Public Company Accounting Oversight Board; Order Granting Approval of Proposed Rules To Require Disclosure of Certain Audit Participants on a New PCAOB Form and Related Amendments to Auditing Standards, 29925-29928 [2016-11292]

Download as PDF mstockstill on DSK3G9T082PROD with NOTICES Federal Register / Vol. 81, No. 93 / Friday, May 13, 2016 / Notices On August 19, 2015, a delinquency letter was sent by the Division of Corporation Finance to Li-ion Motors Corp. (a/k/a Terra Inventions Corp.) requesting compliance with its periodic filing obligations, but Li-ion Motors Corp. (a/k/a Terra Inventions Corp.) did not receive the delinquency letter due to its failure to maintain a valid address on file with the Commission as required by Commission rules (Rule 301 of Regulation S–T, 17 CFR 232.301 and Section 5.4 of EDGAR Filer Manual). It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of PetroHunter Energy Corp. (CIK No. 1298824), a Maryland corporation with its principal place of business listed as Denver, Colorado with stock quoted on OTC Link under the ticker symbol PHUN, because it has not filed any periodic reports since the period ended June 30, 2013. On December 1, 2013, a delinquency letter was sent by the Division of Corporation Finance to PetroHunter Energy Corp. requesting compliance with its periodic filing obligations, and PetroHunter Energy Corp. received the delinquency letter on December 10, 2013, but failed to cure its delinquencies. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Shrink Nanotechnologies, Inc. (CIK No. 1355242), a void Delaware corporation with its principal place of business listed as Las Vegas, Nevada with stock quoted on OTC Link under the ticker symbol INKN, because it has not filed any periodic reports since the period ended March 31, 2013. On August 19, 2015, a delinquency letter was sent by the Division of Corporation Finance to Shrink Nanotechnologies, Inc. requesting compliance with its periodic filing obligations, but Shrink Nanotechnologies, Inc. did not receive the delinquency letter due to its failure to maintain a valid address on file with the Commission as required by Commission rules (Rule 301 of Regulation S–T, 17 CFR 232.301 and Section 5.4 of EDGAR Filer Manual). The Commission is of the opinion that the public interest and the protection of investors require a suspension of trading in the securities of the above-listed companies. Therefore, it is ordered, pursuant to Section 12(k) of the Securities Exchange Act of 1934, that trading in the securities of the above-listed companies is suspended for the period from 9:30 a.m. EDT on May 11, 2016, through 11:59 p.m. EDT on May 24, 2016. VerDate Sep<11>2014 18:05 May 12, 2016 Jkt 238001 By the Commission. Jill M. Peterson, Assistant Secretary. [FR Doc. 2016–11460 Filed 5–11–16; 4:15 pm] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Sunshine Act Meeting; Cancellation FEDERAL REGISTER CITATION OF PREVIOUS ANNOUNCEMENT: 81 FR 29314, May 11, 2016. PREVIOUSLY ANNOUNCED TIME AND DATE OF THE MEETING: Friday, May 13, 2016 at 10:30 a.m. The Closed Meeting scheduled for Friday, May 13, 2016 at 10:30 a.m., has been cancelled. CHANGES IN THE MEETING: CONTACT PERSON FOR MORE INFORMATION: For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact Brent J. Fields of the Office of the Secretary at (202) 551–5400. Dated: May 11, 2016. Brent J. Fields, Secretary. [FR Doc. 2016–11533 Filed 5–11–16; 4:15 pm] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–77787; File No. PCAOB– 2016–01] Public Company Accounting Oversight Board; Order Granting Approval of Proposed Rules To Require Disclosure of Certain Audit Participants on a New PCAOB Form and Related Amendments to Auditing Standards May 9, 2016. I. Introduction On January 29, 2016, the Public Company Accounting Oversight Board (the ‘‘Board’’ or the ‘‘PCAOB’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’), pursuant to Section 107(b) 1 of the Sarbanes-Oxley Act of 2002 (the ‘‘Sarbanes-Oxley Act’’) and Section 19(b) 2 of the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’), a proposal to adopt two new rules, a new form, and amendments to auditing standards to improve transparency regarding the engagement partner and other accounting firms that participate in issuer audits (collectively, the 1 15 2 15 PO 00000 U.S.C. 7217(b). U.S.C. 78s(b). Frm 00094 Fmt 4703 29925 ‘‘Proposed Rules’’).3 The Proposed Rules were published for comment in the Federal Register on February 16, 2016.4 At the time the notice was issued, the Commission extended to May 16, 2016 the date by which the Commission should take action on the Proposed Rules.5 The Commission received four comment letters in response to the notice.6 This order approves the Proposed Rules. II. Description of the Proposed Rules On December 15, 2015, the Board adopted two new rules (‘‘Rules 3210 and 3211’’) and Form AP to provide investors and other financial statement users with information about engagement partners and accounting firms that participate in audits of issuers. A. Changes to PCAOB Rules and Forms Under the Proposed Rules, for each audit report it issues for an issuer, a registered public accounting firm must file with the Board a report on Form AP that includes the following: • The name of the engagement partner and Partner ID; 7 3 The Board originally issued a concept release in 2009. See Concept Release on Requiring the Engagement Partner to Sign the Audit Report, PCAOB Release No. 2009–005 (July 28, 2009) (‘‘Concept Release’’), available at https:// pcaobus.org/Rules/Rulemaking/Docket029/200907-28_Release_No_2009-005.pdf. In 2011, the Board issued proposed rules. See Improving the Transparency of Audits: Proposed Amendments to PCAOB Auditing Standards and Form 2, PCAOB Release No. 2011–007 (Oct. 11, 2011) (‘‘Proposal’’), available at https://www.sec.gov/rules/pcaob/2016/ 34-77082.pdfhttps://pcaobus.org/Rules/Rulemaking/ Docket029/PCAOB_Release_2011-007.pdf. Subsequently, the Board issued a re-proposal in 2013. See Improving the Transparency of Audits: Proposed Amendments to PCAOB Auditing Standards to Provide Disclosure in the Auditor’s Report of Certain Participants in the Audit, PCAOB Release No. 2013–009 (Dec. 4, 2013) (‘‘Reproposal’’), available at https://pcaobus.org/ Rules/Rulemaking/Docket029/ PCAOB%20Release%20No%20%202013-009%20%20Transparency.pdf. In 2015, the Board issued a supplemental request for comment, which ultimately formed the framework for these Proposed Rules. See Supplemental Request for Comment: Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form, PCAOB Release No. 2015–004 (June 30, 2015) (‘‘Supplemental Request’’), available at https:// pcaobus.org/Rules/Rulemaking/Docket029/Release_ 2015_004.pdf. 4 See Release No. 34–77082 (Feb. 8, 2016), 81 FR 7927 (Feb. 16, 2016). 5 Ibid. 6 See letters to the Commission from CFA Institute, dated February 15, 2016 (‘‘CFA Letter’’); Tom Quaadman, Senior Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce, dated March 3, 2016 (‘‘Chamber Letter’’); Deloitte & Touche LLP, dated March 4, 2016 (‘‘Deloitte Letter’’); and Michael R. McMurtry, CPA, dated March 18, 2016 (‘‘McMurtry Letter’’). 7 The firm is required to assign a 10-digit Partner ID number, beginning with the Firm ID (a unique Continued Sfmt 4703 E:\FR\FM\13MYN1.SGM 13MYN1 29926 Federal Register / Vol. 81, No. 93 / Friday, May 13, 2016 / Notices • For other accounting firms 8 participating in the audit for which the responsibility for the audit is not divided: Æ 5% or greater participation: The name, city and state (or, if outside the United States, the city and country) of the headquarters’ office, and, when applicable, the Firm ID, and the percentage of total audit hours attributable to each other accounting firm whose participation in the audit was at least 5% of total audit hours; 9 Æ Less than 5% participation: The number of other accounting firms that participated in the audit whose individual participation was less than 5% of total audit hours, and the aggregate percentage of total audit hours of such firms; and • For other accounting firms participating in the audit for which the responsibility for the audit is divided: Æ The name, and when applicable, the Firm ID; city and state (or if outside the United States, the city and country) of the office of the other accounting firm that issued the other auditor’s report; and the magnitude of the portion of the financial statements audited by the other accounting firm. Form AP has a basic filing deadline of 35 days after the date the auditor’s report is first included in a document filed with the Commission, with a shorter deadline of 10 days after the auditor’s report is first included in a registration statement under the Securities Act of 1933 (the ‘‘Securities Act’’) filed with the Commission, such as for an initial public offering. Firms will file Form AP through the PCAOB’s existing web-based Registration, Annual, and Special Reporting system. B. Changes to PCAOB Standards mstockstill on DSK3G9T082PROD with NOTICES In addition to disclosing the required information on Form AP, the Proposed Rules allow an audit firm to voluntarily provide information about the engagement partner, other accounting firms, or both in the auditor’s report. As a result, the Proposed Rules include amendments to PCAOB auditing standards AS 3101 (currently AU sec. 508), Reports on Audited Financial five-digit number based on the number assigned to the firm by the PCAOB at the time of registration) followed by a unique series of five digits assigned by the firm. 8 The Board defines ‘‘other accounting firm’’ as (i) a registered public accounting firm other than the firm filing Form AP; or (ii) any other person or entity that opines on the compliance of any entity’s financial statements with an applicable financial reporting framework. 9 Actual hours should be used if available. If actual audit hours are unavailable, the auditor may use a reasonable method to estimate the components of this calculation. VerDate Sep<11>2014 18:05 May 12, 2016 Jkt 238001 Statements, and AS 1205 (currently AU sec. 543), Part of the Audit Performed by Other Independent Auditors 10 to allow for voluntary reporting. C. Applicability and Effective Date The PCAOB has proposed application of the Proposed Rules to audits of all issuers, including audits of emerging growth companies (‘‘EGCs’’),11 as discussed in Section IV. below. The Proposed Rules would not apply to audits of brokers and dealers under Exchange Act Rule 17a–5.12 The Proposed Rules would be effective as follows: (a) Disclosure of the engagement partner: auditors’ reports issued on or after January 31, 2017; and (b) Disclosure of other accounting firms: auditors’ reports issued on or after June 30, 2017. III. Comment Letters As noted above, the Commission received four comment letters concerning the Proposed Rules. Two commenters expressed support for the Proposed Rules.13 One commenter provided comments that were generally consistent with those provided by others throughout the PCAOB’s rulemaking process and addressed by the PCAOB.14 In addition, one commenter raised concerns that it had previously raised in comment letters to the Board that: (a) The Proposed Rules were not liability neutral; and b) the substance of the economic analysis was insufficient to justify applying the Proposed Rules to audits of EGCs.15 In addition, this commenter raised two additional issues, including that the 10-digit partner identifying number was not subject to a notice and comment period and a suggestion that the Proposed Rules should sunset after five years, unless a post implementation review finds that the Proposed Rules promote investor protection, capital formation and competition. The commenter stated that 10 On March 31, 2015, the PCAOB adopted the reorganization of its auditing standards using a topical structure and a single, integrated numbering system that was approved by the Commission on September 17, 2015. The reorganized amendments will be effective as of December 31, 2016, and nothing precludes auditors and others from using and referencing the reorganized standards before the effective date. 11 The term ‘‘emerging growth company’’ is defined in Section 3(a)(80) of the Exchange Act. 15 U.S.C. 78c(a)(80). 12 If the broker or dealer is an issuer, the Proposed Rules would apply. 13 See CFA Letter and Deloitte Letter. 14 See McMurtry Letter. The Commission believes that the Board has reasonably responded to these comments in its rulemaking process. 15 See Chamber Letter. PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 it expressed similar concerns in previous comment letters to the PCAOB, and in its opinion, those concerns have not been resolved by the PCAOB. We discuss each of these concerns below. (a) Liability Neutrality In the release accompanying the Proposed Rules (‘‘Final Rule Release’’), the Board noted that this commenter asserted that the Board should not pursue disclosure requirements for the engagement partner and other participants in the audit unless it can be done in a ‘‘liability neutral’’ way.16 The Board explained that its purpose with the Proposed Rules is not to expose auditors to additional liability, and consistent with that purpose, it has endeavored to mitigate any additional liability consequences that may stem from the Proposed Rules. However, the Board also stated in the Final Rule Release that it does not agree with the premise that it should not seek to achieve the anticipated benefits of a new rule—here, increased transparency and accountability for key participants in the audit—unless it can be certain that its actions will not affect liability in any way. On the whole, the Board believes it has appropriately addressed concerns regarding liability consequences of its proposal in a manner compatible with the objectives of this rulemaking, and in view of the rulemaking’s anticipated benefits. Since the Concept Release, the Board has sought and considered commenters’ views on the liability effect of its proposed amendments, has taken steps with the intent not to increase auditors’ liability risk, and has tried to mitigate this possibility to the extent it would be consistent with its policy objectives. In the Reproposal, the Board included a detailed discussion on potential liability considerations of its proposed amendments, including liability under Section 11 of the Securities Act of 1933 (‘‘Securities Act’’) and Section 10(b) of the Exchange Act and Rule 10b–5 thereunder. The Board has also indicated that it takes seriously commenters’ concerns about the potential effects on auditor liability, has engaged in its own review of the relevant statutory provisions and case law and has kept the Commission staff advised of its thoughts on these issues, as commenters suggested. The Board has specifically tailored the Proposed Rules to address, in part, 16 See comment letter of U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, August 31, 2015 available at https://pcaobus.org/Rules/Rulemaking/Docket029/ 031d_Chamber.pdf. This letter was also referenced in the Chamber Letter. E:\FR\FM\13MYN1.SGM 13MYN1 mstockstill on DSK3G9T082PROD with NOTICES Federal Register / Vol. 81, No. 93 / Friday, May 13, 2016 / Notices potential liability considerations raised by commenters. In the Supplemental Request, the Board acknowledged that some commenters on the Reproposal expressed concern that identifying the engagement partner and other participants in the audit in the auditor’s report could create both legal and practical issues under the federal securities laws by increasing the named parties’ potential liability and by requiring their consent if the auditors’ reports naming them were included in, or incorporated by reference into, registration statements under the Securities Act. The Board also acknowledged that some commenters expressed concerns about the possible litigation risk under Section 10(b) of the Exchange Act and Rule 10b–5 thereunder of the engagement partner’s name appearing in the auditor’s report. The Board further noted that many commenters urged the Board to proceed with the new disclosure requirements, if it determined to do so, by mandating disclosure on a newly created PCAOB form (or consider other alternative locations) as a means of responding to liability concerns. In response to these concerns, the Supplemental Request proposed disclosure on new Form AP, an alternative location outside the auditor’s report, and specifically sought comment on whether disclosure on Form AP would mitigate commenters’ concerns about liability-related consequences. In the Final Rule Release, the Board further acknowledged commenters’ concerns that public identification of key audit participants, particularly in the auditor’s report, could impact the potential liability or litigation risks of those identified. In particular, the Board noted that it sought comment throughout the rulemaking process on various means of disclosure—from an engagement partner’s signature on the auditor’s report, to disclosure in the auditor’s report, to disclosure on Form AP—in part to respond to those concerns. The Board stated that it believes the final rules accomplish its disclosure goals while appropriately addressing concerns raised by commenters about liability. The Board also observed that disclosure on Form AP should not raise potential liability concerns under Section 11 of the Securities Act or trigger the consent requirements of Section 7 of the Act because the engagement partner and other accounting firms would not be named in a registration statement or in any document incorporated by reference VerDate Sep<11>2014 18:05 May 12, 2016 Jkt 238001 into one.17 While the Board recognized that commenters expressed mixed views on the potential for liability under Exchange Act Section 10(b) and Rule 10b–5 and the ultimate resolution of Section 10(b) liability is outside its control, the Board stated that it does not believe any such risks warrant not proceeding with the Form AP approach. The Commission believes that the Board has provided sufficient notice of potential liability consequences of the Proposed Rules, has provided sufficient opportunity for public comment on these issues, and has reasonably responded to such concerns. Specifically, the Commission believes the Board has appropriately considered concerns related to liability neutrality as part of the Final Rule Release and taken reasonable steps to address the comments raised with respect to liability considerations in the Proposed Rules. (b) Economic Analysis The Chamber Letter also suggested that the Board’s economic analysis was insufficient to justify applying the Proposed Rules to audits of EGCs. This commenter, however, did not indicate why the economic analysis was insufficient, other than to say that the analysis and the application of the Proposed Rules to EGCs are ‘‘contrary to the intent of Congress [in passing the Jumpstart Our Business Startups Act].’’ The Board presented, and sought comment on, an economic analysis in the Reproposal. Further, in response to comments on the economic analysis provided in connection with the Reproposal, the Board revised its analysis, and sought comment on, an economic analysis as presented in the Supplemental Request. The economic analysis in the Supplemental Request set forth: (1) A description of the need for the standard-setting and how the Proposed Rules address that need; (2) the baseline to consider the economic impacts of the Proposed Rules; (3) the economic impacts of the Proposed Rules including benefits, costs, effects on different categories of audit firms and smaller companies, and responses to comments received on the economic analysis included with the Reproposal; and (4) economic considerations pertaining to audits of EGCs, including efficiency, competition and capital formation. In its Final Rule Release, the Board further discussed the economic considerations of the Proposed Rules and included a separate discussion 17 This assumes the auditor does not voluntarily choose to do so by including relevant disclosures in the auditor’s report. PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 29927 within the economic analysis devoted to potential liability consequences. The Commission notes that the Board provided a qualitative analysis that took into account the views of commenters. As the Board explained, there was limited research and data available regarding economic costs and benefits of the Proposed Rules for U.S. companies, making reliable quantification difficult. As the Board further explained, as part of its rulemaking process through the issuance of the Proposed Rules, the Board requested input from commenters. While commenters provided views on issues pertinent to economic considerations, including potential benefits and costs, they did not provide empirical data. The Commission believes that the Board’s economic analysis reasonably addresses the comments raised and, as further discussed below, is sufficient to make a determination to apply the Proposed Rules to the audits of EGCs. (c) 10-Digit Partner Identifying Number The Chamber Letter also noted that the Board added the 10-digit partner identifying number as part of the Final Rule Release without subjecting it to notice and comment. The Board added the 10-digit partner identifying number to the Proposed Rules in response to suggestions made by two commenters on the Supplemental Request.18 These commenters suggested that a unique partner identifier would help unambiguously identify partners and provide clear identification of auditors with the same or similar names. The Commission’s own notice and comment period on the Proposed Rules provided an opportunity for commenters to address concerns they may have had with the partner identifying number. No commenter identified any substantive concerns with the application of the identifying number. The Commission believes that the feedback received by the Board on the Supplemental Request and the opportunity for public comment on the Commission’s notice of the Proposed Rules provide sufficient basis for the Board to include the 10-digit partner identifying number in the Proposed Rules. (d) Sunset Provision Finally, the Chamber Letter also suggested that the Proposed Rules 18 See letters from the Auditing Standards Committee of the Auditing Section of the American Accounting Association, dated August 30, 2015, available at https://pcaobus.org/Rules/Rulemaking/ Docket029/024d_AAA.pdf and Maureen McNichols, dated August 31, 2015, available at https:// pcaobus.org/Rules/Rulemaking/Docket029/037d_ McNichols.pdf. E:\FR\FM\13MYN1.SGM 13MYN1 29928 Federal Register / Vol. 81, No. 93 / Friday, May 13, 2016 / Notices should sunset after five years, unless a post implementation review finds that the Proposed Rules promote investor protection, capital formation and competition. The Board stated in the Final Rule Release that it has considered feedback received on the concept release issued by the Commission on Possible Revisions to Audit Committee Disclosures (‘‘SEC Concept Release’’) 19 in developing the Proposed Rules. It also stated that it will continue to monitor the provisions included in the Proposed Rules to determine if revisions should be made in the future. In addition, the Board has a process in place to perform post-implementation reviews for its standards and rules.20 Therefore, the Commission does not believe a specific sunset provision is necessary in the Proposed Rules. mstockstill on DSK3G9T082PROD with NOTICES IV. The PCAOB’s EGC Request Section 103(a)(3)(C) of the SarbanesOxley Act requires that any rules of the Board ‘‘requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements (auditor discussion and analysis)’’ shall not apply to an audit of an EGC. The Board’s Proposed Rules do not fall into this category of rules.21 Section 103(a)(3)(C) further provides that ‘‘[a]ny additional rules’’ adopted by the PCAOB after April 5, 2012 do not apply to EGCs ‘‘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.’’ The Proposed Rules fall within this category of additional rules and thus the Commission must make a determination under the statute about the applicability of the Proposed Rules to EGCs. Having 19 See Possible Revisions to Audit Committee Disclosures, Release No. 33–9862 (July 1, 2015), available at: https://www.sec.gov/rules/concept/ 2015/33-9862.pdf. 20 See PCAOB Requests Comment on Engagement Quality Review Standard Under New PostImplementation Review Program, PCAOB News Release (Apr. 6, 2016), available at https:// pcaobus.org/News/Releases/Pages/2016-request-forcomment-AS7-center-post-implementationreview.aspx. 21 While the precise scope of this category of rules under Section 103(a)(3)(C) is not entirely clear, we do not interpret this statutory language as precluding the application of Board rules requiring additional factual information about the engagement partner and certain audit participants to the audits of EGCs. In our view, this approach reflects an appropriate interpretation of the statutory language and is consistent with our understanding of the Congressional purpose underlying this provision. VerDate Sep<11>2014 18:05 May 12, 2016 Jkt 238001 considered those statutory factors, and as explained further herein, the Commission finds that applying the Proposed Rules to audits of EGCs is necessary or appropriate in the public interest. In proposing application of the Proposed Rules to audits of all issuers, including EGCs, the PCAOB requested that the Commission make the determination required by Section 103(a)(3)(C). To assist the Commission in making its determination, the PCAOB prepared and submitted to the Commission its own EGC analysis. The PCAOB’s EGC analysis includes discussions of characteristics of selfidentified EGCs and economic considerations pertaining to audits of EGCs, including efficiency, competition, and capital formation. In its analysis, the Board states, with support from commenters, that requiring the same disclosures for audits of EGCs as for all issuers would provide the same general benefits to investors in EGCs as would be applicable to investors in non-EGCs. On the cost side, the Board does not believe that compliance costs for auditors will be significant. Rather, based on the overall characteristics of EGCs, the Board believes it is unlikely that the cost of collecting data to comply with the Proposed Rules will be disproportionately high for EGCs as a group. Further, the Board’s analysis notes that commenters generally indicated they were not aware of any significant costs that would be specific to audits of EGCs when compared to the costs of non-EGC audits. The PCAOB’s EGC analysis was included in the Commission’s public notice soliciting comment on the Proposed Rules. Based on the analysis submitted, we believe the information in the record is sufficient for the Commission to make the requested EGC determination in relation to the Proposed Rules. The Commission also takes note, in particular, of the PCAOB’s approach to the Proposed Rules, which are not intended to substantively change auditor performance requirements; should reduce investors’ search costs since the information will be provided in one place in a searchable database; and have been developed in a way to mitigate potential increases in auditor liability. In addition, the auditor’s requirements under the new standard are focused on communicating the characteristics of the auditor, of which the auditor is already aware or can readily obtain. PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 V. Conclusion The Commission has carefully reviewed and considered the Proposed Rules and the information submitted therewith by the PCAOB, including the PCAOB’s EGC analysis, and the comment letters received. In connection with the PCAOB’s filing and the Commission’s review, A. The Commission finds that the Proposed Rules are consistent with the requirements of the Sarbanes-Oxley Act and the securities laws and are necessary or appropriate in the public interest or for the protection of investors; and B. Separately, the Commission finds that the application of the Proposed Rules to EGC audits 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. It is therefore ordered, pursuant to Section 107 of the Sarbanes-Oxley Act and Section 19(b)(2) of the Exchange Act, that the Proposed Rules (File No. PCAOB–2016–01) be and hereby are approved. By the Commission. Brent J. Fields, Secretary. [FR Doc. 2016–11292 Filed 5–12–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION In the Matter of GroveWare Technologies Ltd., Luve Sports, Inc., and Northcore Technologies, Inc., File No. 500–1; Order of Suspension of Trading May 11, 2016. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of GroveWare Technologies Ltd. (CIK No. 1484931), a revoked Nevada corporation with its principal place of business listed as Toronto, Ontario, Canada with stock quoted on OTC Link (previously, ‘‘Pink Sheets’’) operated by OTC Markets Group, Inc. (‘‘OTC Link’’) under the ticker symbol GROV, because it has not filed any periodic reports since the period ended March 31, 2013. On August 18, 2015, a delinquency letter was sent by the Division of Corporation Finance to GroveWare Technologies Ltd. requesting compliance with its periodic filing obligations, but GroveWare Technologies Ltd. did not receive the delinquency letter due to its E:\FR\FM\13MYN1.SGM 13MYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 81, Number 93 (Friday, May 13, 2016)]
[Notices]
[Pages 29925-29928]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-11292]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77787; File No. PCAOB-2016-01]


Public Company Accounting Oversight Board; Order Granting 
Approval of Proposed Rules To Require Disclosure of Certain Audit 
Participants on a New PCAOB Form and Related Amendments to Auditing 
Standards

May 9, 2016.

I. Introduction

    On January 29, 2016, the Public Company Accounting Oversight Board 
(the ``Board'' or the ``PCAOB'') filed with the Securities and Exchange 
Commission (the ``Commission''), pursuant to Section 107(b) \1\ of the 
Sarbanes-Oxley Act of 2002 (the ``Sarbanes-Oxley Act'') and Section 
19(b) \2\ of the Securities Exchange Act of 1934 (the ``Exchange 
Act''), a proposal to adopt two new rules, a new form, and amendments 
to auditing standards to improve transparency regarding the engagement 
partner and other accounting firms that participate in issuer audits 
(collectively, the ``Proposed Rules'').\3\ The Proposed Rules were 
published for comment in the Federal Register on February 16, 2016.\4\ 
At the time the notice was issued, the Commission extended to May 16, 
2016 the date by which the Commission should take action on the 
Proposed Rules.\5\ The Commission received four comment letters in 
response to the notice.\6\ This order approves the Proposed Rules.
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    \1\ 15 U.S.C. 7217(b).
    \2\ 15 U.S.C. 78s(b).
    \3\ The Board originally issued a concept release in 2009. See 
Concept Release on Requiring the Engagement Partner to Sign the 
Audit Report, PCAOB Release No. 2009-005 (July 28, 2009) (``Concept 
Release''), available at https://pcaobus.org/Rules/Rulemaking/Docket029/2009-07-28_Release_No_2009-005.pdf. In 2011, the Board 
issued proposed rules. See Improving the Transparency of Audits: 
Proposed Amendments to PCAOB Auditing Standards and Form 2, PCAOB 
Release No. 2011-007 (Oct. 11, 2011) (``Proposal''), available at 
https://www.sec.gov/rules/pcaob/2016/34-77082.pdfhttps://pcaobus.org/Rules/Rulemaking/Docket029/PCAOB_Release_2011-007.pdf. Subsequently, 
the Board issued a re-proposal in 2013. See Improving the 
Transparency of Audits: Proposed Amendments to PCAOB Auditing 
Standards to Provide Disclosure in the Auditor's Report of Certain 
Participants in the Audit, PCAOB Release No. 2013-009 (Dec. 4, 2013) 
(``Reproposal''), available at https://pcaobus.org/Rules/Rulemaking/Docket029/PCAOB%20Release%20No%20%202013-009%20-%20Transparency.pdf. 
In 2015, the Board issued a supplemental request for comment, which 
ultimately formed the framework for these Proposed Rules. See 
Supplemental Request for Comment: Rules to Require Disclosure of 
Certain Audit Participants on a New PCAOB Form, PCAOB Release No. 
2015-004 (June 30, 2015) (``Supplemental Request''), available at 
https://pcaobus.org/Rules/Rulemaking/Docket029/Release_2015_004.pdf.
    \4\ See Release No. 34-77082 (Feb. 8, 2016), 81 FR 7927 (Feb. 
16, 2016).
    \5\ Ibid.
    \6\ See letters to the Commission from CFA Institute, dated 
February 15, 2016 (``CFA Letter''); Tom Quaadman, Senior Vice 
President, Center for Capital Markets Competitiveness, U.S. Chamber 
of Commerce, dated March 3, 2016 (``Chamber Letter''); Deloitte & 
Touche LLP, dated March 4, 2016 (``Deloitte Letter''); and Michael 
R. McMurtry, CPA, dated March 18, 2016 (``McMurtry Letter'').
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II. Description of the Proposed Rules

    On December 15, 2015, the Board adopted two new rules (``Rules 3210 
and 3211'') and Form AP to provide investors and other financial 
statement users with information about engagement partners and 
accounting firms that participate in audits of issuers.

A. Changes to PCAOB Rules and Forms

    Under the Proposed Rules, for each audit report it issues for an 
issuer, a registered public accounting firm must file with the Board a 
report on Form AP that includes the following:
     The name of the engagement partner and Partner ID; \7\
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    \7\ The firm is required to assign a 10-digit Partner ID number, 
beginning with the Firm ID (a unique five-digit number based on the 
number assigned to the firm by the PCAOB at the time of 
registration) followed by a unique series of five digits assigned by 
the firm.

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[[Page 29926]]

     For other accounting firms \8\ participating in the audit 
for which the responsibility for the audit is not divided:
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    \8\ The Board defines ``other accounting firm'' as (i) a 
registered public accounting firm other than the firm filing Form 
AP; or (ii) any other person or entity that opines on the compliance 
of any entity's financial statements with an applicable financial 
reporting framework.
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    [cir] 5% or greater participation: The name, city and state (or, if 
outside the United States, the city and country) of the headquarters' 
office, and, when applicable, the Firm ID, and the percentage of total 
audit hours attributable to each other accounting firm whose 
participation in the audit was at least 5% of total audit hours; \9\
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    \9\ Actual hours should be used if available. If actual audit 
hours are unavailable, the auditor may use a reasonable method to 
estimate the components of this calculation.
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    [cir] Less than 5% participation: The number of other accounting 
firms that participated in the audit whose individual participation was 
less than 5% of total audit hours, and the aggregate percentage of 
total audit hours of such firms; and
     For other accounting firms participating in the audit for 
which the responsibility for the audit is divided:
    [cir] The name, and when applicable, the Firm ID; city and state 
(or if outside the United States, the city and country) of the office 
of the other accounting firm that issued the other auditor's report; 
and the magnitude of the portion of the financial statements audited by 
the other accounting firm.
    Form AP has a basic filing deadline of 35 days after the date the 
auditor's report is first included in a document filed with the 
Commission, with a shorter deadline of 10 days after the auditor's 
report is first included in a registration statement under the 
Securities Act of 1933 (the ``Securities Act'') filed with the 
Commission, such as for an initial public offering. Firms will file 
Form AP through the PCAOB's existing web-based Registration, Annual, 
and Special Reporting system.

B. Changes to PCAOB Standards

    In addition to disclosing the required information on Form AP, the 
Proposed Rules allow an audit firm to voluntarily provide information 
about the engagement partner, other accounting firms, or both in the 
auditor's report. As a result, the Proposed Rules include amendments to 
PCAOB auditing standards AS 3101 (currently AU sec. 508), Reports on 
Audited Financial Statements, and AS 1205 (currently AU sec. 543), Part 
of the Audit Performed by Other Independent Auditors \10\ to allow for 
voluntary reporting.
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    \10\ On March 31, 2015, the PCAOB adopted the reorganization of 
its auditing standards using a topical structure and a single, 
integrated numbering system that was approved by the Commission on 
September 17, 2015. The reorganized amendments will be effective as 
of December 31, 2016, and nothing precludes auditors and others from 
using and referencing the reorganized standards before the effective 
date.
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C. Applicability and Effective Date

    The PCAOB has proposed application of the Proposed Rules to audits 
of all issuers, including audits of emerging growth companies 
(``EGCs''),\11\ as discussed in Section IV. below. The Proposed Rules 
would not apply to audits of brokers and dealers under Exchange Act 
Rule 17a-5.\12\ The Proposed Rules would be effective as follows:
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    \11\ The term ``emerging growth company'' is defined in Section 
3(a)(80) of the Exchange Act. 15 U.S.C. 78c(a)(80).
    \12\ If the broker or dealer is an issuer, the Proposed Rules 
would apply.
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    (a) Disclosure of the engagement partner: auditors' reports issued 
on or after January 31, 2017; and
    (b) Disclosure of other accounting firms: auditors' reports issued 
on or after June 30, 2017.

III. Comment Letters

    As noted above, the Commission received four comment letters 
concerning the Proposed Rules. Two commenters expressed support for the 
Proposed Rules.\13\ One commenter provided comments that were generally 
consistent with those provided by others throughout the PCAOB's 
rulemaking process and addressed by the PCAOB.\14\
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    \13\ See CFA Letter and Deloitte Letter.
    \14\ See McMurtry Letter. The Commission believes that the Board 
has reasonably responded to these comments in its rulemaking 
process.
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    In addition, one commenter raised concerns that it had previously 
raised in comment letters to the Board that: (a) The Proposed Rules 
were not liability neutral; and b) the substance of the economic 
analysis was insufficient to justify applying the Proposed Rules to 
audits of EGCs.\15\ In addition, this commenter raised two additional 
issues, including that the 10-digit partner identifying number was not 
subject to a notice and comment period and a suggestion that the 
Proposed Rules should sunset after five years, unless a post 
implementation review finds that the Proposed Rules promote investor 
protection, capital formation and competition. The commenter stated 
that it expressed similar concerns in previous comment letters to the 
PCAOB, and in its opinion, those concerns have not been resolved by the 
PCAOB. We discuss each of these concerns below.
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    \15\ See Chamber Letter.
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(a) Liability Neutrality
    In the release accompanying the Proposed Rules (``Final Rule 
Release''), the Board noted that this commenter asserted that the Board 
should not pursue disclosure requirements for the engagement partner 
and other participants in the audit unless it can be done in a 
``liability neutral'' way.\16\ The Board explained that its purpose 
with the Proposed Rules is not to expose auditors to additional 
liability, and consistent with that purpose, it has endeavored to 
mitigate any additional liability consequences that may stem from the 
Proposed Rules. However, the Board also stated in the Final Rule 
Release that it does not agree with the premise that it should not seek 
to achieve the anticipated benefits of a new rule--here, increased 
transparency and accountability for key participants in the audit--
unless it can be certain that its actions will not affect liability in 
any way. On the whole, the Board believes it has appropriately 
addressed concerns regarding liability consequences of its proposal in 
a manner compatible with the objectives of this rulemaking, and in view 
of the rulemaking's anticipated benefits.
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    \16\ See comment letter of U.S. Chamber of Commerce's Center for 
Capital Markets Competitiveness, August 31, 2015 available at https://pcaobus.org/Rules/Rulemaking/Docket029/031d_Chamber.pdf. This 
letter was also referenced in the Chamber Letter.
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    Since the Concept Release, the Board has sought and considered 
commenters' views on the liability effect of its proposed amendments, 
has taken steps with the intent not to increase auditors' liability 
risk, and has tried to mitigate this possibility to the extent it would 
be consistent with its policy objectives. In the Reproposal, the Board 
included a detailed discussion on potential liability considerations of 
its proposed amendments, including liability under Section 11 of the 
Securities Act of 1933 (``Securities Act'') and Section 10(b) of the 
Exchange Act and Rule 10b-5 thereunder. The Board has also indicated 
that it takes seriously commenters' concerns about the potential 
effects on auditor liability, has engaged in its own review of the 
relevant statutory provisions and case law and has kept the Commission 
staff advised of its thoughts on these issues, as commenters suggested.
    The Board has specifically tailored the Proposed Rules to address, 
in part,

[[Page 29927]]

potential liability considerations raised by commenters. In the 
Supplemental Request, the Board acknowledged that some commenters on 
the Reproposal expressed concern that identifying the engagement 
partner and other participants in the audit in the auditor's report 
could create both legal and practical issues under the federal 
securities laws by increasing the named parties' potential liability 
and by requiring their consent if the auditors' reports naming them 
were included in, or incorporated by reference into, registration 
statements under the Securities Act. The Board also acknowledged that 
some commenters expressed concerns about the possible litigation risk 
under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder of 
the engagement partner's name appearing in the auditor's report. The 
Board further noted that many commenters urged the Board to proceed 
with the new disclosure requirements, if it determined to do so, by 
mandating disclosure on a newly created PCAOB form (or consider other 
alternative locations) as a means of responding to liability concerns. 
In response to these concerns, the Supplemental Request proposed 
disclosure on new Form AP, an alternative location outside the 
auditor's report, and specifically sought comment on whether disclosure 
on Form AP would mitigate commenters' concerns about liability-related 
consequences.
    In the Final Rule Release, the Board further acknowledged 
commenters' concerns that public identification of key audit 
participants, particularly in the auditor's report, could impact the 
potential liability or litigation risks of those identified. In 
particular, the Board noted that it sought comment throughout the 
rulemaking process on various means of disclosure--from an engagement 
partner's signature on the auditor's report, to disclosure in the 
auditor's report, to disclosure on Form AP--in part to respond to those 
concerns. The Board stated that it believes the final rules accomplish 
its disclosure goals while appropriately addressing concerns raised by 
commenters about liability. The Board also observed that disclosure on 
Form AP should not raise potential liability concerns under Section 11 
of the Securities Act or trigger the consent requirements of Section 7 
of the Act because the engagement partner and other accounting firms 
would not be named in a registration statement or in any document 
incorporated by reference into one.\17\ While the Board recognized that 
commenters expressed mixed views on the potential for liability under 
Exchange Act Section 10(b) and Rule 10b-5 and the ultimate resolution 
of Section 10(b) liability is outside its control, the Board stated 
that it does not believe any such risks warrant not proceeding with the 
Form AP approach.
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    \17\ This assumes the auditor does not voluntarily choose to do 
so by including relevant disclosures in the auditor's report.
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    The Commission believes that the Board has provided sufficient 
notice of potential liability consequences of the Proposed Rules, has 
provided sufficient opportunity for public comment on these issues, and 
has reasonably responded to such concerns. Specifically, the Commission 
believes the Board has appropriately considered concerns related to 
liability neutrality as part of the Final Rule Release and taken 
reasonable steps to address the comments raised with respect to 
liability considerations in the Proposed Rules.
(b) Economic Analysis
    The Chamber Letter also suggested that the Board's economic 
analysis was insufficient to justify applying the Proposed Rules to 
audits of EGCs. This commenter, however, did not indicate why the 
economic analysis was insufficient, other than to say that the analysis 
and the application of the Proposed Rules to EGCs are ``contrary to the 
intent of Congress [in passing the Jumpstart Our Business Startups 
Act].'' The Board presented, and sought comment on, an economic 
analysis in the Reproposal. Further, in response to comments on the 
economic analysis provided in connection with the Reproposal, the Board 
revised its analysis, and sought comment on, an economic analysis as 
presented in the Supplemental Request. The economic analysis in the 
Supplemental Request set forth: (1) A description of the need for the 
standard-setting and how the Proposed Rules address that need; (2) the 
baseline to consider the economic impacts of the Proposed Rules; (3) 
the economic impacts of the Proposed Rules including benefits, costs, 
effects on different categories of audit firms and smaller companies, 
and responses to comments received on the economic analysis included 
with the Reproposal; and (4) economic considerations pertaining to 
audits of EGCs, including efficiency, competition and capital 
formation. In its Final Rule Release, the Board further discussed the 
economic considerations of the Proposed Rules and included a separate 
discussion within the economic analysis devoted to potential liability 
consequences.
    The Commission notes that the Board provided a qualitative analysis 
that took into account the views of commenters. As the Board explained, 
there was limited research and data available regarding economic costs 
and benefits of the Proposed Rules for U.S. companies, making reliable 
quantification difficult. As the Board further explained, as part of 
its rulemaking process through the issuance of the Proposed Rules, the 
Board requested input from commenters. While commenters provided views 
on issues pertinent to economic considerations, including potential 
benefits and costs, they did not provide empirical data. The Commission 
believes that the Board's economic analysis reasonably addresses the 
comments raised and, as further discussed below, is sufficient to make 
a determination to apply the Proposed Rules to the audits of EGCs.
(c) 10-Digit Partner Identifying Number
    The Chamber Letter also noted that the Board added the 10-digit 
partner identifying number as part of the Final Rule Release without 
subjecting it to notice and comment. The Board added the 10-digit 
partner identifying number to the Proposed Rules in response to 
suggestions made by two commenters on the Supplemental Request.\18\ 
These commenters suggested that a unique partner identifier would help 
unambiguously identify partners and provide clear identification of 
auditors with the same or similar names. The Commission's own notice 
and comment period on the Proposed Rules provided an opportunity for 
commenters to address concerns they may have had with the partner 
identifying number. No commenter identified any substantive concerns 
with the application of the identifying number. The Commission believes 
that the feedback received by the Board on the Supplemental Request and 
the opportunity for public comment on the Commission's notice of the 
Proposed Rules provide sufficient basis for the Board to include the 
10-digit partner identifying number in the Proposed Rules.
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    \18\ See letters from the Auditing Standards Committee of the 
Auditing Section of the American Accounting Association, dated 
August 30, 2015, available at https://pcaobus.org/Rules/Rulemaking/Docket029/024d_AAA.pdf and Maureen McNichols, dated August 31, 2015, 
available at https://pcaobus.org/Rules/Rulemaking/Docket029/037d_McNichols.pdf.
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(d) Sunset Provision
    Finally, the Chamber Letter also suggested that the Proposed Rules

[[Page 29928]]

should sunset after five years, unless a post implementation review 
finds that the Proposed Rules promote investor protection, capital 
formation and competition. The Board stated in the Final Rule Release 
that it has considered feedback received on the concept release issued 
by the Commission on Possible Revisions to Audit Committee Disclosures 
(``SEC Concept Release'') \19\ in developing the Proposed Rules. It 
also stated that it will continue to monitor the provisions included in 
the Proposed Rules to determine if revisions should be made in the 
future. In addition, the Board has a process in place to perform post-
implementation reviews for its standards and rules.\20\ Therefore, the 
Commission does not believe a specific sunset provision is necessary in 
the Proposed Rules.
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    \19\ See Possible Revisions to Audit Committee Disclosures, 
Release No. 33-9862 (July 1, 2015), available at: https://www.sec.gov/rules/concept/2015/33-9862.pdf.
    \20\ See PCAOB Requests Comment on Engagement Quality Review 
Standard Under New Post-Implementation Review Program, PCAOB News 
Release (Apr. 6, 2016), available at https://pcaobus.org/News/Releases/Pages/2016-request-for-comment-AS7-center-post-implementation-review.aspx.
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IV. The PCAOB's EGC Request

    Section 103(a)(3)(C) of the Sarbanes-Oxley Act requires that any 
rules of the Board ``requiring mandatory audit firm rotation or a 
supplement to the auditor's report in which the auditor would be 
required to provide additional information about the audit and the 
financial statements (auditor discussion and analysis)'' shall not 
apply to an audit of an EGC. The Board's Proposed Rules do not fall 
into this category of rules.\21\ Section 103(a)(3)(C) further provides 
that ``[a]ny additional rules'' adopted by the PCAOB after April 5, 
2012 do not apply to EGCs ``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.'' The Proposed Rules fall within this category of 
additional rules and thus the Commission must make a determination 
under the statute about the applicability of the Proposed Rules to 
EGCs. Having considered those statutory factors, and as explained 
further herein, the Commission finds that applying the Proposed Rules 
to audits of EGCs is necessary or appropriate in the public interest.
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    \21\ While the precise scope of this category of rules under 
Section 103(a)(3)(C) is not entirely clear, we do not interpret this 
statutory language as precluding the application of Board rules 
requiring additional factual information about the engagement 
partner and certain audit participants to the audits of EGCs. In our 
view, this approach reflects an appropriate interpretation of the 
statutory language and is consistent with our understanding of the 
Congressional purpose underlying this provision.
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    In proposing application of the Proposed Rules to audits of all 
issuers, including EGCs, the PCAOB requested that the Commission make 
the determination required by Section 103(a)(3)(C). To assist the 
Commission in making its determination, the PCAOB prepared and 
submitted to the Commission its own EGC analysis. The PCAOB's EGC 
analysis includes discussions of characteristics of self-identified 
EGCs and economic considerations pertaining to audits of EGCs, 
including efficiency, competition, and capital formation.
    In its analysis, the Board states, with support from commenters, 
that requiring the same disclosures for audits of EGCs as for all 
issuers would provide the same general benefits to investors in EGCs as 
would be applicable to investors in non-EGCs. On the cost side, the 
Board does not believe that compliance costs for auditors will be 
significant. Rather, based on the overall characteristics of EGCs, the 
Board believes it is unlikely that the cost of collecting data to 
comply with the Proposed Rules will be disproportionately high for EGCs 
as a group. Further, the Board's analysis notes that commenters 
generally indicated they were not aware of any significant costs that 
would be specific to audits of EGCs when compared to the costs of non-
EGC audits.
    The PCAOB's EGC analysis was included in the Commission's public 
notice soliciting comment on the Proposed Rules. Based on the analysis 
submitted, we believe the information in the record is sufficient for 
the Commission to make the requested EGC determination in relation to 
the Proposed Rules. The Commission also takes note, in particular, of 
the PCAOB's approach to the Proposed Rules, which are not intended to 
substantively change auditor performance requirements; should reduce 
investors' search costs since the information will be provided in one 
place in a searchable database; and have been developed in a way to 
mitigate potential increases in auditor liability. In addition, the 
auditor's requirements under the new standard are focused on 
communicating the characteristics of the auditor, of which the auditor 
is already aware or can readily obtain.

V. Conclusion

    The Commission has carefully reviewed and considered the Proposed 
Rules and the information submitted therewith by the PCAOB, including 
the PCAOB's EGC analysis, and the comment letters received. In 
connection with the PCAOB's filing and the Commission's review,
    A. The Commission finds that the Proposed Rules are consistent with 
the requirements of the Sarbanes-Oxley Act and the securities laws and 
are necessary or appropriate in the public interest or for the 
protection of investors; and
    B. Separately, the Commission finds that the application of the 
Proposed Rules to EGC audits 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.
    It is therefore ordered, pursuant to Section 107 of the Sarbanes-
Oxley Act and Section 19(b)(2) of the Exchange Act, that the Proposed 
Rules (File No. PCAOB-2016-01) be and hereby are approved.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2016-11292 Filed 5-12-16; 8:45 am]
 BILLING CODE 8011-01-P

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