has therefore made a technical revision to
eliminate this amendment to Rule 4003(d).
3. Rule 4003(e)
The Board's experience in the inspection program to date has
affected the Board's view on the appropriateness of devoting Board
resources to inspecting every firm that has issued an audit report,
including firms that have not recently done so. This was another
respect in which the Board observed that the existing rule sometimes
requires the Board to deploy inspection resources in ways that do not
represent the most effective use of those resources in furtherance of
the public interest and the protection of investors. In particular, it
sometimes happens that (1) a firm issues an audit report in year 1,
opining on financial statements for the preceding year; (2) consistent
with existing Rule 4003(b), the Board's long-range inspection planning
sets that firm for inspection in year 4; and (3) the firm issues no
audit reports in years 2 or 3. Under the current rule, the Board must
then inspect the firm in year 4, even though the most recent audit
report issued by the firm is three years old on financial statements
that are four years old.
In 2007, the Board concluded that it could better fulfill its
public interest and investor protection mandates if it had the
flexibility in that circumstance to focus its year 4 inspection
resources on firms that are more regularly and recently engaged in
preparing audit reports. Accordingly, the Board adopted a new paragraph
(e) to Rule 4003 that would give the Board discretion to forego the
otherwise required inspection in the scenario described above in
determining how to deploy its inspection resources.
The Board continues to view Rule 4003(e) as providing useful
flexibility with respect to the allocation of inspection resources. The
number of otherwise required inspections that the
[[Page 21912]]
Board would have discretion to forego under Rule 4003(e) would vary
from year to year, but, had Rule 4003(e) been in effect, the number of
otherwise required inspections that would have met its criteria would
have been 10 in 2015, 10 in 2014 and eight in 2013. In addition,
because of delays caused by obstacles to Board inspections of
registered firms in certain countries, the current rule's deadline for
the initial inspections of firms in those countries, on the basis of
their having issued audit reports for issuers, has long since passed,
and some of those firms have long since stopped issuing audit reports
for issuers. Nineteen such firms have not issued audit reports since
before 2012, and 13 of those firms have not issued audit reports since
before 2010.
Under proposed Rule 4003(e), the Board would have the flexibility
to deploy its inspection resources in ways other than by inspecting
such firms. Rule 4003(e) would allow the Board to forego an otherwise
required inspection of a firm that issued an audit report if, in two
consecutive years, the firm does not issue any audit reports. The rule
would not require the Board to inspect such a firm unless and until the
firm engaged in conduct that triggered the operation of Rule 4003(b)
anew.\4\ This will give the Board useful and clearly defined
flexibility to focus its inspection resources on firms more recently
involved in issuing audit reports, rather than on relatively old audit
work performed by firms that may not be currently engaged in issuing
audit reports.
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\4\ Rule 4003(e) also makes clear that a firm's issuance of an
audit report solely by consenting to an issuer's use of a previously
issued audit report would not preclude the operation of paragraph
(e) in circumstances where paragraph (e) would otherwise apply.
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Rule 4003(e) would not, however, prohibit the Board from inspecting
any of those firms or in any way entitle those firms not to be
inspected. There may be circumstances in which the Board would choose
to inspect a firm even where Rule 4003(e) gave the Board the discretion
to forego the inspection.
The Board has made a technical amendment to proposed Rule 4003(e)
since the original rule filing. Proposed Rule 4003(e) uses the term
``audit report'' in two places. At the time of the original rule
filing, ``audit report'' was, by definition, limited to reports with
respect to issuers. That definition has since been broadened to include
reports with respect to registered brokers and dealers and, as
broadened, the unqualified use of the term ``audit report'' in Rule
4003(e) would change the meaning of the rule from what the Board
originally intended and still intends. For that reason, the Board has
added the language ``with respect to an issuer'' to qualify ``audit
report'' where that term appears in proposed Rule 4003(e).
B. Board's Statement on Burden on Competition
Not applicable. The Board's consideration of the economic impacts
of the proposed rule changes is discussed in Section D below.
C. Board's Statement on Comments on the Proposed Rule Received From
Members, Participants or Others
The Board solicited public comment before adopting the amendments
to Rule 4003 that were included in the original rule filing. The Board
received three comment letters, all of which were supportive of those
amendments and, more generally, supportive of the Board's effort to
increase its discretion to bring risk-based judgments to bear in
allocating its inspection resources.\5\
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\5\ See Letter from Deloitte Touche Tohmatsu (July 20, 2007)
(``DTT letter''), Letter from PricewaterhouseCoopers LLP (July 23,
2007) (``PwC letter''), and Letter from the New York State Society
of Certified Public Accountants (July 24, 2007) (``NYSSCPA
letter''), available at www.pcaobus.org/Rules/Docket_024.
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The revised proposed amendments reflect certain technical
corrections or updates described above, including undoing a non-
substantive amendment that was discovered to have an unintended
substantive effect, qualifying the term ``audit report'' to remain
consistent with the original meaning following intervening legislation
that expanded the definition, and eliminating references to the effect
of consenting to the use of a previously issued audit report where the
passage of time had negated the potential applicability of those
references. The Board made these revisions without seeking public
comment.
In addition, since the original rule filing, which included the
amendment eliminating any periodic inspection requirement for all
``substantial role only'' firms, the Board has determined to commit to
a practice of conducting some inspections of such firms and to
establish by rule a lower limit on the number of such inspections it
will conduct each year. Such a practice is consistent with the Board's
authority even in the absence of a rule, is consistent with the Board's
description of its possible exercise of that authority in soliciting
public comment on the amendments,\6\ and is consistent with the
discretion and authority that the commenters recognized the Board
retained.\7\ From the perspective of rights and obligations of
registered firms and associated persons, there is no meaningful
difference between the rule originally proposed for comment and the
Board's current practice. The Board has committed itself by rule to
that practice without seeking public comment specific to doing so.
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\6\ See Proposed Amendments to Limit Board Rule 4003's Fixed
Periodic Inspection Requirement to Firms that Regularly Issue Audit
Reports, PCAOB Release No. 2007-007 (May 24, 2007), at 4 (noting
that information that comes to the Board in various ways ``could
lead the Board to exercise its discretion to inspect a particular
`substantial role only' firm''), available at www.pcaobus.org/Rules/Docket_024.
\7\ See DTT letter at 1, PwC letter at 1, NYSSCPA letter at 3.
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D. Economic Considerations and Application to Audits of Emerging Growth
Companies
In the Board's view, the proposed amendments to Rule 4003 are
consistent with the purposes of the Act, the public interest, and the
protection of investors.\8\ In reaching that conclusion, the Board has
taken economic considerations into account.\9\
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\8\ Section 104(b)(2) of the Act provides that the Board may, by
rule, adjust the inspection schedules set by section 104(b)(1) if
the Board finds that different inspection schedules are consistent
with the purposes of the Act, the public interest, and the
protection of investors. To the extent the Commission views any of
the proposed amendments as constituting a change to an inspection
schedule set by section 104(b)(1), the statement in the text
reflects the Board's finding for purposes of section 104(b)(2).
\9\ Section A, above, describes the need for the proposed
amendments and the Board's key decisions in selecting this course of
action. This section does not repeat the earlier discussion, but
focuses on the costs and benefits, relative to an appropriate
baseline, of the Board's proposal.
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1. Rules 4003(b) and 4003(h)
It is anticipated that the proposed amendments to Rule 4003(b) and
the addition of Rule 4003(h) will impose no new costs on the universe
of registered firms relative to current practice.\10\ Those proposed
amendments do not require registered public accounting firms to take
any particular actions as part of their audits or otherwise. Rather,
they merely conform the Board's rules to current practice.\11\
Accordingly, the
[[Page 21913]]
proposed amendments to Rule 4003(b) and the addition of Rule 4003(h) do
not increase the costs imposed on the group of those registered firms
that are subject to inspection because of playing a substantial role in
an audit.
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\10\ To assist the Commission's consideration of this proposal,
this section discusses costs and benefits relative to current
practice. It does not discuss costs and benefits relative to
existing Rule 4003(b), under which, absent the proposed amendments
discussed here, the PCAOB would in each year inspect approximately
33 percent of ``substantial role only'' firms. The resulting
analysis of costs and benefits here, however, should not be
understood to suggest that a rule change conforming a rule to
existing practice would in every case necessarily involve no costs
or benefits.
\11\ The Board's practice, since first inspecting ``substantial
role only'' firms in 2009, has been to inspect each year
approximately five percent of those firms and to reflect that
allocation of inspection resources in its budget materials.
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The Board has considered whether the proposed amendments might
decrease audit quality in the work of the ``substantial role only''
firms by appearing to those firms to reduce the likelihood of their
being inspected. On that question, the Board has considered that the
proposed rules would not change those firms' perception of the fact
that they might be inspected. The Board has also considered whether the
proposed rules would be likely to change, in any meaningful way, those
firms' current perception of the likelihood of being inspected. There
is no direct evidence concerning what those firms' current perceptions
are on that point, but it is reasonable to assume that firms in the
``substantial role only'' category currently perceive the likelihood of
their being inspected as something that is less than the existing
rule.\12\ Because it appears most likely that the typical such firm's
perception of the chance of inspection would be less than the current
rule, and because the proposed rule would not change those firms'
perception of the fact that they might be inspected, the Board does not
anticipate that the proposed amendments would cause any significant
change in the extent to which the potential for inspection currently
provides an incentive for registered firms to perform audit work in
compliance with PCAOB standards. Nor do the proposed amendments provide
any incremental benefit relative to the current practice.
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\12\ The Board inspected no ``substantial role only'' firms
before 2009 and, as noted above, from 2009 on has inspected in each
year approximately five percent of those firms. In addition, since
2010 the Board's Web site has provided an overview of the Board's
inspection practices that, among other things, contrasts the Board's
practice of conducting triennial inspections of firms that issue
audit reports for one to 100 issuers with the practice of
inspecting, in each year, ``some'' firms that are not in that
category but that play a role in issuer audits. See https://pcaobus.org/Inspections/Pages/InspectedFirms.aspx.
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2. Rule 4003(e)
Proposed Rule 4003(e) will potentially reduce costs imposed on the
universe of registered firms relative to current practice.\13\ Proposed
Rule 4003(e) poses the possibility of fewer firms incurring inspection
related costs because it provides the Board with discretion to forgo an
otherwise required inspection of a firm if, after issuing an audit
report in one year, the firm does not issue audit reports in the two
succeeding years. To the extent that proposed Rule 4003(e) results in
the Board forgoing any inspections, the firms that would otherwise have
been inspected would not incur the inspection related costs.\14\
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\13\ Current practice is consistent with existing Rule 4003's
inspection frequency requirements for firms that issue audit
reports. Of the 28 otherwise required inspections in 2013, 2014, and
2015 that would have met the criteria of proposed Rule 4003(e), 16
were in the U.S. or in non-U.S. jurisdictions where the Board was
not blocked from conducting inspections, and the Board conducted all
of those inspections within the period prescribed by current Rule
4003.
\14\ The number of otherwise required inspections that the Board
would have discretion to forego under Rule 4003(e) would vary from
year to year, but, as noted above, had Rule 4003(e) been in effect,
the number of otherwise required inspections that would have met its
criteria would have been 10 in 2015, 10 in 2014, and eight in 2013.
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The Board has considered whether the benefit of potentially
avoiding imposing regulatory burdens on those firms that might, under
proposed Rule 4003(e), be less likely to be inspected than would be the
case under current practice could reduce audit quality in the work of
those firms. On that question, the Board has considered that firms that
the Board could choose to forgo inspecting under proposed Rule 4003(e)
typically would not be expected to realize, at the time they perform an
audit, that future developments will make Rule 4003(e) applicable.
Moreover, Rule 4003(e) would not, even if applicable, provide the firm
with any assurance that it would not be inspected. For those reasons,
the Board does not anticipate that proposed Rule 4003(e) would cause
any significant change in the extent to which the potential for
inspection provides an incentive for registered firms to perform audit
work in compliance with PCAOB standards.
3. Emerging Growth Companies
Before rules adopted by the Board can take effect, they must be
approved by the Commission. Under Section 103(a)(3)(C) of the Act,\15\
any rules adopted by the Board after April 5, 2012, shall not apply
``to an audit of'' any emerging growth company (``EGC'') (as defined in
section 3(a)(80) of the Securities Exchange Act of 1934 \16\ (the
``Exchange Act'')) unless the Commission ``determines that the
application of such additional requirements is necessary or appropriate
in the public interest, after considering the protection of investors
and whether the action will promote efficiency, competition, and
capital formation.''
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\15\ 15 U.S.C. 7213(a)(3)(C).
\16\ 15 U.S.C. 78c(a)(80).
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The proposed amendments do not change or add to the requirements
that apply ``to an audit of'' an EGC or to any other audits. They do
not affect requirements governing how a firm conducts or reports on
audits under PCAOB standards, including audits of EGCs. In addition to
not imposing any requirements that apply to an audit, the proposed
amendments do not appear likely to significantly affect EGCs in other
ways. Specifically, the Board does not anticipate that the proposed
amendments will affect an auditor's perception, during the audit of an
EGC, of the possibility of that audit eventually being reviewed in any
inspection or the nature of any such review. Many factors affect the
selection of audits that the Board reviews in the inspection of any
particular firm, and the proposed rules would not affect the likelihood
that any particular audit of an EGC will be reviewed in an inspection
of the EGC's auditor. In addition, as noted above, firms that the Board
could choose to forgo inspecting under proposed Rule 4003(e) typically
would not be expected to realize, at the time they perform an audit,
that future developments will make Rule 4003(e) applicable, and in any
event they would have no assurance that the Board would forgo the
inspection. Moreover, to the extent audits of EGCs are selected for
review in an inspection, the proposed rules would have no effect on how
that review is conducted, and they provide no reason for an auditor, at
the time of the audit, to anticipate any different treatment of that
audit in an inspection.
It does not appear that the proposed amendments would have an
effect on efficiency, competition, and capital formation with respect
to EGCs. The Board defers to the Commission on the applicability of
Section 103(a)(3)(C) to the proposed amendments. If the Commission
determines that Section 103(a)(3)(C) applies to these amendments, the
Board requests that the Commission determine that it is necessary or
appropriate in the public interest, after considering the protection of
investors and whether the action will promote efficiency, competition,
and capital formation, to apply the amendments to audits of EGCs. The
Board stands ready to assist the Commission with any additional
analysis that may become necessary.
[[Page 21914]]
III. Date of Effectiveness of the Proposed Rules and Timing for
Commission Action
Pursuant to Section 19(b)(2)(A)(ii) of the Exchange Act,\17\ and
based on its determination that an extension of the period set forth in
Section 19(b)(2)(A)(i) of the Exchange Act \18\ is appropriate in light
of the Commission's consideration of Section 103(a)(3)(C) of the
Sarbanes-Oxley Act with respect to applicability of the proposed rules
to audits of emerging growth companies, as defined in Section 3(a)(80)
of the Exchange Act, the Commission has determined to extend to July
12, 2016 the date by which the Commission should take action on the
proposed rules.
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\17\ 15 U.S.C. 78s(b)(2)(A)(ii).
\18\ 15 U.S.C. 78s(b)(2)(A)(i).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed
rules are consistent with the requirements of Title I of the Sarbanes-
Oxley Act. Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/pcaob.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number PCAOB-2007-04 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number PCAOB-2007-04. This file
number should be included on the subject line if email 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 (https://www.sec.gov/rules/pcaob.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rules that are filed
with the Commission, and all written communications relating to the
proposed rules 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 Web site viewing and printing in
the Commission's Public Reference Room, 100 F Street NE., Washington,
DC 20549-1090, on official business days between the hours of 10:00
a.m. and 3:00 p.m. Copies of such filing will also 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 No. PCAOB-2007-04 and should be
submitted on or before May 4, 2016.
For the Commission, by the Office of the Chief Accountant, by
delegated authority.\19\
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\19\ 17 CFR 200.30-11(b)(2).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-08444 Filed 4-12-16; 8:45 am]
BILLING CODE 8011-01-P
