Public Company Accounting Oversight Board; Notice of Filing of Proposed Rules on Constructive Requests To Withdraw From Registration, 92213-92226 [2024-27247]
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Federal Register / Vol. 89, No. 225 / Thursday, November 21, 2024 / Notices
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
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Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
NYSENAT–2024–31 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–NYSENAT–2024–31. 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 website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change 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 website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
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business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–NYSENAT–2024–31 and should be
submitted on or before December 12,
2024.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
Stephanie J. Fouse,
Assistant Secretary.
[FR Doc. 2024–27216 Filed 11–20–24; 8:45 am]
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II. Board’s Statement of the Purpose of,
and Statutory Basis for, the Proposed
Rules
In its filing with the Commission, the
Board included statements concerning
the purpose of, and basis for, the
proposed rules and discussed any
comments it received on the proposed
rules. The text of these statements may
be examined at the places specified in
Item IV below. The Board prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements. In addition,
to the extent that Section 103(a)(3)(C) of
the Act applies to the proposed rules,
the Board is requesting that the
Commission approve the proposed
rules, pursuant to that provision, for
application to audits of emerging growth
companies (‘‘EGCs’’), as that term is
defined in Section 3(a)(80) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’). The Board’s request
is set forth in section D.
SECURITIES AND EXCHANGE
COMMISSION
A. Board’s Statement of the Purpose of,
and Statutory Basis for, the Proposed
Rules
[Release No. 34–101644; File No. PCAOB–
2024–05]
(a) Purpose
To further enhance the PCAOB’s
registration program, the Board adopted
an amendment to its rule regarding
withdrawals from registration. The
amendment establishes a new
procedural mechanism that will enable
the Board to address situations in which
a registered firm has ceased to exist, is
nonoperational, or no longer wishes to
remain registered, as demonstrated by
its failures to file annual reports
(PCAOB Form 2, Annual Report) and
pay annual fees for at least two
consecutive reporting years. Until now,
a firm could be removed from PCAOB
registration only if the Board either (1)
authorized a withdrawal from
registration based on firm-initiated
withdrawal request or (2) imposed a
disciplinary sanction revoking the firm’s
registration. The amendment the Board
adopted introduces a third procedural
mechanism for removing a firm from
PCAOB registration. It builds on the
existing framework of firm-initiated
withdrawal requests under PCAOB Rule
2107, Withdrawal from Registration, by
creating a process that treats
consecutive delinquencies as a
constructive request from a firm for
leave to withdraw from registration.
New paragraph (h) (‘‘Constructive
Withdrawal Requests’’) of Rule 2107
will allow the Board, under certain
conditions, to update its registration
records by (1) treating a firm’s failure
both to file annual reports and to pay
annual fees for at least two consecutive
Public Company Accounting Oversight
Board; Notice of Filing of Proposed
Rules on Constructive Requests To
Withdraw From Registration
November 15, 2024.
Pursuant to Section 107(b) of the
Sarbanes-Oxley Act of 2002 (‘‘SarbanesOxley,’’ or the ‘‘Act’’), notice is hereby
given that on Thursday, November 14,
2024, the Public Company Accounting
Oversight Board (the ‘‘Board’’ or the
‘‘PCAOB’’) filed with the Securities and
Exchange Commission (the
‘‘Commission’’ or the ‘‘SEC’’) the
proposed rules described in Items I and
II below, which items have been
prepared by the Board. The Commission
is publishing this notice to solicit
comments on the proposed rules from
interested persons.
I. Board’s Statement of the Terms of
Substance of the Proposed Rules
On November 14, 2024, the Board
adopted Constructive Requests to
Withdraw from Registration (‘‘proposed
rules’’). The text of the proposed rules
appears in Exhibit A to the SEC Filing
Form 19b–4 and is available on the
Board’s website at https://pcaobus.org/
about/rules-rulemaking/rulemakingdockets/docket-054 and at the
Commission’s Public Reference Room.
19 17
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CFR 200.30–3(a)(12).
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Federal Register / Vol. 89, No. 225 / Thursday, November 21, 2024 / Notices
reporting years as a constructive request
by the firm for leave to withdraw from
registration, and (2) deeming the firm’s
registration withdrawn.
If approved by the Commission, Rule
2107(h) will take effect initially for
annual reports and annual fees that are
due in 2025, meaning that a registered
firm that does not file an annual report
and does not pay an annual fee for both
the 2025 and 2026 reporting years could
be deemed withdrawn from registration
under Rule 2107(h) beginning in the fall
of 2026.
See Exhibit 3 for additional
discussion of the purpose of this project.
(b) Statutory Basis
The statutory basis for Rule 2107(h) is
Title I of the Act, and, specifically,
Section 102 of the Act (registration) and
Sections 101(c)(1), (c)(5), (f)(6), and
(g)(1) of the Act (duties, powers, and
rules of the Board). Rule 2107(h)
directly relates to the Board’s statutory
duties and the purposes for its
establishment.
B. Board’s Statement on Burden on
Competition
Not applicable. The Board’s
consideration of the economic impacts
of the proposed rules is discussed in
section D below.
C. Board’s Statement on Comments on
the Proposed Rules Received From
Members, Participants or Others
The Board initially released the
proposed rules for public comment in
PCAOB Release No. 2024–001 (February
27, 2024).1 The Board received 18
written comment letters relating to its
initial proposed rules. See Exhibits
2(a)(B) and 2(a)(C). The Board adopted
its proposed amendment to Rule 2107
with modifications to address comments
it received. The Board is continuing to
consider next steps relating to other
aspects of the initial proposed rules that
the Board did not adopt on November
14, 2024. The Board has carefully
considered comments received on
proposed Rule 2107(h). The Board’s
response to the comments it received,
and the changes it made to the initial
proposed rules in response to the
comments received, are discussed
below.
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Background
Each year, a registered firm must file
an annual report with the Board and pay
1 See Proposals Regarding False or Misleading
Statements Concerning PCAOB Registration and
Oversight and Constructive Requests to Withdraw
from Registration, PCAOB Release No. 2024–001
(Feb. 27, 2024) (‘‘Proposing Release’’).
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an annual fee to the Board.2 Despite
repeated reminders, a consistent group
of firms neither files annual reports nor
pays annual fees each year. The
PCAOB’s Registration staff devotes
resources each year to sending multiple
communications to these firms, but
these efforts have repeatedly failed to
yield the required annual reports and
annual fees from this persistent group of
delinquent firms. As of August 31, 2024,
data show that 80 registered firms did
not file annual reports and did not pay
annual fees for both the 2022 and 2023
reporting years.3
To be clear, the 80 registered firms in
question were not merely late in filing
their annual reports and paying their
annual fees by the respective due dates.
These firms have not filed annual
reports and have not paid annual fees at
all for both the 2022 and 2023 reporting
years. It is possible that many of these
firms either may no longer exist or may
not understand that they remain
registered with the PCAOB, given their
consecutive failures to file annual
reports and pay annual fees. The
PCAOB staff believes that these firms
include, for example, sole
proprietorships that remain registered
even though the sole proprietor has
died; firms that registered with the
Board years ago but now appear to be
defunct; and small firms, often in
foreign countries, that cannot be
reached through the primary contact
person designated by the firm.4
Additionally, the PCAOB staff believes
that none of these 80 firms has recently
2 See PCAOB Rule 2200, Annual Report; PCAOB
Rule 2202, Annual Fee.
3 Figure 3 of the Proposing Release reflected 87
registered firms, as of December 31, 2023, that did
not file annual reports and did not pay annual fees
for both the 2022 and 2023 reporting years. By
August 31, 2024, this number decreased to 80 firms.
Five of the original 87 firms withdrew from
registration in 2024, removing them from PCAOB
registration as of August 31, 2024. Based on the
PCAOB staff’s analysis of data from Audit Analytics
and PCAOB Form AP, Auditor Reporting of Certain
Audit Participants, there is no indication that these
five firms have performed any services for issuers
requiring PCAOB registration between January 1,
2021, and August 31, 2024. Additionally, two of the
original 87 firms addressed their prior
noncompliance by filing their annual reports and
paying their annual fees for the 2022 and 2023
reporting years after the due dates had passed, thus
these firms are also no longer included in the
analysis. Although five firms withdrew from
registration and two firms are no longer delinquent,
it is difficult to attribute this behavior directly to
the Proposing Release. Moreover, this subset of
firms is small compared to the 92 percent of firms
(80 out of 87) that continue to exhibit a pattern of
delinquency spanning at least two consecutive
reporting years.
4 See Figure 1 for a breakdown by firm type of the
80 firms that did not file annual reports and did not
pay annual fees for the 2022 and 2023 reporting
years.
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issued an audit report for an issuer.5 For
79 of these firms, there is no indication
that they have recently played a
substantial role in issuer audits.6 This
suggests that, with respect to the vast
majority of consecutively delinquent
firms—79 of the 80 identified firms—
there is no indication of recent
engagement in services requiring
PCAOB registration.
The presence of consecutively
delinquent firms on the Board’s list of
registered firms hinders several
regulatory objectives, including its
ability to maintain an accurate public
record of registered public accounting
firms in operation that wish to remain
registered; to ensure that the
information required on annual reports
is being reported to the public and the
PCAOB; to collect mandatory annual
fees; and to efficiently use PCAOB staff
time and resources. Before now, the
PCAOB has lacked an effective
procedural mechanism to deal with
such firms. The prior framework offered
only two methods of removing a firm
from PCAOB registration: (1) the Board
authorizing a withdrawal based on a
firm-initiated withdrawal request,7 and
5 Based on Audit Analytics data, PCAOB staff
analyzed audit reports issued between January 1,
2021, and August 31, 2024, which covers the 2022
and 2023 reporting years. The terms ‘‘audit,’’ ‘‘audit
report,’’ ‘‘issuer, ’’ ‘‘broker,’’ and ‘‘dealer’’ are used
as defined in the Act and PCAOB Rule 1001,
Definitions of Terms Employed in Rules. The term
‘‘broker-dealer’’ refers to entities registered with the
SEC as either a ‘‘broker’’ or a ‘‘dealer,’’ or both.
6 Without a firm’s own Form 2 reporting, it is
challenging for the PCAOB staff to conclusively
determine whether a firm has played a substantial
role in preparing or furnishing an audit report for
an issuer or broker-dealer. Based on a review of
Form AP data, the PCAOB staff noted that one of
the 80 firms that did not file annual reports and did
not pay annual fees for both the 2022 and 2023
reporting years was reported by another registered
firm as potentially playing a substantial role in
issuer audit reports issued in 2022, 2023, and 2024.
However, the inferences that the PCAOB can draw
from this are limited by the constraints inherent in
Form AP reporting: (1) only the firm that issues the
audit report to the issuer files Form AP, and it alone
identifies ‘‘other accounting firm’’ participants and
the audit hours attributable to those firms; and (2)
for purposes of Form AP reporting, an ‘‘other
accounting firm’’ is categorized as a participant in
an issuer audit if any of its principals or
professional employees performed work on the
audit that was supervised by the firm that issues the
audit report, irrespective of whether the ‘‘other
accounting firm’’ itself participated in the audit.
Therefore, after reviewing available data, the
PCAOB staff has not found any indications that 79
of the 80 firms have recently engaged in any
services requiring PCAOB registration, and the
participation of the remaining firm in such services
remains uncertain due to the characteristics of Form
AP reporting.
7 Pursuant to PCAOB rules, subject to certain
limitations, a firm’s registration with the Board is
deemed withdrawn if the firm requests leave to
withdraw by filing Form 1–WD, Request for Leave
to Withdraw from Registration, and (i) the Board
grants leave to withdraw, or (ii) the Board does not,
within 60 days of receipt of the request, order that
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(2) the Board instituting formal
disciplinary proceedings that could lead
to the revocation of the firm’s
registration due to violations of laws,
rules, or standards that the Board is
charged with enforcing.8
As discussed below, the Board
believes a ‘‘constructive withdrawal
request’’ mechanism will provide the
PCAOB with a reasonable, efficient, and
equitable way of identifying and
removing from registration firms that
have ceased to exist, are nonoperational,
or no longer wish to remain registered.
After furnishing a consecutively
delinquent firm with written notice and
60 days to contact the Registration staff,
the new provision of the PCAOB’s rule
relating to withdrawal from registration
permits the Board to treat a firm’s
failure both to file annual reports and to
pay annual fees for at least two
consecutive reporting years as a
constructive request by the firm for
leave to withdraw from registration, and
to deem the firm’s registration
withdrawn. As indicated above,
updating the PCAOB’s registration
records through this process will
promote the quality of information by
removing from registration firms that
have ceased to exist, are nonoperational,
or no longer wish to remain registered.
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Discussion
The PCAOB added a provision to an
existing rule to advance the PCAOB’s
investor protection mission and to
enhance the Board’s registration
program by creating a more accurate
public record of registered public
accounting firms in operation that wish
to remain registered.
Specifically, the PCAOB adopted an
amendment to an existing rule to add a
new provision that will permit the
Board to deem a firm’s registration
withdrawn—under specified conditions
and subject to enumerated safeguards—
if the firm fails to file its annual reports
and to pay its annual fees for at least
two consecutive reporting years. This
dual condition, involving the lack of
both annual report submission and
annual fee payment over two
consecutive reporting years, is designed
to identify and remove from registration
firms that have ceased to exist, are
nonoperational, or no longer wish to
remain registered.
withdrawal of the firm’s registration be delayed. See
Rule 2107(a).
8 Under Section 105(c)(4) and (5) of the Act and
PCAOB Rule 5300, Sanctions, the Board can revoke
a firm’s registration as a sanction in a Board
disciplinary proceeding under certain
circumstances. See Rule 1001(r)(ii) (defining
‘‘revocation’’ as ‘‘a permanent disciplinary sanction
terminating a firm’s registration’’).
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Until now, the PCAOB has had no
effective and efficient procedural
mechanism to withdraw consecutively
delinquent firms from registration. As
noted above, under the Board’s current
rules, there are only two ways for a
registered firm to depart from PCAOB
registration. One is a firm-initiated
withdrawal: a firm seeking to withdraw
from registration can file a form
requesting leave to withdraw.9 The
other is revocation: when appropriate, a
firm’s registration can be revoked as a
sanction in a Board disciplinary
proceeding upon a finding of
intentional, reckless, or repeatedly
negligent conduct.10
Withdrawal and revocation often
suffice as methods for managing the
PCAOB’s registration records, but each
of these paths depends on some form of
active engagement with the registered
firm. They begin either with the firm
filing a withdrawal request or with the
PCAOB’s Office of the Secretary
providing notice of an Order Instituting
Disciplinary Proceedings (‘‘OIP’’) to the
firm.11 In some circumstances, however,
such as when a firm that has ceased to
exist or is nonoperational or for some
other reason consecutively fails to file
its annual reports and pay its annual
fees, it may not be possible to actively
engage with that registered firm. To
account for such situations, the Board
believes there should be a procedural
mechanism for the Board to update the
PCAOB’s registration records.
Building on the Board’s current
withdrawal framework in Rule 2107, the
9 Rule 2107 provides that a registered firm may
request leave to withdraw from registration at any
time by filing Form 1–WD. Withdrawal, however,
is not immediately effective; the Board may order
that withdrawal be delayed while the Board carries
out an inspection, investigation, or disciplinary
proceeding. See Rule 2107(d). After a firm’s
registration is withdrawn, the firm is permitted to
participate in audits of issuers or broker-dealers and
otherwise associate with registered firms only so
long as the withdrawn firm’s participation falls
below the ‘‘substantial role’’ threshold. See Rule
1001(p)(iii). A firm that withdraws from registration
and later decides that it wishes to re-register must
reapply for registration by filing a new PCAOB
Form 1, Application for Registration.
10 After the Board revokes a firm’s registration,
the firm is not permitted to participate in audits
involving issuers or broker-dealers or otherwise
associate with a registered firm; even participation
that falls below the ‘‘substantial role’’ threshold
would violate the order revoking the firm’s
registration. See Rules on Investigations and
Adjudications, PCAOB Release No. 2003–015 (Sept.
29, 2003), at A2–7 (a revocation ‘‘prohibit[s] the
firm from preparing or issuing, or participating in
the preparation or issuance of, audit reports’’). The
revocation remains in operation unless and until
the Board approves a new application for
registration submitted by the firm. See generally
paragraphs (a) and (c) of PCAOB Rule 5302,
Applications for Relief From, or Modification of,
Revocations and Bars.
11 See generally PCAOB Rule 5201, Notification of
Commencement of Disciplinary Proceedings.
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92215
core premise of Rule 2107(h) is that a
two-year period of noncompliance with
the PCAOB’s annual reporting and
annual payment requirements,
following warnings of these omissions,
can reasonably be interpreted as a
constructive request by the firm for
leave to withdraw from registration,
provided that appropriate procedural
safeguards are in place. Often, a firm’s
failure to file an annual report and pay
an annual fee is the first indication that
the firm may be defunct or no longer
wishes to remain registered. Therefore,
the Board believes that, when a firm
fails to submit annual reports and to pay
annual fees for at least two consecutive
reporting years, it is reasonable to infer
that the firm has ceased to exist, is no
longer operational, or no longer wishes
to remain registered with the PCAOB.
As a withdrawal-based mechanism,
Rule 2107(h) is not a disciplinary
proceeding or disciplinary process.
Instead of resulting in a disciplinary
sanction (like a revocation), Rule
2107(h) would result in withdrawal of
the firm from registration. Unlike a
revocation, a withdrawal under Rule
2107(h) would not be reported as a
disciplinary sanction to the
Commission, state regulatory
authorities, foreign accountancy
licensing boards, or the public.12 A
withdrawal under Rule 2107(h) would,
instead, be reflected on the PCAOB’s
website as a withdrawal from
registration. Should the firm seek reregistration, it would be required to file
a Form 1 like other firms that were
previously registered but withdrew from
registration, without the need to adhere
to the requirements of Rule 5302(a) or
(c), which relate to the termination of
revocation sanctions. Under Rule
2107(h), a firm whose registration is
withdrawn, in contrast to a firm whose
registration is revoked,13 would retain
eligibility to perform work on audits of
issuers or broker-dealers, provided that
work remains below the substantial role
threshold established by Rule
1001(p)(ii) and PCAOB Rule 2100,
Registration Requirements for Public
Accounting Firms. In accordance with
Rule 2107(b)(1), a firm that has
withdrawn from registration is
permitted to reissue or give consent to
the use of a prior audit report issued by
the firm while registered with the
Board; however, the firm is not allowed
to update or dual-date any previously
issued audit report once the firm is no
longer registered.
12 Cf.
Section 105(d) of the Act.
footnote 10.
13 See
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Consecutively Delinquent Firms and
Current Responses
Section 102(d) of the Act requires
each registered firm to submit an annual
report to the PCAOB. The PCAOB’s
annual reporting framework implements
Section 102(d) by requiring each
registered firm to report, on an annual
basis, general information about the firm
and its audit practice over the most
recent 12-month reporting period.
Annual reports must be filed on Form
2 and must be filed no later than June
30 of each year.14
Annual reporting is an important part
of the investor protection framework
prescribed by the Act and PCAOB rules.
Information provided by registered
firms in their annual reports informs the
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14 See Rule 2200 and PCAOB Rule 2201, Time for
Filing of Annual Report.
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PCAOB’s oversight activities and
provides information to the public
regarding the nature and extent of each
registered firm’s audit practice with
respect to issuers and broker-dealers.
Annual reporting also keeps the
PCAOB’s records current on such basic
information as the firm’s name, location,
and contact information, and provides
assurance, through a firm certification,15
that the firm has reported the
occurrence of various significant events
during the reporting period on PCAOB
Form 3, Special Report. When a firm
does not comply with the reporting
requirements, it deprives the public of
valuable information and impacts the
PCAOB’s analysis and planning for
inspections and other Board
responsibilities.
15 See
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Each registered firm must also pay an
annual fee. Section 102(f) of the Act
directs the Board, in relevant part, to
assess and collect annual fees from each
registered firm in amounts that, together
with registration fees, are sufficient to
recover the costs of processing and
reviewing registration applications and
annual reports. Annual fees are due on
or before July 31 of each year.16
Since the Board’s annual reporting
and annual fee requirements became
effective in 2010, a number of registered
firms have continuously failed both to
file annual reports and to pay annual
fees, in violation of PCAOB rules. While
some firms have belatedly made their
required filings and payments, others
remain persistently noncompliant.
16 See
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Federal Register / Vol. 89, No. 225 / Thursday, November 21, 2024 / Notices
Figure A. Cumulative Number of
Registered Firms With Continuous
Noncompliance From the Indicated
Reporting Year Through the 2023
Reporting Year 17
BILLING CODE 8011–01–P
100
90
90
80
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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Reporting Year
BILLING CODE 8011–01–C
Note: Reporting years are based on the
PCAOB’s reporting year-end of March 31
(e.g., the 2023 reporting year covers April 1,
2022, to March 31, 2023). Registered firms
must submit an annual report by June 30 and
pay an annual fee by July 31 each year,
covering the 12-month period from April 1 to
March 31.
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Figure A is based on data available as
of August 31, 2024. Each bar in Figure
17 The PCAOB staff’s analysis ends with the 2023
reporting year. Although annual reports and annual
fees for the 2024 reporting year were due several
months ago, in the PCAOB’s experience some firms
eventually file their annual reports and pay their
annual fees many months after these deadlines.
Including those firms in the analysis could
potentially prevent an accurate count of delinquent
firms for the 2024 reporting year and skew the
assessment of the number of firms that might be
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A illustrates the cumulative number of
firms registered with the PCAOB as of
August 31, 2024, that have continuously
failed both to file annual reports and to
pay annual fees from each reporting
year listed on the x-axis through August
31, 2024. These data exclude firms that
were previously noncompliant but
subsequently either withdrew from
registration or belatedly made their
required filings and payments before
August 31, 2024.19
For example, the bar for the 2010
reporting year shows that 13 firms failed
both to file annual reports and pay
annual fees starting in reporting year
2010, and those firms have remained
consistently noncompliant every
subsequent reporting year through 2023.
By the 2011 reporting year, the
cumulative total increases to 18 firms,
subject to withdrawal from registration under Rule
2107(h). However, the PCAOB believes this
decision does not affect the PCAOB’s inferences, as
a preliminary review of reporting year 2024 data
through August 31, 2024, shows no significant
deviations from the patterns observed through
reporting year 2023.
PCAOB information about registered public
accounting firms, and is available at https://
rasr.pcaobus.org/Search/Search.aspx.
19 The number of delinquent firms depicted in the
graph does not account for firms’ filing and
payment activities after August 31, 2024. Therefore,
for example, if a firm was delinquent for reporting
year 2023 but subsequently filed an annual report
or paid an annual fee after August 31, 2024, it
would still be considered delinquent in the graph.
18 The term ‘‘RASR’’ refers to the PCAOB’s webbased Registration, Annual, and Special Reporting
System, which provides access to publicly available
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representing an additional five firms
that first failed to meet both annual
obligations in 2011 and continued their
noncompliance through the end of this
period. This cumulative count grows
progressively with each subsequent
reporting year as more firms fall into
continuous noncompliance through the
end of this period, reaching a total of 90
firms by the 2023 reporting year. This
represents just under six percent of the
total population of 1,554 PCAOBregistered firms as of August 31, 2024.20
These data indicate that, over time, a
number of firms have persistently failed
to fulfill both annual obligations, with
more than 50 firms in noncompliance
for at least six consecutive years and 13
firms in noncompliance for 14
consecutive reporting years. Based on
the PCAOB staff’s experience, the Board
believes that many of these
continuously delinquent firms may be
defunct. Consequently, it is unlikely
that these firms will either (1)
voluntarily request leave to withdraw
from registration or (2) assert to the
PCAOB that their registration was
withdrawn under Rule 2107(h) when
they needed to remain registered in
order to perform audit work for issuers
or broker-dealers.
In each reporting year, the
Registration staff contacted all registered
firms to remind them of their
obligations to file annual reports and to
pay annual fees prior to their respective
due dates. After the relevant due dates
passed, the Registration staff followed
up by sending at least one warning letter
to each delinquent firm, specifically
highlighting its failure to meet the
annual filing and annual payment
requirements. These warning letters
have been effective in spurring most
delinquent firms to act.
But each year, a recurring set of firms
does not cure delinquencies and yet
remains registered. Without Rule
2107(h), the PCAOB would have no
effective and efficient procedural
mechanism to withdraw these
20 Section III.B.1 of the Proposing Release
provided similar data as depicted in Figure A, but
with a cutoff date of December 31, 2023, instead of
August 31, 2024. As a result, the number of firms
that both did not file an annual report and did not
pay an annual fee for reporting years 2022 and 2023
decreased. Specifically, the number of
noncompliant firms for the 2022 and 2023 reporting
years decreased from 87 and 108 as of December 31,
2023, to 80 and 90 firms, respectively, as of August
31, 2024. The number decreased because some of
the initially noncompliant firms either (1) withdrew
from registration in 2024 or (2) filed annual reports
and/or paid annual fees for the corresponding
reporting year in 2024. See footnote 3 for a similar
discussion of the reasons why the number of firms
that did not file annual reports and did not pay
annual fees for both the 2022 and 2023 reporting
years changed.
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consecutively delinquent firms from
registration.
Relying on firm-initiated withdrawals
is not currently a viable avenue, as these
consecutively delinquent firms have not
requested leave to withdraw from
PCAOB registration and, given their
extended unresponsiveness and
repeated noncompliance, are unlikely to
do so in the future. Moreover, existing
Board rules do not permit PCAOB staff
to file a request for leave to withdraw
from registration on a firm’s behalf, even
upon information and belief that the
firm no longer exists or has ceased
operations.
Nor have enforcement efforts proven
to be a desirable approach—or even a
viable option—in certain circumstances.
Historically, the PCAOB’s Division of
Enforcement and Investigations (‘‘DEI’’)
has allocated its resources toward
higher risk delinquencies, prioritizing
enforcement action with respect to
delinquent firms that continue to issue
audit reports or play a substantial role
in the preparation or furnishing of audit
reports. Since 2011, the Board has
issued more than three dozen OIPs
against delinquent firms,21 and while
most of those cases settled (or were
dismissed in connection with the
delinquent firm’s withdrawal from
registration), nine of those cases
proceeded to an initial decision by a
hearing officer.22 Although the facts and
legal issues in these proceedings were
generally straightforward, each case
consumed substantial time and
resources that could have been
expended pursuing other oversight
activities. And in some cases, the
PCAOB has encountered difficulties
providing notice of the institution of a
disciplinary proceeding to a firm that
appears to have ceased operations;
serving OIPs on seemingly nonexistent
or nonoperational firms may be
21 This figure represents OIPs that solely relate to
delinquent annual reports or annual fees, or both.
See, e.g., R.A. Bianchi & Associates, An
Accountancy Corporation, PCAOB Release No.
105–2015–003 (Jan. 22, 2015); Baumgarten &
Company LLP, PCAOB Release No. 105–2013–001
(Feb. 21, 2013); Reuben E. Price & Co., Public
Accountancy Corp., PCAOB Release No. 105–2011–
008 (Dec. 20, 2011); GLO CPAs, LLLP, PCAOB
Release No. 105–2011–006 (Nov. 30, 2011).
22 See Monte C. Waldman CPA, PCAOB File No.
105–2015–013 (Aug. 4, 2016); Chr. Mortensen
Revisionsfirma, statsautoriseret
revisionsinteressentskab, PCAOB File No. 105–
2015–008 (Jan. 12, 2016); David W. Dube, PCAOB
File No. 105–2014–005 (Nov. 30, 2015); Joseph
Troche, CPA, PCAOB File No. 105–2014–007 (Mar.
6, 2015); P.S. Yap & Associates, PCAOB File No.
105–2013–006 (May 8, 2014); Kenneth J. McBride,
PCAOB File No. 105–2012–007 (May 7, 2013); Eric
C. Yartz, P.C., PCAOB File No. 105–2012–006 (May
7, 2013); Buckno Lisicky & Company, P.C., PCAOB
File No. 105–2011–004 (Jan. 9, 2012); Paul Gaynes,
PCAOB File No. 105–2011–006 (Jan. 3, 2012).
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unnecessarily challenging, if even
possible.
Additionally, encumbering the
disciplinary process to address a
registered firm’s noncompliance with
the PCAOB’s annual reporting and
payment requirements may often be a
disproportionate response to a defunct
firm’s failure to request leave to
withdraw from registration before
ceasing operations. Instituting
approximately 80 new disciplinary
proceedings, one for each registered
firm that failed to file an annual report
and pay the annual fee for both the 2022
and 2023 reporting periods, would
impose significant resource demands on
the Board and its staff and could require
significant time to resolve. The Board
believes a more efficient process, with
appropriate procedural safeguards,
should be available to address
circumstances where a registered firm’s
conduct gives rise to the inference that
the firm has ceased to exist, is
nonoperational, or no longer wishes to
remain registered with the PCAOB.
Mechanics of Rule 2107(h)
The Board designed Rule 2107(h)
expressly to fall within the framework
of a withdrawal from registration. Rule
2107(h) is aimed at registered firms that
have ceased to exist, are nonoperational,
or no longer wish to remain registered.
Still, in the absence of procedural
safeguards, the Board recognizes that
there is some risk that a constructivewithdrawal-request approach could
unintentionally affect a firm that wishes
to remain registered. Anticipating that
risk, Rule 2107(h) includes a set of
procedural safeguards to protect the
interests of any firm that wishes to
remain registered, including written
notice and website notice, and an
opportunity to stop the Rule 2107(h)
process merely by emailing the
Registration staff.
On balance, the Board believes that
Rule 2107(h) will avoid unnecessary
expenditures of PCAOB resources while
still affording a registered firm notice
and an opportunity to stop the
withdrawal process. It would also cause
consecutively delinquent firms either to
contact the Registration staff or to be
withdrawn from registration more
efficiently than is possible currently.
Thus, the Board believes Rule 2107(h)
will provide a reasonable and effective
way to identify and remove from the
PCAOB’s registration records those
firms that have ceased to exist, are
nonoperational, or no longer wish to
remain registered.
Commenters broadly supported
proposed Rule 2107(h), and the Board
adopted the proposed amendment with
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certain limited modifications, as
discussed below. One commenter, an
academic, expressed concern that
withdrawing a firm from registration
through the Rule 2107(h) process would
remove the firm from the PCAOB’s
enforcement authority. However, the
Board may consider its enforcementrelated responsibilities when deciding
whether or when to employ Rule
2107(h)’s constructive-withdrawalrequest process with respect to a
particular firm, just as it may consider
whether a firm-initiated withdrawal
from registration should be delayed in
light of the Board’s responsibilities to
conduct investigations or disciplinary
proceedings.23
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1. Prerequisites
Under Rule 2107(h)(1), the
withdrawal process would be available
only if a registered firm, for at least two
consecutive Form 2 reporting years, has
neither filed an annual report nor paid
an annual fee.24 The two-year
benchmark is intended to serve as a
proxy to assist the Board in identifying
firms that may fairly be deemed to have
made a constructive withdrawal request.
The Board believes delinquency for a
period of at least two consecutive
reporting years is an effective indication
that a firm has ceased to exist, is
nonoperational, or no longer wishes to
remain registered.25 Under the two-year
benchmark, all firms that recently filed
an annual report or paid an annual fee
would fall outside the scope of Rule
2107(h). The Board believes that a single
missed filing or payment, or even one
reporting year’s worth of missed annual
reports and payments, is an insufficient
23 See Rule 2107(d) (the Board may delay a firminitiated withdrawal by up to 18 months, if done
within 60 days of receiving a completed Form 1–
WD and determined necessary to fulfill the Board’s
inspection, investigative, or disciplinary
responsibilities under the Act); see also Rule
2107(e) (automatically delaying a firm’s withdrawal
if a Board disciplinary proceeding is pending
against the firm or any of its associated persons).
24 A Form 2 reporting year covers the 12-month
period from April 1 to March 31. See Form 2,
General Instruction 4.
25 While the PCAOB recognizes that seven of the
originally identified 87 consecutively delinquent
firms either withdrew from registration (five firms)
or caught up on overdue annual reports and annual
fees (two firms), this activity supports the rationale
for adopting Rule 2107(h). The actions of these
firms reinforce the utility of establishing a clear
benchmark to infer that a consecutively delinquent
firm, if it still exists, no longer wishes to remain
registered with the PCAOB. The two-year marker of
consecutive noncompliance with the annual
reporting and annual fee requirements will serve as
an effective and clear benchmark for interpreting
such consecutive noncompliance as a firm’s
constructive request for leave to withdraw from
registration. And the procedural safeguards built
into Rule 2107(h) provide a clear and easy course
of action for a firm if the inference that the firm no
longer wishes to remain registered is inaccurate.
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basis upon which to infer that a firm no
longer wishes to remain registered.26 On
the other hand, allowing three or more
years of delinquency before presuming
a firm no longer wishes to remain
registered may unduly delay
appropriate regulatory action. The
minimum amount of time that a firm
would have to be delinquent before
meeting the threshold of ‘‘two
consecutive reporting years’’ would be
13 months, encompassing the first
overdue annual report following the
June 30 deadline, the first overdue
annual fee following the July 31
deadline, the second overdue annual
report following June 30 of the second
consecutive year, and the second
overdue annual fee following July 31 of
the second consecutive year.
The Rule 2107(h) process is
discretionary. Whether Rule 2107(h) is
used, and the exact timing of how it is
used, is left to the Board. Establishing a
discretionary process, rather than a
mandatory or automatic one, allows the
Board to consider specific facts and
circumstances—including whether a
firm is providing services requiring
PCAOB registration and whether the
firm is subject to a current or
forthcoming inspection or
investigation—when determining
whether to deem the firm’s registration
withdrawn under Rule 2107(h). The
Board did not receive any comments on
the discretionary nature of Rule 2107(h).
The Registration staff will continue its
practice of sending warning letters each
year to delinquent registered firms.
These notices will continue to call
attention to any missed annual report
filings or annual fee payments.
While commenters generally
supported the two-year threshold for
considering a firm’s non-submission of
annual reports and non-payment of
annual fees as a basis for a constructive
withdrawal request, some commenters
suggested either reducing this period to
one year or treating a single missed
annual report or annual fee as a
sufficient basis to initiate a firm’s
withdrawal from PCAOB registration.
The Board considered these options,
but, as explained in the Proposing
Release and above, the Board believes
that a two-year criterion, encompassing
both annual reports and annual fees, is
an appropriate indicator that a firm has
ceased to exist, is nonoperational, or no
longer wishes to remain registered.
Of course, the failure to file reports or
pay fees when due constitutes a
26 Of course, rule violations related to
noncompliance with the Board’s annual reporting
and payment requirements remain subject to
enforcement.
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violation of PCAOB rules concerning
annual reporting and fees, and firms
should bear in mind that new paragraph
(h) of Rule 2107 does not limit the
Board’s enforcement authority with
respect to violations of those
requirements.
2. Notice of Delinquency and Impending
Withdrawal
Pursuant to Rule 2107(h)(2), the Board
commences the Rule 2107(h) process by
sending a written notice to the
registered firm’s primary contact with
the Board as identified in the firm’s
most recent filing on Form 1, Form 2,
Form 3, or PCAOB Form 4, Succeeding
to Registration Status of Predecessor.
That notice (the ‘‘Notice of Delinquency
and Impending Withdrawal’’) would
specify the annual reports and annual
fees that are past due and remain
outstanding and provide information to
the firm about the impending
withdrawal of its registration, including
the opportunity to avoid withdrawal by
contacting the Registration staff within
60 days. The Notice of Delinquency and
Impending Withdrawal is intended to
provide the firm notice of the
commencement of the Rule 2107(h)
process, the reason for the
commencement of that process, its
potential significance for the firm’s
registration, and the firm’s opportunity
to avoid withdrawal by sending an
email to the Registration staff within 60
days.
The Board would send the Notice of
Delinquency and Impending
Withdrawal to the registered firm’s
primary contact with the Board as
identified in the firm’s most recent
filing on Form 1, Form 2, Form 3, or
Form 4, via a mail or commercial
courier service, and the Board would
obtain a confirmation of actual or
attempted delivery.27 In considering the
fairness of this approach, the Board has
taken into account that if there has been
a change in the identity or business
mailing address of the firm’s primary
contact from the information disclosed
in a previous form filing, the firm is
required to report that change to the
PCAOB within 30 days on Form 3.28 In
light of a firm’s longstanding obligation
to maintain up-to-date primary contact
information, the Board believes it is fair
and reasonable for the Registration staff
27 In the adopted rule, the PCAOB revised the
proposed phrase ‘‘that results in a confirmation of
actual or attempted delivery’’ to ‘‘and obtains a
confirmation of actual or attempted delivery.’’ This
change aims to enhance clarity. The Board did not
receive any comments on this specific phrasing,
and this change is not intended to alter the rule’s
meaning.
28 See PCAOB Rule 2203, Special Reports, and
Items 2.18 and 7.2 of Form 3.
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to send the Notice of Delinquency and
Impending Withdrawal to the firm’s
primary contact at the address reported
in the firm’s most recent filing.29
One commenter suggested that the
PCAOB should use email in addition to
traditional mail or a commercial courier
service when providing notice of the
initiation of the Rule 2107(h)
withdrawal process. The Board
emphasizes that all registered firms are
required to keep their primary contact’s
mailing address updated under current
PCAOB rules. Moreover, as discussed in
the next subsection, notice by mail or
commercial courier service would be
supplemented, as required under Rule
2107(h), by a notice on the PCAOB’s
website. Together, the Board believes
that these methods of providing notice
are sufficient. However, the Board also
notes that the rule does not prohibit the
Board or its staff from using email as an
additional, discretionary means by
which to provide notice of the initiation
of the Rule 2107(h) process to firms.
Though the use of email is not
mandated by Rule 2107(h), the Board or
PCAOB staff may deem it appropriate,
under certain circumstances, to
supplement the prescribed notice with
email.
3. Website Notice
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After the Notice of Delinquency and
Impending Withdrawal is sent to the
registered firm’s primary contact, the
Board will publish notice of the
impending withdrawal on its public
website, pursuant to Rule 2107(h)(3).
The Board will make reasonable efforts
to do so promptly. The website posting
is intended to provide reasonable notice
to the firm and to others, including any
current or former audit clients, who may
be able to alert the firm of the
impending withdrawal of its registration
and its 60-day window to avoid
withdrawal. Disclosing the firm’s
pending withdrawal on the Board’s
website is also consistent with the
current firm-initiated withdrawal
process.30
29 See generally Rule 141 of the Commission’s
Rules of Practice, 17 CFR 201.141, which similarly
permits service to the most recent address shown
on a registered entity’s most recent filing with the
Commission.
30 See Rule 2107(b)(2) (requiring disclosure of the
identity of any firm with a pending request to
withdraw from registration and the date the Board
received the Form 1–WD); see also Registered
Public Accounting Firms—Withdrawal Request
Pending, available at https://assets.pcaobus.org/
pcaob-dev/docs/default-source/registration/firms/
documents/withdrawalrequests.pdf?sfvrsn=d30aab29_287.
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4. Sixty-Day Opportunity To Avoid
Withdrawal From Registration
After the date the Board sends the
Notice of Delinquency and Impending
Withdrawal to the registered firm’s
primary contact, the firm, under Rule
2107(h)(4), would have 60 days to stop
the withdrawal process.31 The Board
believes 60 days is a reasonable amount
of time for the firm to become aware of
the initiation of the Rule 2107(h)
process, review the Notice of
Delinquency and Impending
Withdrawal, consider whether it wishes
to remain registered, and contact the
Registration staff by email.32
To stop the Rule 2107(h) process, the
registered firm’s primary contact would
be required to send an email to a
designated electronic address specified
in the Notice of Delinquency and
Impending Withdrawal within the 60day period. In contemplating how a firm
should stop the Rule 2107(h) process,
the Board sought to establish a method
of contacting the PCAOB that would not
be overly burdensome. Requiring that an
email be sent by the firm’s primary
contact increases the likelihood that the
person who contacts the PCAOB is an
authorized representative of the firm.33
This requirement also increases the
likelihood that future communications
to the firm would result in actual notice
to the firm.34 In particular, this process
31 PCAOB Rule 1002, Time Computation, governs
the computation of periods of time prescribed in or
allowed by the Board’s rules. Rule 1002’s time
computation principles would apply to the 60-day
period specified in the Notice of Delinquency and
Impending Withdrawal.
32 The limitations imposed in Rule 2107(c) do not
apply to firms that have received notice of the
commencement of the Rule 2107(h) process. Those
limitations apply only to firms that choose to
initiate the withdrawal process through the filing of
a completed Form 1–WD.
33 If the email address of the firm’s primary
contact on file with the Board is outdated, the firm
is required to update this information using Form
3 before transmitting an email to stop the Rule
2107(h) process. See Items 2.18 and 7.2 of Form 3.
This ensures that any email received by the
Registration staff to stop the Rule 2107(h) process
originates from an authorized representative of the
firm, who has access to the firm’s account in the
RASR system.
34 One firm expressed concern that emails sent to
the PCAOB to stop the Rule 2107(h) process
potentially could be marked as spam. The
commenter suggested that the Board should either
allow for additional communication methods or
commit to confirming receipt of emails so that the
sender has confidence that an email was received.
The Board believes that having a single channel for
communications from firms to stop the Rule
2107(h) process promotes efficiency and the proper
administration of the rule, and the Board believes
that email is the optimal method because it is fast,
not unduly burdensome, and in writing. Given the
significance of an email from a firm under Rule
2107(h)(4), the PCAOB staff will confirm receipt of
such an email. This confirmation will provide
assurance to firms regarding the successful delivery
of their email to the PCAOB.
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expedites further communications with
the firm regarding its legal obligations to
file annual and special reports and pay
annual fees, and will facilitate its ability
to institute, as the Board deems
appropriate, a disciplinary proceeding
against the firm.35
In the Proposing Release, the Board
suggested a 30-day period for firms to
send an email to the Registration staff to
stop the withdrawal process. One firm
suggested that a 60-day period might be
more appropriate. The Board has
decided to adopt a 60-day window for
sending an email to the Registration
staff. This extension aims to provide
firms with sufficient time to become
aware of the initiation of the Rule
2107(h) process, which includes
notification of pending withdrawals
posted on its website. The extended
period also allows firms sufficient time
to have internal discussions to
determine whether they wish to remain
registered. It also accommodates any
updates needed regarding the firm’s
primary contact with the Board to
facilitate the email to the Registration
staff.
5. Withdrawal From Registration
If, after the 60-day period in Rule
2107(h), the registered firm has not
emailed the Registration staff, the Board
would be able to treat the firm’s
consecutive failures to file annual
reports and to pay annual fees as a
constructive request for leave to
withdraw from registration, and to deem
the firm’s registration withdrawn.36 The
provision reflects the Board’s judgment
that a firm that has not filed an annual
report and has not paid an annual fee
over a period of at least two consecutive
reporting years may reasonably be
deemed to have made a constructive
request for leave to withdraw from
PCAOB registration. After the Board
deems a registration withdrawn
pursuant to Rule 2107(h), the
Registration staff, consistent with
existing practices, would send written
notification to the firm regarding the
withdrawal. The withdrawal of the firm
from registration would also be reflected
on the Board’s website.
35 If a firm sends an email to the Registration staff
to stop Rule 2107(h)’s withdrawal process, it still
could face potential enforcement action, just like
any other registered firm that violates the PCAOB’s
annual reporting or annual fee requirements.
36 As noted, the intent of Rule 2107(h) is to
identify firms that have ceased to exist, are
nonoperational, or no longer wish to remain
registered. It is not intended as a disciplinary
measure against firms that wish to remain registered
but fail to fulfill their obligations to file annual
reports or pay annual fees. The PCAOB has other
mechanisms to address such noncompliance.
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After a firm’s registration is
withdrawn pursuant to Rule 2107(h),
the consequences would mirror those of
any other withdrawal from PCAOB
registration. Specifically, the withdrawn
firm, like any other unregistered firm,
would be prohibited from engaging in
the preparation or issuance of an audit
report for an issuer or broker-dealer, or
playing a substantial role in the
preparation or furnishing of an audit
report for an issuer or broker-dealer,
other than to issue a consent to the use
of an audit report for a prior period that
it issued while registered.37 A firm that
has had its registration withdrawn
pursuant to Rule 2107(h) would no
longer have to comply with the
PCAOB’s annual reporting or annual fee
requirements. Should such a firm wish
to re-register, it would have to file a new
registration application and pay a
registration fee, as is required of all
firms reapplying after withdrawal. In
reviewing any such registration
application from the firm, the Board has
discretion to consider its past
interactions with the firm during the
firm’s previous registration period. This
includes considering any instances in
which the firm did not file required
reports, including annual reports, or pay
required annual fees.38
Effective Date
The Board has determined that Rule
2107(h), if approved by the
Commission, will take effect initially for
annual reports and annual fees that are
due in 2025, meaning that a registered
firm that does not file an annual report
and does not pay an annual fee in 2025
and in 2026 could have its registration
deemed withdrawn under Rule 2107(h)
beginning in the fall of 2026.
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37 See
Section 102(a) of the Act; Rule 2100; Rule
1001(p)(ii). Note 2 to Rule 2100 clarifies that issuing
a consent to include an audit report for a prior
period does not, in itself, obligate a public
accounting firm to be registered with the PCAOB.
This provision applies to a firm whose registration
has been withdrawn, including a firm whose
registration has been withdrawn pursuant to Rule
2107(h).
38 Consistent with the Board’s current practices,
a history of not filing annual reports or paying
annual fees has, in some cases, led to disapproval
of a withdrawn firm’s subsequent application for reregistration. See, e.g., Registration Application of
Alas Oplas & Co., CPAs, PCAOB Release No. 102–
2024–004 (Aug. 20, 2024); Registration Application
of S S Kothari Mehta and Company, PCAOB
Release No. 102–2021–001 (Nov. 23, 2021);
Registration Application of GYL Decauwer LLP,
PCAOB Release No. 102–2018–001 (June 13, 2018);
Registration Application of David R. Ramos, CPA,
PCAOB Release No. 102–2014–002 (Mar. 6, 2014);
Registration Application of Lawrence Hoffman,
Certified Public Accountant, P.C., PCAOB Release
No. 102–2014–001 (Jan. 28, 2014); Registration
Application of Vail & Knauth LLP, PCAOB Release
No. 102–2013–001 (Feb. 21, 2013).
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The Board initially proposed that
annual reports and annual fees due in
2024 could be considered if Rule
2107(h) was adopted. While most
commenters did not comment on the
proposed amendment’s effective date,
one commenter supported the proposed
effective date. In addition, one firm
suggested that missing annual reports
and unpaid annual fees for 2024 should
be taken into consideration under Rule
2107(h) only if the final rule
amendment took effect prior to the 2024
deadlines for these annual obligations.
In light of the timing of Rule 2107(h)’s
adoption, the Board opted to defer the
initial consideration of annual reports
and annual fees under Rule 2107(h) to
those due in 2025. This approach
ensures that registered firms are
adequately informed of the constructivewithdrawal-request mechanism
introduced by Rule 2107(h).
D. Economic Considerations and
Application to Audits of Emerging
Growth Companies
Economic Analysis
The Board is mindful of the economic
impacts of its rulemaking. This section
discusses the economic baseline, need,
expected economic impacts of the final
rule amendment, and alternative
approaches considered. The Board’s
economic discussion is largely
qualitative in nature due to data
limitations. However, where reasonable
and feasible, the analysis incorporates
quantitative information, including data
from the PCAOB’s RASR system.
The Board sought information
relevant to the economic analysis
throughout this rulemaking 39 and has
carefully considered the comments
submitted. Some commenters expressed
favorable opinions about the economic
analysis and also commented on
specific sections of the economic
analysis such as the baseline, need,
benefit, and cost sections. Some
commenters raised concerns about
certain aspects of the economic analysis.
The Board discussed these comments
and its responses to them in the relevant
sections below.
Baseline
This section establishes the economic
baseline against which the impacts of
the final rule amendment can be
considered. The discussion above
describes important components of the
39 See, e.g., Proposing Release at 44, 52, 56, 60–
61, 62–63. Although the Proposing Release’s
economic analysis also addressed proposed Rule
2400 and the proposed amendment to Form 3, this
economic discussion is limited to the amendment
to Rule 2107 that the Board has adopted.
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baseline, including the current
regulatory framework and certain firms’
consecutive failures to file annual
reports and pay annual fees. This
section discusses two additional
components that inform the Board’s
understanding of the economic baseline:
(1) the PCAOB staff’s analysis of RASR
data and (2) a consideration of relevant
research.
Commenters indicated that the
baseline and the data provided in the
economic analysis are helpful in
understanding the economic impacts of
the proposals.
1. Analysis of RASR Data
To inform the Board’s understanding
of the baseline for the Rule 2107(h)
amendment, the PCAOB staff has
analyzed RASR data to calculate the
number of registered firms with
repeated failures to file annual reports
and pay annual fees (Figure 1 below).
This section examines statistics of
registered firms that failed to file annual
reports and/or pay annual fees. Figure 1
presents the number of registered firms
that failed to file annual reports and/or
pay annual fees for reporting years 2022
and 2023.40 Among all 1,554 registered
firms as of August 31, 2024,41 1,406
firms (90 percent) were required to file
annual reports and pay annual fees for
reporting years 2022 and 2023.42 Of
those 1,406 registered firms, 84 firms
failed for both years to file annual
reports, 84 firms failed for both years to
pay annual fees, and 80 firms failed for
those two reporting years to both pay
annual fees and file annual reports.43
The overall rate of registered firms that
failed to both file annual reports and
pay annual fees for reporting years 2022
40 As previously noted, annual report (Form 2)
reporting years span from April 1 of the previous
year to March 31 of the reporting year. The 2022
reporting year covers April 1, 2021, to March 31,
2022. The 2023 reporting year covers April 1, 2022,
to March 31, 2023.
41 The PCAOB staff based this analysis of
reporting years 2022 and 2023 using August 31,
2024, as the cutoff date. As discussed above, the
PCAOB did not include data from reporting year
2024.
42 Firms with pending withdrawal requests are
excluded from the analysis. Also, as of August 31,
2024, some registered firms were not required to
pay annual fees or file annual reports for reporting
years 2022 and 2023. For example, firms that
registered after March 31, 2023, were not required
to file the 2023 annual report or pay the 2023
annual fee.
43 Four firms failed to file annual reports for both
years but paid an annual fee for at least one of the
years, and another four firms failed to pay annual
fees for both years but filed an annual report for at
least one of the years. The PCAOB does not have
access to specific information on the reasons for
this partial noncompliance. The PCAOB notes that
these firms would not meet the criteria for
withdrawal under Rule 2107(h).
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and 2023 is just under six percent (80
out of 1,406).
Ninety-nine percent of the firms that
failed to file annual reports and pay
annual fees for both years are nonaffiliate firms (‘‘NAFs’’) (79 out of 80),
which tend to be smaller firms.44 Thirty-
and 12 percent of non-U.S. NAFs failed
to file annual reports and pay annual
fees for both years. In comparison, no
U.S. GNFs and only one non-U.S. GNF
failed to file annual reports and pay
annual fees for both years.
three percent of these 80 firms (26 firms)
are U.S. NAFs and 66 percent (53 firms)
are non-U.S. NAFs; thus non-U.S. NAFs
account for twice as many instances of
failing to both file annual reports and
pay annual fees for both years. Within
firm types, four percent of U.S. NAFs
FIGURE 1—NUMBER OF REGISTERED FIRMS THAT DID NOT FILE ANNUAL REPORTS AND/OR PAY ANNUAL FEES AS OF
AUGUST 31, 2024
Firms required
to file annual
reports and pay
annual fees for
reporting years
2022 and 2023
Firms ............................................
By firm type:
U.S. GNF ..............................
Non-U.S. GNF ......................
U.S. NAF ...............................
Non-U.S. NAF .......................
Firms that did
not file annual
reports for
reporting years
2022 and 2023
Firms that both
did not file
annual reports
and did not pay
annual fees for
reporting years
2022 and 2023
Firms that did
not pay annual
fees for
reporting years
2022 and 2023
Percentage of
firms that both
did not file
annual reports
and did not pay
annual fees for
reporting years
2022 and 2023
(%)
1,406
84
84
80
6
6
323
633
444
0
1
27
56
0
1
26
57
0
1
26
53
0
0.3
4
12
Source: RASR.
The PCAOB staff has reviewed
literature related to the final rule
amendment. To the PCAOB’s
knowledge, no studies specifically
address the economic consequences of
situations where an audit firm has
ceased to exist, is nonoperational, or no
longer wishes to remain registered—as
indicated by consecutive delinquencies
in its annual reporting and annual fee
obligations—and yet continues to
appear as registered on the PCAOB
website. Additionally, there is a lack of
research on the effects of withdrawing
such firms from registration.45
The presence of registered firms that
have ceased to exist, are nonoperational,
or no longer wish to remain registered
impacts the utility and value of the
registration data on the PCAOB’s
website and in its internal records. First,
there is a significant misalignment: the
PCAOB’s registration records continue
to list these firms as registered, which
implies they exist, are operational, and
wish to remain registered, despite their
actual statuses potentially being to the
contrary—nonexistent, nonoperational,
or no longer wishing to remain
registered. Second, these firms do not
file annual reports, resulting in outdated
information about their existence,
operational status, and scope of
practice. Third, while it is more
common for the PCAOB to have limited
or no information about the operational
status of registered firms that have
stopped filing annual reports and
paying annual fees, there are
exceptional circumstances where the
PCAOB staff is aware of information,
such as the death of a sole proprietor,
indicating that a registered firm has
ceased to exist or become
nonoperational. In these instances,
despite having information that the firm
has ceased operations, the PCAOB
currently lacks a mechanism to adjust
its registration records to reflect this
reality. This limitation introduces a
discrepancy between the PCAOB staff’s
internal knowledge and the information
reflected on the PCAOB’s website.
Academic research provides insights
into the broader implications of lowerquality information in the registration
data. Studies indicate that higher
information processing costs—arising
from the need to verify and interpret
potentially lower-quality information on
registered firms—can lead to
inefficiencies in information search
costs.46 Currently, the inclusion of
persistently delinquent firms in the
44 NAFs are accounting firms registered with the
Board that are not global network firms (‘‘GNFs’’).
GNFs are the member firms of the six global
accounting firm networks that include the largest
number of PCAOB-registered non-U.S. firms (BDO
International Ltd., Deloitte Touche Tohmatsu Ltd.,
Ernst & Young Global Ltd., Grant Thornton
International Ltd., KPMG International Cooperative,
and PricewaterhouseCoopers International Ltd.).
The discussion in this release uses ‘‘U.S. GNF’’ to
refer to a GNF member firm based in the United
States, and ‘‘non-U.S. GNF’’ to refer to a GNF
member firm based outside the United States.
Similarly, ‘‘U.S. NAF’’ refers to a NAF firm based
in the United States, and ‘‘non-U.S. NAF’’ refers to
a NAF firm based outside the United States.
45 The PCAOB did not receive any comments
regarding additional data or academic studies in
response to its request for such information in the
Proposing Release.
46 See, e.g., E. Blankespoor, E. deHaan, and I.
Marinovic, Disclosure processing costs, investors’
information choice, and equity market outcomes: A
review, 70 Journal of Accounting and Economics 1
(2020). Blankespoor et al. (2020) study how
information processing costs—such as the costs of
monitoring, acquiring, and integrating public
information—impact investor behavior and market
outcomes. They argue that high processing costs,
such as acquiring and integrating information into
decision-making, can discourage stakeholders from
engaging with available data, leading to inefficient
outcomes. Extending these findings to the PCAOB
registration context, it suggests that removing
persistently delinquent firms from registration
could decrease information processing costs by
lowering the costs of assessing the operational
status of these firms. Thus, improving the overall
quality of information available could reduce
inefficiencies in audit search decisions.
The PCAOB staff’s analysis of the 80
registered firms that failed to file annual
reports and pay annual fees for
reporting years 2022 and 2023 (reflected
in Figure A above) shows a consistent
pattern over multiple reporting years.
Notably, a majority of these firms have
failed to file annual reports and pay
annual fees for more than two
consecutive reporting years. For
example, Figure A shows that 58 of
these 80 firms failed both to file an
annual report and to pay an annual fee
for reporting year 2019, and these 58
firms continued to neglect these
obligations for five consecutive years,
from reporting years 2019 to 2023.
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2. Consideration of Relevant Research
and Implications
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PCAOB’s registration list could impose
additional search costs, as the
information available to stakeholders is
less useful. Additionally, in
circumstances where the PCAOB has
information indicating that certain firms
may no longer exist, are nonoperational,
or no longer wish to remain registered,
the PCAOB lacks a mechanism to
withdraw these firms from registration.
Without a mechanism to update PCAOB
registration records to reflect this
information, search costs could remain
elevated for stakeholders attempting to
verify the operational status of PCAOBregistered firms.
For stakeholders such as audit
committees of potential clients assessing
a firm’s suitability as an auditor, these
higher information processing costs can
delay their analysis and potentially
impact the efficiency of audit-related
decisions. Improving the quality of the
PCAOB’s registration records by
removing persistently delinquent firms
would reduce stakeholders’ information
processing costs and better support
well-informed decision-making in the
audit market.
Partners or former partners of audit
firms are typically aware of their firm’s
operational status—including whether
the firm no longer exists, is
nonoperational, or no longer wishes to
remain registered. Additionally, the
PCAOB staff sometimes gathers
anecdotal information through its
interactions with firms and their
personnel, further informing its
understanding of a firm’s operational
status. However, such information
bearing upon a registered firm’s
operational status may not be readily
available to the public. Together, these
discrepancies obscure the true status of
these firms, resulting in a gap between
what the PCAOB staff knows internally
and what is publicly available on the
PCAOB website. Additionally, there are
gaps between what firms, including
their partners or former partners, know
about their operational status and what
is accessible to the public on the
PCAOB’s website.
Currently, without a mechanism to
remove consecutively delinquent firms
from registration, the PCAOB lacks a
means to accurately convey the status of
these firms to stakeholders, which could
result in less-informed decisions.
Need and How the Changes Would
Address the Need
This section discusses the problem
that needs to be addressed and explains
how the final rule amendment is
expected to address it.
The PCAOB currently has no effective
and efficient procedural mechanism to
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withdraw from registration firms that
are consecutively delinquent with
respect to filing required annual reports
and paying mandatory annual fees. As
discussed in Figure 1, PCAOB staff
analysis indicates that as of August 31,
2024, 80 firms did not file annual
reports and did not pay annual fees for
both the 2022 and 2023 reporting years.
Many of these firms may be defunct.
The presence of such firms on the
PCAOB’s registration records may not
only disrupt the PCAOB’s regulatory
objectives, such as maintaining an
accurate public record of operational
registered firms that wish to remain
registered and efficiently using PCAOB
staff time and resources, which
diminishes the Board’s ability to fulfill
its investor protection mission, but
could also adversely impact investor
confidence in the capital markets. While
their number is small and there is no
indication that these firms are currently
issuing audit reports on which investors
rely, the fact that a firm may fail to
comply with fundamental obligations
incident to registration and yet remain
registered could lessen the significance
of PCAOB registration in the market.
Firms that are complying with the
annual reporting and fee requirements
may form a mistaken belief that they
also may be able to forgo compliance
with their reporting and fee obligations
when they observe that these
consecutively delinquent firms remain
registered with the Board. It is also
possible that this conduct could
persist,47 necessitating resolution to
maintain confidence in the capital
markets.
In addition, PCAOB staff spend time
and resources seeking to contact these
firms year after year so that they will
comply with their basic legal
obligations, including annual reporting
and the payment of annual fees that
contribute to funding the PCAOB’s
registration program. Also, utilizing
enforcement mechanisms to pursue
these firms would not always be
feasible, and even where feasible, would
further strain staff time and resources.
These firms’ inattention, inactivity, or
inanimacy would cause the PCAOB to
incur recurring costs with no expected
improvement in sight.
Rule 2107(h) would address the need
to make the PCAOB’s oversight more
47 The accumulation of possibly defunct or
nonoperational firms on the PCAOB’s registration
list potentially reflects a growing issue. See Figure
A and the accompanying description. If a
significant portion of all registered firms is
perceived as never filing annual reports or paying
annual fees without apparent consequence, it risks
creating a perception of widespread noncompliance
and PCAOB inaction.
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effective and efficient by providing an
effective procedural mechanism to
withdraw from PCAOB registration
firms that have ceased to exist or are
otherwise defunct, or no longer wish to
remain registered.
Commenters were generally
supportive of the proposed amendment
to Rule 2107 and stated that they
understood the rationale for the
amendment to the rule. In particular,
one commenter expressed agreement
that the proposed amendment to Rule
2107 would result in more efficient use
of PCAOB resources.
Furthermore, commenters agreed that
the proposed amendment to Rule
2107(h) would address the need to make
the PCAOB’s oversight more effective
and efficient. One commenter agreed
that the amendment generally will
accomplish the objective of providing a
mechanism for the Board to remove
from the PCAOB’s registration records
firms that are delinquent in filing their
annual reports with the PCAOB and
paying their annual fees. Another
commenter indicated the proposed
amendment to Rule 2107 would provide
the PCAOB with a mechanism to keep
its registration records updated,
providing issuers and broker-dealers in
the process of selecting an appropriate
accounting firm greater confidence that
any accounting firm they consider
hiring is operational and wishes to
remain registered with the PCAOB.
In general, commenters did not
introduce arguments or data that caused
the Board to change its assessment of
the need for the final rule amendment.
The Board believes the final rule
amendment addresses the problem
discussed above, yielding the economic
impacts discussed further below.
Economic Impacts
This section discusses the expected
benefits and costs of the final rule
amendment and potential unintended
consequences. One commenter
expressed agreement with the benefit
and cost evaluation provided in the
Proposing Release and stated that it was
not currently aware of any additional
academic studies or data related to the
economic impacts of the proposals that
could be used to quantify the benefits
and costs.
1. Benefits
Rule 2107(h) would provide an
effective procedural mechanism to
withdraw from PCAOB registration
firms that have ceased to exist, are
nonoperational, or no longer wish to
remain registered. Therefore, it would
facilitate the PCAOB’s regulatory
objectives discussed above by enabling
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the public and the PCAOB to have a
higher quality list of registered firms.
Such an improvement could provide
informational benefits to investors,
audit committees, and other
stakeholders by reducing their
information search and processing costs.
Additionally, it would reduce the gaps
in information about the operational
status of registered firms.
Additionally, Rule 2107(h) would
reduce resources spent by the PCAOB in
efforts to bring delinquent firms into
compliance with the annual reporting
and fee payment requirements. This
would allow the PCAOB to more
effectively allocate PCAOB staff
resources that are currently used to
attempt to contact delinquent firms,
which could enhance the PCAOB’s
ability to advance its investor protection
mission. One commenter agreed that, by
allowing the PCAOB to reallocate staff
resources away from contacting
delinquent firms, Rule 2107(h) would
enhance the PCAOB’s ability to further
its mission.
Further, removing firms that
consistently fail to meet their annual
reporting and annual payment
obligations will help promote the
integrity of the list of registered firms.
By treating consecutive delinquencies as
a constructive request for leave to
withdraw, the PCAOB may foster a
sense of fairness among all registered
firms, and a level playing field where
compliance with basic requirements,
such as filing annual reports and paying
annual fees, is maintained.
Given the nature of these benefits, the
PCAOB does not expect a substantial
influence on efficiency, competition, or
capital formation as a result of the rule
amendment.
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2. Costs
Rule 2107(h) would impose potential
incremental costs only on operating
firms with at least two years of
consecutive delinquencies. As
discussed above, 80 firms currently
meet the criterion for Rule 2107(h)’s
withdrawal process. For firms that no
longer exist, are nonoperational, or no
longer wish to remain registered, the
Board does not anticipate any costs with
respect to being removed from the
PCAOB’s registration records.48
48 As discussed above, among the 80 firms that
meet the criterion for Rule 2107(h)’s constructivewithdrawal-request process based on the 2022 and
2023 reporting years, 58 had not filed annual
reports and had not paid annual fees since at least
2019. The PCAOB staff’s analysis has found that
only one of the 80 firms has any indication that it
may have performed services requiring registration
in recent years. Should this firm’s noncompliance
persist, it could be subject to the Rule 2107(h)
constructive-withdrawal-request process and could
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For any firms that wish to remain
registered, they would incur the cost of
stopping the withdrawal process under
Rule 2107(h), by preparing and
submitting an email to the PCAOB
notifying the staff of their desire to
remain registered with the Board as
directed in the Notice of Delinquency
and Impending Withdrawal within the
60-day period.
Rule 2107(h) includes several
safeguards to protect firms that wish to
remain registered but may be unaware
that the withdrawal process has
commenced. These include multiple
forms of notice, a 60-day window
during which firms can stop the
withdrawal process, and a
straightforward process to stop the
withdrawal. These measures should
significantly reduce the likelihood of a
firm being withdrawn under Rule
2107(h) without its knowledge, which
should attenuate any potential costs or
disruptions associated with an
unexpected withdrawal.49
The Board did not receive specific
comments on the costs of Rule 2107(h).
However, a commenter expressed the
belief that the expected implementation
costs of the proposals as a whole would
be minimal, which would result in a net
positive economic impact. Based on the
above discussion of the incremental
costs expected to result from this
amendment, the Board does not
anticipate a significant impact on
efficiency, competition, or capital
formation.
3. Potential Unintended Consequences
In addition to the benefits and costs
discussed above, the final rule
amendment could have unintended
economic consequences. One
commenter noted that the potential
unintended consequences discussed in
the proposals are adequate. There were
no other comments related to potential
unintended consequences with respect
to the proposed amendment to Rule
2107. The following discussion
describes potential unintended
consequences considered by the Board
and, where applicable, factors that
mitigate those potential consequences.
utilize the rule’s safeguards to stop the withdrawal
process if it wishes to remain registered.
49 While unlikely, there exists a possibility that a
firm might unexpectedly discover that its
registration has been withdrawn under Rule
2107(h), despite the rule’s safeguards. Should this
occur, the firm would need to undertake the process
of re-registering with the PCAOB if it wished to
provide services requiring registration, thereby
incurring the costs associated with registration.
Additionally, the firm could lose business from
issuers or broker-dealers that might have engaged
the firm’s audit services had it maintained its
PCAOB registration.
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Rule 2107(h) provides a new
procedural mechanism that would make
consecutively delinquent registered
firms eligible for withdrawal from
PCAOB registration. Because this
mechanism does not require affirmative
action by a firm, an unintended
consequence could arise if a firm was
withdrawn from registration contrary to
the firm’s wishes. This could potentially
impact clients, potential clients, and the
public. However, as noted above, Rule
2107(h) includes several safeguards—
including multiple forms of notice and
a straightforward process to stop the
withdrawal process—that should
significantly reduce the likelihood of
such an occurrence. Should such an
exceptional situation arise, the firm has
the option to reapply for registration
and present to the PCAOB any special
circumstances that led to the firm’s
noncompliance with the PCAOB’s
annual reporting and fee payment rules
and its inability to stop the Rule 2107(h)
withdrawal procedure.50
Alternatives Considered
The Board considered alternatives to
the final rule amendment, taking into
account feedback from commenters on
alternative approaches considered in the
Proposing Release, as well as other
alternatives suggested by commenters.
This section considers all of the
alternative approaches and discusses
what the Board believes to be the most
reasonable alternatives.
Rather than a constructivewithdrawal-request approach to
delinquent annual reports and annual
fees, the Board considered an expedited
enforcement approach. Although
issuing an order imposing a disciplinary
sanction on these firms, upon a finding
of consecutive violations of the Board’s
annual reporting and annual payment
requirements, is a possibility, instituting
and resolving an expedited disciplinary
proceeding would require significantly
more PCAOB staff time and other Board
resources than the approach outlined in
Rule 2107(h).51 Furthermore, revocation
50 While unlikely, it is conceivable that, despite
the PCAOB’s best efforts to provide notice, a firm
deemed withdrawn under Rule 2107(h) may issue
an audit report, or update or dual-date a previouslyissued report, that gets included in a filing with the
Commission. In such a scenario, the Commission
has authority to bring an enforcement action against
the firm; the Board may consider such conduct if
the firm applies to re-register; and issuer and
broker-dealer clients of the firm may incur costs to
engage a new accounting firm, as well as
reputational costs.
51 In such litigation, even in circumstances where
the firm is defunct, the hearing officer may need to
address service issues (including for non-U.S.
firms), issue a show-cause order, enter default (after
DEI files a motion), and issue an initial decision
specifying and justifying sanctions. Such litigation
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would take significantly longer as
compared to the approximately 60 days
it would take following the approach
outlined in Rule 2107(h). Therefore, the
Board has adopted the constructivewithdrawal-request approach largely as
it was originally proposed.
Some commenters stated they would
be supportive of constructive
withdrawal requests if a firm fails to file
annual reports or fails to pay annual
fees. The Board believes the dual
condition of both failure to file annual
reports and failure to pay annual fees
appropriately identifies firms that cease
to exist, are nonoperational, or no longer
wish to remain registered. A firm that
has done one or the other but not both
implies some level of activity at the firm
and wish to remain registered,
indicating that other tools in the
PCAOB’s toolkit may be available to
promote compliance.
One commenter suggested reducing
the threshold for constructive
withdrawal requests to one year of
noncompliance, but the Board
concluded that this could increase the
risk of withdrawing from registration
operational firms that wish to remain
registered.52
The Board believes that both of these
alternative processes suggested by
commenters would enhance the risk of
a withdrawal from registration of
operational firms that wish to remain
registered. The procedural safeguards in
Rule 2107(h), including the timing
parameters, help ensure that the Rule
2107(h) process does not impose a
significant burden on firms that
inadvertently fail to comply with the
annual reporting and annual payment
requirements or on other entities
(clients, investors, etc.). The
requirements set forth in Rule 2107(h)
provide firms sufficient notice and a
clear process that governs how and
when a firm’s registration would be
also consumes significant DEI staff time, in light of
the production requirements of PCAOB Rule 5422,
Availability of Documents For Inspection and
Copying, as well as the motion practice and briefing
that is expected on sanctions. The adopted
approach would avoid these delays.
52 As discussed above, the minimum amount of
time that a firm must be delinquent in filing annual
reports and paying annual fees before meeting the
threshold of two consecutive reporting years is 13
months. In contrast, under a framework that
considers only a single reporting year’s
noncompliance, a firm would be eligible for the
constructive-withdrawal-request mechanism after
only one month of delinquency, spanning from the
firm’s failure to file an annual report by June 30 of
the reporting year to the firm’s failure to pay the
annual fee by July 31 of the same reporting year.
The Board believes that such a brief period of
delinquency is not sufficient to indicate that a firm
has ceased to exist, is nonoperational, or no longer
wishes to remain registered.
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withdrawn based on a constructive
withdrawal request.
In response to a commenter’s
suggestion, the Board extended from 30
days to 60 days the time that these firms
have to decide whether to send an email
to the Registration staff so that firms can
remain registered. This change may
incrementally reduce the likelihood of
withdrawals from registration of a firm
that is operational and wishes to remain
registered.
Special Considerations for Audits of
Emerging Growth Companies
Pursuant to Section 104 of the
Jumpstart Our Business Startups
(‘‘JOBS’’) Act, rules adopted by the
Board subsequent to April 5, 2012,
generally do not apply to the audits of
emerging growth companies (‘‘EGCs’’),
as defined in Section 3(a)(80) of 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.’’ 53 As a result of the JOBS
Act, the rules that the Board adopts are
generally subject to a separate
determination by the Commission
regarding their applicability to audits of
EGCs.
The final rule amendment does not
impose any additional requirements on
emerging growth company audits.
Accordingly, the Board believes that
Section 103(a)(3)(C) of the Act does not
apply. Nevertheless, the Board has
included this analysis to inform the
rulemaking. The discussion of benefits,
costs, and unintended consequences
above generally applies to audits of
EGCs.
To inform consideration of the
application of PCAOB rules and
standards to audits of EGCs, PCAOB
staff prepares a white paper annually
that provides general information about
characteristics of EGCs.54 As of the
53 See Public Law 112–106 (Apr. 5, 2012). Section
103(a)(3)(C) of the Act, as added by Section 104 of
the JOBS Act, also provides that any rules of the
Board requiring (1) mandatory audit firm rotation
or (2) 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 of the issuer (auditor discussion and
analysis) shall not apply to an audit of an EGC. The
final rule amendment does not fall within either of
these two categories.
54 See PCAOB Office of Economic and Risk
Analysis, Characteristics of Emerging Growth
Companies and Their Audit Firms at November 15,
2022 (Feb. 20, 2024) (‘‘EGC Staff White Paper’’),
available at https://assets.pcaobus.org/pcaob-dev/
docs/default-source/economicandriskanalysis/
projectsother/documents/white-paper-oncharacteristics-of-emerging-growth-companies-asof-nov-15-2022.pdf?sfvrsn=a8294f3_4.
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Frm 00140
Fmt 4703
Sfmt 4703
92225
November 15, 2022 measurement date,
PCAOB staff identified 3,031 companies
that self-identified with the Commission
as EGCs and filed audited financial
statements in the 18 months preceding
the measurement date.55
EGCs are likely to be newer
companies, and their audit committees
may have limited experience in seeking
and selecting PCAOB-registered public
accounting firms. The removal of
consecutively delinquent firms from the
PCAOB registration database, as
facilitated by Rule 2107(h), could
enhance the quality of the information
available and reduce information search
costs, thereby aiding the decisionmaking of these stakeholders. As for the
costs associated with the final rule
amendment, which are likely to be
incremental for operating firms that
wish to remain registered, the Board has
no reason to believe that registered firms
providing services to EGCs will incur
costs that are greater than those incurred
by firms providing services to nonEGCs.
Commenters agreed that the proposals
generally should apply to audits of
EGCs and that excluding the application
of the proposals from audits of EGCs
would be inconsistent with protecting
the public interest.
Accordingly, and for the reasons
explained above, the Board has
requested that the Commission
determine, to the extent that Section
103(a)(3)(C) of the Act applies, 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 final rule
amendment to audits of EGCs.
III. Date of Effectiveness of the
Proposed Rules and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
55 The EGC Staff White Paper uses a lagging 18month window to identify companies as EGCs.
Please refer to the ‘‘Current Methodology’’ section
in the Staff White Paper for details. Using an 18month window enables staff to analyze the
characteristics of a fuller population in the EGC
Staff White Paper but may tend to result in a larger
number of EGCs being included for purposes of the
present EGC analysis than would alternative
methodologies. For example, an estimate using a
lagging 12-month window would exclude some
EGCs that are delinquent in making periodic filings.
An estimate as of the measurement date would
exclude EGCs that have terminated their
registration, or that have exceeded the eligibility or
time limits. In the EGC Staff White paper, PCAOB
staff identified 263 registered audit firms that
issued audit reports for the 3,031 EGCs as of the
November 15, 2022 measurement date. None of
these 263 audit firms are among the 80 firms that
failed to file annual reports and pay annual fees for
reporting years 2022 and 2023.
E:\FR\FM\21NON1.SGM
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92226
Federal Register / Vol. 89, No. 225 / Thursday, November 21, 2024 / Notices
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Board consents, the
Commission will:
(A) By order approve or disapprove
such proposed rules; or
(B) Institute proceedings to determine
whether the proposed rules should be
disapproved.
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 Act. Comments may be
submitted by any of the following
methods:
lotter on DSK11XQN23PROD with NOTICES1
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/pcaob); or
• Send an email to rule-comments@
sec.gov. Please include PCAOB–2024–
05 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–1090.
All submissions should refer to
PCAOB–2024–05. 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 website (https://www.sec.gov/
rules/pcaob). 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 website
viewing and printing in the
Commission’s Public Reference Room,
100 F Street NE, Washington, DC 20549,
on official business days between the
hours of 10 a.m. and 3 p.m. Copies of
such filing will also be available for
inspection and copying at the principal
office of the PCAOB. Do not include
personal identifiable information in
submissions; you should submit only
information that you wish to make
available publicly.
VerDate Sep<11>2014
18:02 Nov 20, 2024
Jkt 265001
We may redact in part or withhold
entirely from publication submitted
material that is obscene or subject to
copyright protection. All submissions
should refer to PCAOB–2024–05 and
should be submitted on or before
December 12, 2024.
By the Commission.
Vanessa A. Countryman.
Secretary.
[FR Doc. 2024–27247 Filed 11–20–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
35387; File No. 812–15188]
Zscaler, Inc.
November 15, 2024.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice.
AGENCY:
Notice of application for an order
under Section 3(b)(2) of the Investment
Company Act of 1940 (‘‘Act’’).
APPLICANT: Zscaler, Inc.
SUMMARY OF APPLICATION: Applicant
seeks an order under Section 3(b)(2) of
the Act declaring it to be primarily
engaged in a business other than that of
investing, reinvesting, owning, holding
or trading in securities. Applicant states
that it is in the business of providing,
improving, and developing cloud
security solutions to businesses.
FILING DATES: The application was filed
on December 28, 2020, and amended on
May 11, 2021, July 28, 2021, January 6,
2022, July 31, 2023, and September 13,
2024.
HEARING OR NOTIFICATION OF HEARING:
An order granting the requested relief
will be issued unless the Commission
orders a hearing. Interested persons may
request a hearing by emailing the
Commission’s Secretary at SecretarysOffice@sec.gov and serving applicants
with a copy of the request, by email if
an email address is listed for the
relevant Applicant below, or personally
or by mail, if a physical address is listed
for the relevant Applicant below.
Hearing requests should be received by
the Commission by 5:30 p.m. on
December 10, 2024, and should be
accompanied by proof of service on the
applicants, in the form of an affidavit,
or for lawyers, a certificate of service.
Pursuant to rule 0–5 under the Act,
hearing requests should state the nature
of the writer’s interest, any facts bearing
upon the desirability of a hearing on the
matter, the reason for the request, and
PO 00000
Frm 00141
Fmt 4703
Sfmt 4703
the issues contested. Persons who wish
to be notified of a hearing may request
notification by emailing the
Commission’s Secretary at SecretarysOffice@sec.gov.
ADDRESSES: The Commission:
Secretarys-Office@sec.gov. Applicant:
Remo Canessa, Chief Financial Officer,
and Robert Schlossman, Esq., Chief
Legal Officer, Zscaler, Inc., at Treasury@
zscaler.com; Kevin R. Bettsteller, Esq.,
at kbettsteller@gibsondunn.com.
FOR FURTHER INFORMATION CONTACT:
Adam Lovell, Senior Counsel, or Terri
G. Jordan, Branch Chief, at (202) 551–
6825 (Division of Investment
Management, Chief Counsel’s Office).
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. For Applicant’s
representations, legal analysis, and
conditions, please refer to Applicant’s
fifth amended and restated application,
dated September 13, 2024, which may
be obtained via the Commission’s
website by searching for the file number
at the top of this document, or for an
Applicant using the Company name
search field, on the SEC’s EDGAR
system. The SEC’s EDGAR system may
be searched at https://www.sec.gov/
edgar/searchedgar/legacy/
companysearch.html. You may also call
the SEC’s Public Reference Room at
(202) 551–8090.
Applicant’s Representations
1. Applicant states that it is a
Delaware corporation formed in 2007
that, directly and through its whollyowned subsidiaries,1 is engaged in the
business of providing, improving, and
developing cloud security solutions to
businesses.
2. Applicant states that its business is
highly capital intensive, requires R&D of
new technologies, and does not involve
the Applicant acquiring or retaining
significant ‘‘hard’’ operating assets.
Applicant states that it maintains
significant cash reserves that it seeks to
invest for purposes of conserving capital
and providing liquidity until the funds
are used in its cloud-based services and
technology business. As described more
fully in the application, Applicant states
that it requires significant liquid capital
primarily to: (i) fund R&D for new
products and services, (ii) advance the
commercialization of its business, (iii)
otherwise fund its operations, and (iv)
make other capital expenditures in
keeping with the growth of the
1 Applicant states that its 28 wholly-owned
subsidiaries generally engage in sales and marketing
or research and development (‘‘R&D’’) activities in
their respective jurisdictions.
E:\FR\FM\21NON1.SGM
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Agencies
[Federal Register Volume 89, Number 225 (Thursday, November 21, 2024)]
[Notices]
[Pages 92213-92226]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-27247]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101644; File No. PCAOB-2024-05]
Public Company Accounting Oversight Board; Notice of Filing of
Proposed Rules on Constructive Requests To Withdraw From Registration
November 15, 2024.
Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002
(``Sarbanes-Oxley,'' or the ``Act''), notice is hereby given that on
Thursday, November 14, 2024, the Public Company Accounting Oversight
Board (the ``Board'' or the ``PCAOB'') filed with the Securities and
Exchange Commission (the ``Commission'' or the ``SEC'') the proposed
rules described in Items I and II below, which items have been prepared
by the Board. The Commission is publishing this notice to solicit
comments on the proposed rules from interested persons.
I. Board's Statement of the Terms of Substance of the Proposed Rules
On November 14, 2024, the Board adopted Constructive Requests to
Withdraw from Registration (``proposed rules''). The text of the
proposed rules appears in Exhibit A to the SEC Filing Form 19b-4 and is
available on the Board's website at https://pcaobus.org/about/rules-rulemaking/rulemaking-dockets/docket-054 and at the Commission's Public
Reference Room.
II. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rules
In its filing with the Commission, the Board included statements
concerning the purpose of, and basis for, the proposed rules and
discussed any comments it received on the proposed rules. The text of
these statements may be examined at the places specified in Item IV
below. The Board prepared summaries, set forth in sections A, B, and C
below, of the most significant aspects of such statements. In addition,
to the extent that Section 103(a)(3)(C) of the Act applies to the
proposed rules, the Board is requesting that the Commission approve the
proposed rules, pursuant to that provision, for application to audits
of emerging growth companies (``EGCs''), as that term is defined in
Section 3(a)(80) of the Securities Exchange Act of 1934 (``Exchange
Act''). The Board's request is set forth in section D.
A. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rules
(a) Purpose
To further enhance the PCAOB's registration program, the Board
adopted an amendment to its rule regarding withdrawals from
registration. The amendment establishes a new procedural mechanism that
will enable the Board to address situations in which a registered firm
has ceased to exist, is nonoperational, or no longer wishes to remain
registered, as demonstrated by its failures to file annual reports
(PCAOB Form 2, Annual Report) and pay annual fees for at least two
consecutive reporting years. Until now, a firm could be removed from
PCAOB registration only if the Board either (1) authorized a withdrawal
from registration based on firm-initiated withdrawal request or (2)
imposed a disciplinary sanction revoking the firm's registration. The
amendment the Board adopted introduces a third procedural mechanism for
removing a firm from PCAOB registration. It builds on the existing
framework of firm-initiated withdrawal requests under PCAOB Rule 2107,
Withdrawal from Registration, by creating a process that treats
consecutive delinquencies as a constructive request from a firm for
leave to withdraw from registration. New paragraph (h) (``Constructive
Withdrawal Requests'') of Rule 2107 will allow the Board, under certain
conditions, to update its registration records by (1) treating a firm's
failure both to file annual reports and to pay annual fees for at least
two consecutive
[[Page 92214]]
reporting years as a constructive request by the firm for leave to
withdraw from registration, and (2) deeming the firm's registration
withdrawn.
If approved by the Commission, Rule 2107(h) will take effect
initially for annual reports and annual fees that are due in 2025,
meaning that a registered firm that does not file an annual report and
does not pay an annual fee for both the 2025 and 2026 reporting years
could be deemed withdrawn from registration under Rule 2107(h)
beginning in the fall of 2026.
See Exhibit 3 for additional discussion of the purpose of this
project.
(b) Statutory Basis
The statutory basis for Rule 2107(h) is Title I of the Act, and,
specifically, Section 102 of the Act (registration) and Sections
101(c)(1), (c)(5), (f)(6), and (g)(1) of the Act (duties, powers, and
rules of the Board). Rule 2107(h) directly relates to the Board's
statutory duties and the purposes for its establishment.
B. Board's Statement on Burden on Competition
Not applicable. The Board's consideration of the economic impacts
of the proposed rules is discussed in section D below.
C. Board's Statement on Comments on the Proposed Rules Received From
Members, Participants or Others
The Board initially released the proposed rules for public comment
in PCAOB Release No. 2024-001 (February 27, 2024).\1\ The Board
received 18 written comment letters relating to its initial proposed
rules. See Exhibits 2(a)(B) and 2(a)(C). The Board adopted its proposed
amendment to Rule 2107 with modifications to address comments it
received. The Board is continuing to consider next steps relating to
other aspects of the initial proposed rules that the Board did not
adopt on November 14, 2024. The Board has carefully considered comments
received on proposed Rule 2107(h). The Board's response to the comments
it received, and the changes it made to the initial proposed rules in
response to the comments received, are discussed below.
---------------------------------------------------------------------------
\1\ See Proposals Regarding False or Misleading Statements
Concerning PCAOB Registration and Oversight and Constructive
Requests to Withdraw from Registration, PCAOB Release No. 2024-001
(Feb. 27, 2024) (``Proposing Release'').
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Background
Each year, a registered firm must file an annual report with the
Board and pay an annual fee to the Board.\2\ Despite repeated
reminders, a consistent group of firms neither files annual reports nor
pays annual fees each year. The PCAOB's Registration staff devotes
resources each year to sending multiple communications to these firms,
but these efforts have repeatedly failed to yield the required annual
reports and annual fees from this persistent group of delinquent firms.
As of August 31, 2024, data show that 80 registered firms did not file
annual reports and did not pay annual fees for both the 2022 and 2023
reporting years.\3\
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\2\ See PCAOB Rule 2200, Annual Report; PCAOB Rule 2202, Annual
Fee.
\3\ Figure 3 of the Proposing Release reflected 87 registered
firms, as of December 31, 2023, that did not file annual reports and
did not pay annual fees for both the 2022 and 2023 reporting years.
By August 31, 2024, this number decreased to 80 firms. Five of the
original 87 firms withdrew from registration in 2024, removing them
from PCAOB registration as of August 31, 2024. Based on the PCAOB
staff's analysis of data from Audit Analytics and PCAOB Form AP,
Auditor Reporting of Certain Audit Participants, there is no
indication that these five firms have performed any services for
issuers requiring PCAOB registration between January 1, 2021, and
August 31, 2024. Additionally, two of the original 87 firms
addressed their prior noncompliance by filing their annual reports
and paying their annual fees for the 2022 and 2023 reporting years
after the due dates had passed, thus these firms are also no longer
included in the analysis. Although five firms withdrew from
registration and two firms are no longer delinquent, it is difficult
to attribute this behavior directly to the Proposing Release.
Moreover, this subset of firms is small compared to the 92 percent
of firms (80 out of 87) that continue to exhibit a pattern of
delinquency spanning at least two consecutive reporting years.
---------------------------------------------------------------------------
To be clear, the 80 registered firms in question were not merely
late in filing their annual reports and paying their annual fees by the
respective due dates. These firms have not filed annual reports and
have not paid annual fees at all for both the 2022 and 2023 reporting
years. It is possible that many of these firms either may no longer
exist or may not understand that they remain registered with the PCAOB,
given their consecutive failures to file annual reports and pay annual
fees. The PCAOB staff believes that these firms include, for example,
sole proprietorships that remain registered even though the sole
proprietor has died; firms that registered with the Board years ago but
now appear to be defunct; and small firms, often in foreign countries,
that cannot be reached through the primary contact person designated by
the firm.\4\ Additionally, the PCAOB staff believes that none of these
80 firms has recently issued an audit report for an issuer.\5\ For 79
of these firms, there is no indication that they have recently played a
substantial role in issuer audits.\6\ This suggests that, with respect
to the vast majority of consecutively delinquent firms--79 of the 80
identified firms--there is no indication of recent engagement in
services requiring PCAOB registration.
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\4\ See Figure 1 for a breakdown by firm type of the 80 firms
that did not file annual reports and did not pay annual fees for the
2022 and 2023 reporting years.
\5\ Based on Audit Analytics data, PCAOB staff analyzed audit
reports issued between January 1, 2021, and August 31, 2024, which
covers the 2022 and 2023 reporting years. The terms ``audit,''
``audit report,'' ``issuer, '' ``broker,'' and ``dealer'' are used
as defined in the Act and PCAOB Rule 1001, Definitions of Terms
Employed in Rules. The term ``broker-dealer'' refers to entities
registered with the SEC as either a ``broker'' or a ``dealer,'' or
both.
\6\ Without a firm's own Form 2 reporting, it is challenging for
the PCAOB staff to conclusively determine whether a firm has played
a substantial role in preparing or furnishing an audit report for an
issuer or broker-dealer. Based on a review of Form AP data, the
PCAOB staff noted that one of the 80 firms that did not file annual
reports and did not pay annual fees for both the 2022 and 2023
reporting years was reported by another registered firm as
potentially playing a substantial role in issuer audit reports
issued in 2022, 2023, and 2024. However, the inferences that the
PCAOB can draw from this are limited by the constraints inherent in
Form AP reporting: (1) only the firm that issues the audit report to
the issuer files Form AP, and it alone identifies ``other accounting
firm'' participants and the audit hours attributable to those firms;
and (2) for purposes of Form AP reporting, an ``other accounting
firm'' is categorized as a participant in an issuer audit if any of
its principals or professional employees performed work on the audit
that was supervised by the firm that issues the audit report,
irrespective of whether the ``other accounting firm'' itself
participated in the audit. Therefore, after reviewing available
data, the PCAOB staff has not found any indications that 79 of the
80 firms have recently engaged in any services requiring PCAOB
registration, and the participation of the remaining firm in such
services remains uncertain due to the characteristics of Form AP
reporting.
---------------------------------------------------------------------------
The presence of consecutively delinquent firms on the Board's list
of registered firms hinders several regulatory objectives, including
its ability to maintain an accurate public record of registered public
accounting firms in operation that wish to remain registered; to ensure
that the information required on annual reports is being reported to
the public and the PCAOB; to collect mandatory annual fees; and to
efficiently use PCAOB staff time and resources. Before now, the PCAOB
has lacked an effective procedural mechanism to deal with such firms.
The prior framework offered only two methods of removing a firm from
PCAOB registration: (1) the Board authorizing a withdrawal based on a
firm-initiated withdrawal request,\7\ and
[[Page 92215]]
(2) the Board instituting formal disciplinary proceedings that could
lead to the revocation of the firm's registration due to violations of
laws, rules, or standards that the Board is charged with enforcing.\8\
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\7\ Pursuant to PCAOB rules, subject to certain limitations, a
firm's registration with the Board is deemed withdrawn if the firm
requests leave to withdraw by filing Form 1-WD, Request for Leave to
Withdraw from Registration, and (i) the Board grants leave to
withdraw, or (ii) the Board does not, within 60 days of receipt of
the request, order that withdrawal of the firm's registration be
delayed. See Rule 2107(a).
\8\ Under Section 105(c)(4) and (5) of the Act and PCAOB Rule
5300, Sanctions, the Board can revoke a firm's registration as a
sanction in a Board disciplinary proceeding under certain
circumstances. See Rule 1001(r)(ii) (defining ``revocation'' as ``a
permanent disciplinary sanction terminating a firm's
registration'').
---------------------------------------------------------------------------
As discussed below, the Board believes a ``constructive withdrawal
request'' mechanism will provide the PCAOB with a reasonable,
efficient, and equitable way of identifying and removing from
registration firms that have ceased to exist, are nonoperational, or no
longer wish to remain registered. After furnishing a consecutively
delinquent firm with written notice and 60 days to contact the
Registration staff, the new provision of the PCAOB's rule relating to
withdrawal from registration permits the Board to treat a firm's
failure both to file annual reports and to pay annual fees for at least
two consecutive reporting years as a constructive request by the firm
for leave to withdraw from registration, and to deem the firm's
registration withdrawn. As indicated above, updating the PCAOB's
registration records through this process will promote the quality of
information by removing from registration firms that have ceased to
exist, are nonoperational, or no longer wish to remain registered.
Discussion
The PCAOB added a provision to an existing rule to advance the
PCAOB's investor protection mission and to enhance the Board's
registration program by creating a more accurate public record of
registered public accounting firms in operation that wish to remain
registered.
Specifically, the PCAOB adopted an amendment to an existing rule to
add a new provision that will permit the Board to deem a firm's
registration withdrawn--under specified conditions and subject to
enumerated safeguards--if the firm fails to file its annual reports and
to pay its annual fees for at least two consecutive reporting years.
This dual condition, involving the lack of both annual report
submission and annual fee payment over two consecutive reporting years,
is designed to identify and remove from registration firms that have
ceased to exist, are nonoperational, or no longer wish to remain
registered.
Until now, the PCAOB has had no effective and efficient procedural
mechanism to withdraw consecutively delinquent firms from registration.
As noted above, under the Board's current rules, there are only two
ways for a registered firm to depart from PCAOB registration. One is a
firm-initiated withdrawal: a firm seeking to withdraw from registration
can file a form requesting leave to withdraw.\9\ The other is
revocation: when appropriate, a firm's registration can be revoked as a
sanction in a Board disciplinary proceeding upon a finding of
intentional, reckless, or repeatedly negligent conduct.\10\
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\9\ Rule 2107 provides that a registered firm may request leave
to withdraw from registration at any time by filing Form 1-WD.
Withdrawal, however, is not immediately effective; the Board may
order that withdrawal be delayed while the Board carries out an
inspection, investigation, or disciplinary proceeding. See Rule
2107(d). After a firm's registration is withdrawn, the firm is
permitted to participate in audits of issuers or broker-dealers and
otherwise associate with registered firms only so long as the
withdrawn firm's participation falls below the ``substantial role''
threshold. See Rule 1001(p)(iii). A firm that withdraws from
registration and later decides that it wishes to re-register must
reapply for registration by filing a new PCAOB Form 1, Application
for Registration.
\10\ After the Board revokes a firm's registration, the firm is
not permitted to participate in audits involving issuers or broker-
dealers or otherwise associate with a registered firm; even
participation that falls below the ``substantial role'' threshold
would violate the order revoking the firm's registration. See Rules
on Investigations and Adjudications, PCAOB Release No. 2003-015
(Sept. 29, 2003), at A2-7 (a revocation ``prohibit[s] the firm from
preparing or issuing, or participating in the preparation or
issuance of, audit reports''). The revocation remains in operation
unless and until the Board approves a new application for
registration submitted by the firm. See generally paragraphs (a) and
(c) of PCAOB Rule 5302, Applications for Relief From, or
Modification of, Revocations and Bars.
---------------------------------------------------------------------------
Withdrawal and revocation often suffice as methods for managing the
PCAOB's registration records, but each of these paths depends on some
form of active engagement with the registered firm. They begin either
with the firm filing a withdrawal request or with the PCAOB's Office of
the Secretary providing notice of an Order Instituting Disciplinary
Proceedings (``OIP'') to the firm.\11\ In some circumstances, however,
such as when a firm that has ceased to exist or is nonoperational or
for some other reason consecutively fails to file its annual reports
and pay its annual fees, it may not be possible to actively engage with
that registered firm. To account for such situations, the Board
believes there should be a procedural mechanism for the Board to update
the PCAOB's registration records.
---------------------------------------------------------------------------
\11\ See generally PCAOB Rule 5201, Notification of Commencement
of Disciplinary Proceedings.
---------------------------------------------------------------------------
Building on the Board's current withdrawal framework in Rule 2107,
the core premise of Rule 2107(h) is that a two-year period of
noncompliance with the PCAOB's annual reporting and annual payment
requirements, following warnings of these omissions, can reasonably be
interpreted as a constructive request by the firm for leave to withdraw
from registration, provided that appropriate procedural safeguards are
in place. Often, a firm's failure to file an annual report and pay an
annual fee is the first indication that the firm may be defunct or no
longer wishes to remain registered. Therefore, the Board believes that,
when a firm fails to submit annual reports and to pay annual fees for
at least two consecutive reporting years, it is reasonable to infer
that the firm has ceased to exist, is no longer operational, or no
longer wishes to remain registered with the PCAOB.
As a withdrawal-based mechanism, Rule 2107(h) is not a disciplinary
proceeding or disciplinary process. Instead of resulting in a
disciplinary sanction (like a revocation), Rule 2107(h) would result in
withdrawal of the firm from registration. Unlike a revocation, a
withdrawal under Rule 2107(h) would not be reported as a disciplinary
sanction to the Commission, state regulatory authorities, foreign
accountancy licensing boards, or the public.\12\ A withdrawal under
Rule 2107(h) would, instead, be reflected on the PCAOB's website as a
withdrawal from registration. Should the firm seek re-registration, it
would be required to file a Form 1 like other firms that were
previously registered but withdrew from registration, without the need
to adhere to the requirements of Rule 5302(a) or (c), which relate to
the termination of revocation sanctions. Under Rule 2107(h), a firm
whose registration is withdrawn, in contrast to a firm whose
registration is revoked,\13\ would retain eligibility to perform work
on audits of issuers or broker-dealers, provided that work remains
below the substantial role threshold established by Rule 1001(p)(ii)
and PCAOB Rule 2100, Registration Requirements for Public Accounting
Firms. In accordance with Rule 2107(b)(1), a firm that has withdrawn
from registration is permitted to reissue or give consent to the use of
a prior audit report issued by the firm while registered with the
Board; however, the firm is not allowed to update or dual-date any
previously issued audit report once the firm is no longer registered.
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\12\ Cf. Section 105(d) of the Act.
\13\ See footnote 10.
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[[Page 92216]]
Consecutively Delinquent Firms and Current Responses
Section 102(d) of the Act requires each registered firm to submit
an annual report to the PCAOB. The PCAOB's annual reporting framework
implements Section 102(d) by requiring each registered firm to report,
on an annual basis, general information about the firm and its audit
practice over the most recent 12-month reporting period. Annual reports
must be filed on Form 2 and must be filed no later than June 30 of each
year.\14\
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\14\ See Rule 2200 and PCAOB Rule 2201, Time for Filing of
Annual Report.
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Annual reporting is an important part of the investor protection
framework prescribed by the Act and PCAOB rules. Information provided
by registered firms in their annual reports informs the PCAOB's
oversight activities and provides information to the public regarding
the nature and extent of each registered firm's audit practice with
respect to issuers and broker-dealers. Annual reporting also keeps the
PCAOB's records current on such basic information as the firm's name,
location, and contact information, and provides assurance, through a
firm certification,\15\ that the firm has reported the occurrence of
various significant events during the reporting period on PCAOB Form 3,
Special Report. When a firm does not comply with the reporting
requirements, it deprives the public of valuable information and
impacts the PCAOB's analysis and planning for inspections and other
Board responsibilities.
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\15\ See Form 2, Item 10.1.
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Each registered firm must also pay an annual fee. Section 102(f) of
the Act directs the Board, in relevant part, to assess and collect
annual fees from each registered firm in amounts that, together with
registration fees, are sufficient to recover the costs of processing
and reviewing registration applications and annual reports. Annual fees
are due on or before July 31 of each year.\16\
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\16\ See Rule 2202.
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Since the Board's annual reporting and annual fee requirements
became effective in 2010, a number of registered firms have
continuously failed both to file annual reports and to pay annual fees,
in violation of PCAOB rules. While some firms have belatedly made their
required filings and payments, others remain persistently noncompliant.
[[Page 92217]]
Figure A. Cumulative Number of Registered Firms With Continuous
Noncompliance From the Indicated Reporting Year Through the 2023
Reporting Year 17
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\17\ The PCAOB staff's analysis ends with the 2023 reporting
year. Although annual reports and annual fees for the 2024 reporting
year were due several months ago, in the PCAOB's experience some
firms eventually file their annual reports and pay their annual fees
many months after these deadlines. Including those firms in the
analysis could potentially prevent an accurate count of delinquent
firms for the 2024 reporting year and skew the assessment of the
number of firms that might be subject to withdrawal from
registration under Rule 2107(h). However, the PCAOB believes this
decision does not affect the PCAOB's inferences, as a preliminary
review of reporting year 2024 data through August 31, 2024, shows no
significant deviations from the patterns observed through reporting
year 2023.
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BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN21NO24.001
BILLING CODE 8011-01-C
Note: Reporting years are based on the PCAOB's reporting year-
end of March 31 (e.g., the 2023 reporting year covers April 1, 2022,
to March 31, 2023). Registered firms must submit an annual report by
June 30 and pay an annual fee by July 31 each year, covering the 12-
month period from April 1 to March 31.
\18\ The term ``RASR'' refers to the PCAOB's web-based
Registration, Annual, and Special Reporting System, which provides
access to publicly available PCAOB information about registered
public accounting firms, and is available at https://rasr.pcaobus.org/Search/Search.aspx.
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Figure A is based on data available as of August 31, 2024. Each bar
in Figure A illustrates the cumulative number of firms registered with
the PCAOB as of August 31, 2024, that have continuously failed both to
file annual reports and to pay annual fees from each reporting year
listed on the x-axis through August 31, 2024. These data exclude firms
that were previously noncompliant but subsequently either withdrew from
registration or belatedly made their required filings and payments
before August 31, 2024.\19\
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\19\ The number of delinquent firms depicted in the graph does
not account for firms' filing and payment activities after August
31, 2024. Therefore, for example, if a firm was delinquent for
reporting year 2023 but subsequently filed an annual report or paid
an annual fee after August 31, 2024, it would still be considered
delinquent in the graph.
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For example, the bar for the 2010 reporting year shows that 13
firms failed both to file annual reports and pay annual fees starting
in reporting year 2010, and those firms have remained consistently
noncompliant every subsequent reporting year through 2023. By the 2011
reporting year, the cumulative total increases to 18 firms,
[[Page 92218]]
representing an additional five firms that first failed to meet both
annual obligations in 2011 and continued their noncompliance through
the end of this period. This cumulative count grows progressively with
each subsequent reporting year as more firms fall into continuous
noncompliance through the end of this period, reaching a total of 90
firms by the 2023 reporting year. This represents just under six
percent of the total population of 1,554 PCAOB-registered firms as of
August 31, 2024.\20\
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\20\ Section III.B.1 of the Proposing Release provided similar
data as depicted in Figure A, but with a cutoff date of December 31,
2023, instead of August 31, 2024. As a result, the number of firms
that both did not file an annual report and did not pay an annual
fee for reporting years 2022 and 2023 decreased. Specifically, the
number of noncompliant firms for the 2022 and 2023 reporting years
decreased from 87 and 108 as of December 31, 2023, to 80 and 90
firms, respectively, as of August 31, 2024. The number decreased
because some of the initially noncompliant firms either (1) withdrew
from registration in 2024 or (2) filed annual reports and/or paid
annual fees for the corresponding reporting year in 2024. See
footnote 3 for a similar discussion of the reasons why the number of
firms that did not file annual reports and did not pay annual fees
for both the 2022 and 2023 reporting years changed.
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These data indicate that, over time, a number of firms have
persistently failed to fulfill both annual obligations, with more than
50 firms in noncompliance for at least six consecutive years and 13
firms in noncompliance for 14 consecutive reporting years. Based on the
PCAOB staff's experience, the Board believes that many of these
continuously delinquent firms may be defunct. Consequently, it is
unlikely that these firms will either (1) voluntarily request leave to
withdraw from registration or (2) assert to the PCAOB that their
registration was withdrawn under Rule 2107(h) when they needed to
remain registered in order to perform audit work for issuers or broker-
dealers.
In each reporting year, the Registration staff contacted all
registered firms to remind them of their obligations to file annual
reports and to pay annual fees prior to their respective due dates.
After the relevant due dates passed, the Registration staff followed up
by sending at least one warning letter to each delinquent firm,
specifically highlighting its failure to meet the annual filing and
annual payment requirements. These warning letters have been effective
in spurring most delinquent firms to act.
But each year, a recurring set of firms does not cure delinquencies
and yet remains registered. Without Rule 2107(h), the PCAOB would have
no effective and efficient procedural mechanism to withdraw these
consecutively delinquent firms from registration.
Relying on firm-initiated withdrawals is not currently a viable
avenue, as these consecutively delinquent firms have not requested
leave to withdraw from PCAOB registration and, given their extended
unresponsiveness and repeated noncompliance, are unlikely to do so in
the future. Moreover, existing Board rules do not permit PCAOB staff to
file a request for leave to withdraw from registration on a firm's
behalf, even upon information and belief that the firm no longer exists
or has ceased operations.
Nor have enforcement efforts proven to be a desirable approach--or
even a viable option--in certain circumstances. Historically, the
PCAOB's Division of Enforcement and Investigations (``DEI'') has
allocated its resources toward higher risk delinquencies, prioritizing
enforcement action with respect to delinquent firms that continue to
issue audit reports or play a substantial role in the preparation or
furnishing of audit reports. Since 2011, the Board has issued more than
three dozen OIPs against delinquent firms,\21\ and while most of those
cases settled (or were dismissed in connection with the delinquent
firm's withdrawal from registration), nine of those cases proceeded to
an initial decision by a hearing officer.\22\ Although the facts and
legal issues in these proceedings were generally straightforward, each
case consumed substantial time and resources that could have been
expended pursuing other oversight activities. And in some cases, the
PCAOB has encountered difficulties providing notice of the institution
of a disciplinary proceeding to a firm that appears to have ceased
operations; serving OIPs on seemingly nonexistent or nonoperational
firms may be unnecessarily challenging, if even possible.
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\21\ This figure represents OIPs that solely relate to
delinquent annual reports or annual fees, or both. See, e.g., R.A.
Bianchi & Associates, An Accountancy Corporation, PCAOB Release No.
105-2015-003 (Jan. 22, 2015); Baumgarten & Company LLP, PCAOB
Release No. 105-2013-001 (Feb. 21, 2013); Reuben E. Price & Co.,
Public Accountancy Corp., PCAOB Release No. 105-2011-008 (Dec. 20,
2011); GLO CPAs, LLLP, PCAOB Release No. 105-2011-006 (Nov. 30,
2011).
\22\ See Monte C. Waldman CPA, PCAOB File No. 105-2015-013 (Aug.
4, 2016); Chr. Mortensen Revisionsfirma, statsautoriseret
revisionsinteressentskab, PCAOB File No. 105-2015-008 (Jan. 12,
2016); David W. Dube, PCAOB File No. 105-2014-005 (Nov. 30, 2015);
Joseph Troche, CPA, PCAOB File No. 105-2014-007 (Mar. 6, 2015); P.S.
Yap & Associates, PCAOB File No. 105-2013-006 (May 8, 2014); Kenneth
J. McBride, PCAOB File No. 105-2012-007 (May 7, 2013); Eric C.
Yartz, P.C., PCAOB File No. 105-2012-006 (May 7, 2013); Buckno
Lisicky & Company, P.C., PCAOB File No. 105-2011-004 (Jan. 9, 2012);
Paul Gaynes, PCAOB File No. 105-2011-006 (Jan. 3, 2012).
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Additionally, encumbering the disciplinary process to address a
registered firm's noncompliance with the PCAOB's annual reporting and
payment requirements may often be a disproportionate response to a
defunct firm's failure to request leave to withdraw from registration
before ceasing operations. Instituting approximately 80 new
disciplinary proceedings, one for each registered firm that failed to
file an annual report and pay the annual fee for both the 2022 and 2023
reporting periods, would impose significant resource demands on the
Board and its staff and could require significant time to resolve. The
Board believes a more efficient process, with appropriate procedural
safeguards, should be available to address circumstances where a
registered firm's conduct gives rise to the inference that the firm has
ceased to exist, is nonoperational, or no longer wishes to remain
registered with the PCAOB.
Mechanics of Rule 2107(h)
The Board designed Rule 2107(h) expressly to fall within the
framework of a withdrawal from registration. Rule 2107(h) is aimed at
registered firms that have ceased to exist, are nonoperational, or no
longer wish to remain registered. Still, in the absence of procedural
safeguards, the Board recognizes that there is some risk that a
constructive-withdrawal-request approach could unintentionally affect a
firm that wishes to remain registered. Anticipating that risk, Rule
2107(h) includes a set of procedural safeguards to protect the
interests of any firm that wishes to remain registered, including
written notice and website notice, and an opportunity to stop the Rule
2107(h) process merely by emailing the Registration staff.
On balance, the Board believes that Rule 2107(h) will avoid
unnecessary expenditures of PCAOB resources while still affording a
registered firm notice and an opportunity to stop the withdrawal
process. It would also cause consecutively delinquent firms either to
contact the Registration staff or to be withdrawn from registration
more efficiently than is possible currently. Thus, the Board believes
Rule 2107(h) will provide a reasonable and effective way to identify
and remove from the PCAOB's registration records those firms that have
ceased to exist, are nonoperational, or no longer wish to remain
registered.
Commenters broadly supported proposed Rule 2107(h), and the Board
adopted the proposed amendment with
[[Page 92219]]
certain limited modifications, as discussed below. One commenter, an
academic, expressed concern that withdrawing a firm from registration
through the Rule 2107(h) process would remove the firm from the PCAOB's
enforcement authority. However, the Board may consider its enforcement-
related responsibilities when deciding whether or when to employ Rule
2107(h)'s constructive-withdrawal-request process with respect to a
particular firm, just as it may consider whether a firm-initiated
withdrawal from registration should be delayed in light of the Board's
responsibilities to conduct investigations or disciplinary
proceedings.\23\
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\23\ See Rule 2107(d) (the Board may delay a firm-initiated
withdrawal by up to 18 months, if done within 60 days of receiving a
completed Form 1-WD and determined necessary to fulfill the Board's
inspection, investigative, or disciplinary responsibilities under
the Act); see also Rule 2107(e) (automatically delaying a firm's
withdrawal if a Board disciplinary proceeding is pending against the
firm or any of its associated persons).
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1. Prerequisites
Under Rule 2107(h)(1), the withdrawal process would be available
only if a registered firm, for at least two consecutive Form 2
reporting years, has neither filed an annual report nor paid an annual
fee.\24\ The two-year benchmark is intended to serve as a proxy to
assist the Board in identifying firms that may fairly be deemed to have
made a constructive withdrawal request. The Board believes delinquency
for a period of at least two consecutive reporting years is an
effective indication that a firm has ceased to exist, is
nonoperational, or no longer wishes to remain registered.\25\ Under the
two-year benchmark, all firms that recently filed an annual report or
paid an annual fee would fall outside the scope of Rule 2107(h). The
Board believes that a single missed filing or payment, or even one
reporting year's worth of missed annual reports and payments, is an
insufficient basis upon which to infer that a firm no longer wishes to
remain registered.\26\ On the other hand, allowing three or more years
of delinquency before presuming a firm no longer wishes to remain
registered may unduly delay appropriate regulatory action. The minimum
amount of time that a firm would have to be delinquent before meeting
the threshold of ``two consecutive reporting years'' would be 13
months, encompassing the first overdue annual report following the June
30 deadline, the first overdue annual fee following the July 31
deadline, the second overdue annual report following June 30 of the
second consecutive year, and the second overdue annual fee following
July 31 of the second consecutive year.
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\24\ A Form 2 reporting year covers the 12-month period from
April 1 to March 31. See Form 2, General Instruction 4.
\25\ While the PCAOB recognizes that seven of the originally
identified 87 consecutively delinquent firms either withdrew from
registration (five firms) or caught up on overdue annual reports and
annual fees (two firms), this activity supports the rationale for
adopting Rule 2107(h). The actions of these firms reinforce the
utility of establishing a clear benchmark to infer that a
consecutively delinquent firm, if it still exists, no longer wishes
to remain registered with the PCAOB. The two-year marker of
consecutive noncompliance with the annual reporting and annual fee
requirements will serve as an effective and clear benchmark for
interpreting such consecutive noncompliance as a firm's constructive
request for leave to withdraw from registration. And the procedural
safeguards built into Rule 2107(h) provide a clear and easy course
of action for a firm if the inference that the firm no longer wishes
to remain registered is inaccurate.
\26\ Of course, rule violations related to noncompliance with
the Board's annual reporting and payment requirements remain subject
to enforcement.
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The Rule 2107(h) process is discretionary. Whether Rule 2107(h) is
used, and the exact timing of how it is used, is left to the Board.
Establishing a discretionary process, rather than a mandatory or
automatic one, allows the Board to consider specific facts and
circumstances--including whether a firm is providing services requiring
PCAOB registration and whether the firm is subject to a current or
forthcoming inspection or investigation--when determining whether to
deem the firm's registration withdrawn under Rule 2107(h). The Board
did not receive any comments on the discretionary nature of Rule
2107(h).
The Registration staff will continue its practice of sending
warning letters each year to delinquent registered firms. These notices
will continue to call attention to any missed annual report filings or
annual fee payments.
While commenters generally supported the two-year threshold for
considering a firm's non-submission of annual reports and non-payment
of annual fees as a basis for a constructive withdrawal request, some
commenters suggested either reducing this period to one year or
treating a single missed annual report or annual fee as a sufficient
basis to initiate a firm's withdrawal from PCAOB registration. The
Board considered these options, but, as explained in the Proposing
Release and above, the Board believes that a two-year criterion,
encompassing both annual reports and annual fees, is an appropriate
indicator that a firm has ceased to exist, is nonoperational, or no
longer wishes to remain registered.
Of course, the failure to file reports or pay fees when due
constitutes a violation of PCAOB rules concerning annual reporting and
fees, and firms should bear in mind that new paragraph (h) of Rule 2107
does not limit the Board's enforcement authority with respect to
violations of those requirements.
2. Notice of Delinquency and Impending Withdrawal
Pursuant to Rule 2107(h)(2), the Board commences the Rule 2107(h)
process by sending a written notice to the registered firm's primary
contact with the Board as identified in the firm's most recent filing
on Form 1, Form 2, Form 3, or PCAOB Form 4, Succeeding to Registration
Status of Predecessor. That notice (the ``Notice of Delinquency and
Impending Withdrawal'') would specify the annual reports and annual
fees that are past due and remain outstanding and provide information
to the firm about the impending withdrawal of its registration,
including the opportunity to avoid withdrawal by contacting the
Registration staff within 60 days. The Notice of Delinquency and
Impending Withdrawal is intended to provide the firm notice of the
commencement of the Rule 2107(h) process, the reason for the
commencement of that process, its potential significance for the firm's
registration, and the firm's opportunity to avoid withdrawal by sending
an email to the Registration staff within 60 days.
The Board would send the Notice of Delinquency and Impending
Withdrawal to the registered firm's primary contact with the Board as
identified in the firm's most recent filing on Form 1, Form 2, Form 3,
or Form 4, via a mail or commercial courier service, and the Board
would obtain a confirmation of actual or attempted delivery.\27\ In
considering the fairness of this approach, the Board has taken into
account that if there has been a change in the identity or business
mailing address of the firm's primary contact from the information
disclosed in a previous form filing, the firm is required to report
that change to the PCAOB within 30 days on Form 3.\28\ In light of a
firm's longstanding obligation to maintain up-to-date primary contact
information, the Board believes it is fair and reasonable for the
Registration staff
[[Page 92220]]
to send the Notice of Delinquency and Impending Withdrawal to the
firm's primary contact at the address reported in the firm's most
recent filing.\29\
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\27\ In the adopted rule, the PCAOB revised the proposed phrase
``that results in a confirmation of actual or attempted delivery''
to ``and obtains a confirmation of actual or attempted delivery.''
This change aims to enhance clarity. The Board did not receive any
comments on this specific phrasing, and this change is not intended
to alter the rule's meaning.
\28\ See PCAOB Rule 2203, Special Reports, and Items 2.18 and
7.2 of Form 3.
\29\ See generally Rule 141 of the Commission's Rules of
Practice, 17 CFR 201.141, which similarly permits service to the
most recent address shown on a registered entity's most recent
filing with the Commission.
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One commenter suggested that the PCAOB should use email in addition
to traditional mail or a commercial courier service when providing
notice of the initiation of the Rule 2107(h) withdrawal process. The
Board emphasizes that all registered firms are required to keep their
primary contact's mailing address updated under current PCAOB rules.
Moreover, as discussed in the next subsection, notice by mail or
commercial courier service would be supplemented, as required under
Rule 2107(h), by a notice on the PCAOB's website. Together, the Board
believes that these methods of providing notice are sufficient.
However, the Board also notes that the rule does not prohibit the Board
or its staff from using email as an additional, discretionary means by
which to provide notice of the initiation of the Rule 2107(h) process
to firms. Though the use of email is not mandated by Rule 2107(h), the
Board or PCAOB staff may deem it appropriate, under certain
circumstances, to supplement the prescribed notice with email.
3. Website Notice
After the Notice of Delinquency and Impending Withdrawal is sent to
the registered firm's primary contact, the Board will publish notice of
the impending withdrawal on its public website, pursuant to Rule
2107(h)(3). The Board will make reasonable efforts to do so promptly.
The website posting is intended to provide reasonable notice to the
firm and to others, including any current or former audit clients, who
may be able to alert the firm of the impending withdrawal of its
registration and its 60-day window to avoid withdrawal. Disclosing the
firm's pending withdrawal on the Board's website is also consistent
with the current firm-initiated withdrawal process.\30\
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\30\ See Rule 2107(b)(2) (requiring disclosure of the identity
of any firm with a pending request to withdraw from registration and
the date the Board received the Form 1-WD); see also Registered
Public Accounting Firms--Withdrawal Request Pending, available at
https://assets.pcaobus.org/pcaob-dev/docs/default-source/registration/firms/documents/withdrawal-requests.pdf?sfvrsn=d30aab29_287.
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4. Sixty-Day Opportunity To Avoid Withdrawal From Registration
After the date the Board sends the Notice of Delinquency and
Impending Withdrawal to the registered firm's primary contact, the
firm, under Rule 2107(h)(4), would have 60 days to stop the withdrawal
process.\31\ The Board believes 60 days is a reasonable amount of time
for the firm to become aware of the initiation of the Rule 2107(h)
process, review the Notice of Delinquency and Impending Withdrawal,
consider whether it wishes to remain registered, and contact the
Registration staff by email.\32\
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\31\ PCAOB Rule 1002, Time Computation, governs the computation
of periods of time prescribed in or allowed by the Board's rules.
Rule 1002's time computation principles would apply to the 60-day
period specified in the Notice of Delinquency and Impending
Withdrawal.
\32\ The limitations imposed in Rule 2107(c) do not apply to
firms that have received notice of the commencement of the Rule
2107(h) process. Those limitations apply only to firms that choose
to initiate the withdrawal process through the filing of a completed
Form 1-WD.
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To stop the Rule 2107(h) process, the registered firm's primary
contact would be required to send an email to a designated electronic
address specified in the Notice of Delinquency and Impending Withdrawal
within the 60-day period. In contemplating how a firm should stop the
Rule 2107(h) process, the Board sought to establish a method of
contacting the PCAOB that would not be overly burdensome. Requiring
that an email be sent by the firm's primary contact increases the
likelihood that the person who contacts the PCAOB is an authorized
representative of the firm.\33\ This requirement also increases the
likelihood that future communications to the firm would result in
actual notice to the firm.\34\ In particular, this process expedites
further communications with the firm regarding its legal obligations to
file annual and special reports and pay annual fees, and will
facilitate its ability to institute, as the Board deems appropriate, a
disciplinary proceeding against the firm.\35\
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\33\ If the email address of the firm's primary contact on file
with the Board is outdated, the firm is required to update this
information using Form 3 before transmitting an email to stop the
Rule 2107(h) process. See Items 2.18 and 7.2 of Form 3. This ensures
that any email received by the Registration staff to stop the Rule
2107(h) process originates from an authorized representative of the
firm, who has access to the firm's account in the RASR system.
\34\ One firm expressed concern that emails sent to the PCAOB to
stop the Rule 2107(h) process potentially could be marked as spam.
The commenter suggested that the Board should either allow for
additional communication methods or commit to confirming receipt of
emails so that the sender has confidence that an email was received.
The Board believes that having a single channel for communications
from firms to stop the Rule 2107(h) process promotes efficiency and
the proper administration of the rule, and the Board believes that
email is the optimal method because it is fast, not unduly
burdensome, and in writing. Given the significance of an email from
a firm under Rule 2107(h)(4), the PCAOB staff will confirm receipt
of such an email. This confirmation will provide assurance to firms
regarding the successful delivery of their email to the PCAOB.
\35\ If a firm sends an email to the Registration staff to stop
Rule 2107(h)'s withdrawal process, it still could face potential
enforcement action, just like any other registered firm that
violates the PCAOB's annual reporting or annual fee requirements.
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In the Proposing Release, the Board suggested a 30-day period for
firms to send an email to the Registration staff to stop the withdrawal
process. One firm suggested that a 60-day period might be more
appropriate. The Board has decided to adopt a 60-day window for sending
an email to the Registration staff. This extension aims to provide
firms with sufficient time to become aware of the initiation of the
Rule 2107(h) process, which includes notification of pending
withdrawals posted on its website. The extended period also allows
firms sufficient time to have internal discussions to determine whether
they wish to remain registered. It also accommodates any updates needed
regarding the firm's primary contact with the Board to facilitate the
email to the Registration staff.
5. Withdrawal From Registration
If, after the 60-day period in Rule 2107(h), the registered firm
has not emailed the Registration staff, the Board would be able to
treat the firm's consecutive failures to file annual reports and to pay
annual fees as a constructive request for leave to withdraw from
registration, and to deem the firm's registration withdrawn.\36\ The
provision reflects the Board's judgment that a firm that has not filed
an annual report and has not paid an annual fee over a period of at
least two consecutive reporting years may reasonably be deemed to have
made a constructive request for leave to withdraw from PCAOB
registration. After the Board deems a registration withdrawn pursuant
to Rule 2107(h), the Registration staff, consistent with existing
practices, would send written notification to the firm regarding the
withdrawal. The withdrawal of the firm from registration would also be
reflected on the Board's website.
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\36\ As noted, the intent of Rule 2107(h) is to identify firms
that have ceased to exist, are nonoperational, or no longer wish to
remain registered. It is not intended as a disciplinary measure
against firms that wish to remain registered but fail to fulfill
their obligations to file annual reports or pay annual fees. The
PCAOB has other mechanisms to address such noncompliance.
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[[Page 92221]]
After a firm's registration is withdrawn pursuant to Rule 2107(h),
the consequences would mirror those of any other withdrawal from PCAOB
registration. Specifically, the withdrawn firm, like any other
unregistered firm, would be prohibited from engaging in the preparation
or issuance of an audit report for an issuer or broker-dealer, or
playing a substantial role in the preparation or furnishing of an audit
report for an issuer or broker-dealer, other than to issue a consent to
the use of an audit report for a prior period that it issued while
registered.\37\ A firm that has had its registration withdrawn pursuant
to Rule 2107(h) would no longer have to comply with the PCAOB's annual
reporting or annual fee requirements. Should such a firm wish to re-
register, it would have to file a new registration application and pay
a registration fee, as is required of all firms reapplying after
withdrawal. In reviewing any such registration application from the
firm, the Board has discretion to consider its past interactions with
the firm during the firm's previous registration period. This includes
considering any instances in which the firm did not file required
reports, including annual reports, or pay required annual fees.\38\
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\37\ See Section 102(a) of the Act; Rule 2100; Rule 1001(p)(ii).
Note 2 to Rule 2100 clarifies that issuing a consent to include an
audit report for a prior period does not, in itself, obligate a
public accounting firm to be registered with the PCAOB. This
provision applies to a firm whose registration has been withdrawn,
including a firm whose registration has been withdrawn pursuant to
Rule 2107(h).
\38\ Consistent with the Board's current practices, a history of
not filing annual reports or paying annual fees has, in some cases,
led to disapproval of a withdrawn firm's subsequent application for
re-registration. See, e.g., Registration Application of Alas Oplas &
Co., CPAs, PCAOB Release No. 102-2024-004 (Aug. 20, 2024);
Registration Application of S S Kothari Mehta and Company, PCAOB
Release No. 102-2021-001 (Nov. 23, 2021); Registration Application
of GYL Decauwer LLP, PCAOB Release No. 102-2018-001 (June 13, 2018);
Registration Application of David R. Ramos, CPA, PCAOB Release No.
102-2014-002 (Mar. 6, 2014); Registration Application of Lawrence
Hoffman, Certified Public Accountant, P.C., PCAOB Release No. 102-
2014-001 (Jan. 28, 2014); Registration Application of Vail & Knauth
LLP, PCAOB Release No. 102-2013-001 (Feb. 21, 2013).
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Effective Date
The Board has determined that Rule 2107(h), if approved by the
Commission, will take effect initially for annual reports and annual
fees that are due in 2025, meaning that a registered firm that does not
file an annual report and does not pay an annual fee in 2025 and in
2026 could have its registration deemed withdrawn under Rule 2107(h)
beginning in the fall of 2026.
The Board initially proposed that annual reports and annual fees
due in 2024 could be considered if Rule 2107(h) was adopted. While most
commenters did not comment on the proposed amendment's effective date,
one commenter supported the proposed effective date. In addition, one
firm suggested that missing annual reports and unpaid annual fees for
2024 should be taken into consideration under Rule 2107(h) only if the
final rule amendment took effect prior to the 2024 deadlines for these
annual obligations.
In light of the timing of Rule 2107(h)'s adoption, the Board opted
to defer the initial consideration of annual reports and annual fees
under Rule 2107(h) to those due in 2025. This approach ensures that
registered firms are adequately informed of the constructive-
withdrawal-request mechanism introduced by Rule 2107(h).
D. Economic Considerations and Application to Audits of Emerging Growth
Companies
Economic Analysis
The Board is mindful of the economic impacts of its rulemaking.
This section discusses the economic baseline, need, expected economic
impacts of the final rule amendment, and alternative approaches
considered. The Board's economic discussion is largely qualitative in
nature due to data limitations. However, where reasonable and feasible,
the analysis incorporates quantitative information, including data from
the PCAOB's RASR system.
The Board sought information relevant to the economic analysis
throughout this rulemaking \39\ and has carefully considered the
comments submitted. Some commenters expressed favorable opinions about
the economic analysis and also commented on specific sections of the
economic analysis such as the baseline, need, benefit, and cost
sections. Some commenters raised concerns about certain aspects of the
economic analysis. The Board discussed these comments and its responses
to them in the relevant sections below.
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\39\ See, e.g., Proposing Release at 44, 52, 56, 60-61, 62-63.
Although the Proposing Release's economic analysis also addressed
proposed Rule 2400 and the proposed amendment to Form 3, this
economic discussion is limited to the amendment to Rule 2107 that
the Board has adopted.
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Baseline
This section establishes the economic baseline against which the
impacts of the final rule amendment can be considered. The discussion
above describes important components of the baseline, including the
current regulatory framework and certain firms' consecutive failures to
file annual reports and pay annual fees. This section discusses two
additional components that inform the Board's understanding of the
economic baseline: (1) the PCAOB staff's analysis of RASR data and (2)
a consideration of relevant research.
Commenters indicated that the baseline and the data provided in the
economic analysis are helpful in understanding the economic impacts of
the proposals.
1. Analysis of RASR Data
To inform the Board's understanding of the baseline for the Rule
2107(h) amendment, the PCAOB staff has analyzed RASR data to calculate
the number of registered firms with repeated failures to file annual
reports and pay annual fees (Figure 1 below).
This section examines statistics of registered firms that failed to
file annual reports and/or pay annual fees. Figure 1 presents the
number of registered firms that failed to file annual reports and/or
pay annual fees for reporting years 2022 and 2023.\40\ Among all 1,554
registered firms as of August 31, 2024,\41\ 1,406 firms (90 percent)
were required to file annual reports and pay annual fees for reporting
years 2022 and 2023.\42\ Of those 1,406 registered firms, 84 firms
failed for both years to file annual reports, 84 firms failed for both
years to pay annual fees, and 80 firms failed for those two reporting
years to both pay annual fees and file annual reports.\43\ The overall
rate of registered firms that failed to both file annual reports and
pay annual fees for reporting years 2022
[[Page 92222]]
and 2023 is just under six percent (80 out of 1,406).
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\40\ As previously noted, annual report (Form 2) reporting years
span from April 1 of the previous year to March 31 of the reporting
year. The 2022 reporting year covers April 1, 2021, to March 31,
2022. The 2023 reporting year covers April 1, 2022, to March 31,
2023.
\41\ The PCAOB staff based this analysis of reporting years 2022
and 2023 using August 31, 2024, as the cutoff date. As discussed
above, the PCAOB did not include data from reporting year 2024.
\42\ Firms with pending withdrawal requests are excluded from
the analysis. Also, as of August 31, 2024, some registered firms
were not required to pay annual fees or file annual reports for
reporting years 2022 and 2023. For example, firms that registered
after March 31, 2023, were not required to file the 2023 annual
report or pay the 2023 annual fee.
\43\ Four firms failed to file annual reports for both years but
paid an annual fee for at least one of the years, and another four
firms failed to pay annual fees for both years but filed an annual
report for at least one of the years. The PCAOB does not have access
to specific information on the reasons for this partial
noncompliance. The PCAOB notes that these firms would not meet the
criteria for withdrawal under Rule 2107(h).
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Ninety-nine percent of the firms that failed to file annual reports
and pay annual fees for both years are non-affiliate firms (``NAFs'')
(79 out of 80), which tend to be smaller firms.\44\ Thirty-three
percent of these 80 firms (26 firms) are U.S. NAFs and 66 percent (53
firms) are non-U.S. NAFs; thus non-U.S. NAFs account for twice as many
instances of failing to both file annual reports and pay annual fees
for both years. Within firm types, four percent of U.S. NAFs and 12
percent of non-U.S. NAFs failed to file annual reports and pay annual
fees for both years. In comparison, no U.S. GNFs and only one non-U.S.
GNF failed to file annual reports and pay annual fees for both years.
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\44\ NAFs are accounting firms registered with the Board that
are not global network firms (``GNFs''). GNFs are the member firms
of the six global accounting firm networks that include the largest
number of PCAOB-registered non-U.S. firms (BDO International Ltd.,
Deloitte Touche Tohmatsu Ltd., Ernst & Young Global Ltd., Grant
Thornton International Ltd., KPMG International Cooperative, and
PricewaterhouseCoopers International Ltd.). The discussion in this
release uses ``U.S. GNF'' to refer to a GNF member firm based in the
United States, and ``non-U.S. GNF'' to refer to a GNF member firm
based outside the United States. Similarly, ``U.S. NAF'' refers to a
NAF firm based in the United States, and ``non-U.S. NAF'' refers to
a NAF firm based outside the United States.
Figure 1--Number of Registered Firms That Did Not File Annual Reports and/or Pay Annual Fees as of August 31, 2024
--------------------------------------------------------------------------------------------------------------------------------------------------------
Percentage of
Firms required to Firms that both firms that both
file annual Firms that did not Firms that did not did not file did not file
reports and pay file annual pay annual fees annual reports and annual reports and
annual fees for reports for for reporting did not pay annual did not pay annual
reporting years reporting years years 2022 and fees for reporting fees for reporting
2022 and 2023 2022 and 2023 2023 years 2022 and years 2022 and
2023 2023 (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Firms............................................... 1,406 84 84 80 6
By firm type:
U.S. GNF........................................ 6 0 0 0 0
Non-U.S. GNF.................................... 323 1 1 1 0.3
U.S. NAF........................................ 633 27 26 26 4
Non-U.S. NAF.................................... 444 56 57 53 12
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: RASR.
The PCAOB staff's analysis of the 80 registered firms that failed
to file annual reports and pay annual fees for reporting years 2022 and
2023 (reflected in Figure A above) shows a consistent pattern over
multiple reporting years. Notably, a majority of these firms have
failed to file annual reports and pay annual fees for more than two
consecutive reporting years. For example, Figure A shows that 58 of
these 80 firms failed both to file an annual report and to pay an
annual fee for reporting year 2019, and these 58 firms continued to
neglect these obligations for five consecutive years, from reporting
years 2019 to 2023.
2. Consideration of Relevant Research and Implications
The PCAOB staff has reviewed literature related to the final rule
amendment. To the PCAOB's knowledge, no studies specifically address
the economic consequences of situations where an audit firm has ceased
to exist, is nonoperational, or no longer wishes to remain registered--
as indicated by consecutive delinquencies in its annual reporting and
annual fee obligations--and yet continues to appear as registered on
the PCAOB website. Additionally, there is a lack of research on the
effects of withdrawing such firms from registration.\45\
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\45\ The PCAOB did not receive any comments regarding additional
data or academic studies in response to its request for such
information in the Proposing Release.
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The presence of registered firms that have ceased to exist, are
nonoperational, or no longer wish to remain registered impacts the
utility and value of the registration data on the PCAOB's website and
in its internal records. First, there is a significant misalignment:
the PCAOB's registration records continue to list these firms as
registered, which implies they exist, are operational, and wish to
remain registered, despite their actual statuses potentially being to
the contrary--nonexistent, nonoperational, or no longer wishing to
remain registered. Second, these firms do not file annual reports,
resulting in outdated information about their existence, operational
status, and scope of practice. Third, while it is more common for the
PCAOB to have limited or no information about the operational status of
registered firms that have stopped filing annual reports and paying
annual fees, there are exceptional circumstances where the PCAOB staff
is aware of information, such as the death of a sole proprietor,
indicating that a registered firm has ceased to exist or become
nonoperational. In these instances, despite having information that the
firm has ceased operations, the PCAOB currently lacks a mechanism to
adjust its registration records to reflect this reality. This
limitation introduces a discrepancy between the PCAOB staff's internal
knowledge and the information reflected on the PCAOB's website.
Academic research provides insights into the broader implications
of lower-quality information in the registration data. Studies indicate
that higher information processing costs--arising from the need to
verify and interpret potentially lower-quality information on
registered firms--can lead to inefficiencies in information search
costs.\46\ Currently, the inclusion of persistently delinquent firms in
the
[[Page 92223]]
PCAOB's registration list could impose additional search costs, as the
information available to stakeholders is less useful. Additionally, in
circumstances where the PCAOB has information indicating that certain
firms may no longer exist, are nonoperational, or no longer wish to
remain registered, the PCAOB lacks a mechanism to withdraw these firms
from registration. Without a mechanism to update PCAOB registration
records to reflect this information, search costs could remain elevated
for stakeholders attempting to verify the operational status of PCAOB-
registered firms.
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\46\ See, e.g., E. Blankespoor, E. deHaan, and I. Marinovic,
Disclosure processing costs, investors' information choice, and
equity market outcomes: A review, 70 Journal of Accounting and
Economics 1 (2020). Blankespoor et al. (2020) study how information
processing costs--such as the costs of monitoring, acquiring, and
integrating public information--impact investor behavior and market
outcomes. They argue that high processing costs, such as acquiring
and integrating information into decision-making, can discourage
stakeholders from engaging with available data, leading to
inefficient outcomes. Extending these findings to the PCAOB
registration context, it suggests that removing persistently
delinquent firms from registration could decrease information
processing costs by lowering the costs of assessing the operational
status of these firms. Thus, improving the overall quality of
information available could reduce inefficiencies in audit search
decisions.
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For stakeholders such as audit committees of potential clients
assessing a firm's suitability as an auditor, these higher information
processing costs can delay their analysis and potentially impact the
efficiency of audit-related decisions. Improving the quality of the
PCAOB's registration records by removing persistently delinquent firms
would reduce stakeholders' information processing costs and better
support well-informed decision-making in the audit market.
Partners or former partners of audit firms are typically aware of
their firm's operational status--including whether the firm no longer
exists, is nonoperational, or no longer wishes to remain registered.
Additionally, the PCAOB staff sometimes gathers anecdotal information
through its interactions with firms and their personnel, further
informing its understanding of a firm's operational status. However,
such information bearing upon a registered firm's operational status
may not be readily available to the public. Together, these
discrepancies obscure the true status of these firms, resulting in a
gap between what the PCAOB staff knows internally and what is publicly
available on the PCAOB website. Additionally, there are gaps between
what firms, including their partners or former partners, know about
their operational status and what is accessible to the public on the
PCAOB's website.
Currently, without a mechanism to remove consecutively delinquent
firms from registration, the PCAOB lacks a means to accurately convey
the status of these firms to stakeholders, which could result in less-
informed decisions.
Need and How the Changes Would Address the Need
This section discusses the problem that needs to be addressed and
explains how the final rule amendment is expected to address it.
The PCAOB currently has no effective and efficient procedural
mechanism to withdraw from registration firms that are consecutively
delinquent with respect to filing required annual reports and paying
mandatory annual fees. As discussed in Figure 1, PCAOB staff analysis
indicates that as of August 31, 2024, 80 firms did not file annual
reports and did not pay annual fees for both the 2022 and 2023
reporting years. Many of these firms may be defunct.
The presence of such firms on the PCAOB's registration records may
not only disrupt the PCAOB's regulatory objectives, such as maintaining
an accurate public record of operational registered firms that wish to
remain registered and efficiently using PCAOB staff time and resources,
which diminishes the Board's ability to fulfill its investor protection
mission, but could also adversely impact investor confidence in the
capital markets. While their number is small and there is no indication
that these firms are currently issuing audit reports on which investors
rely, the fact that a firm may fail to comply with fundamental
obligations incident to registration and yet remain registered could
lessen the significance of PCAOB registration in the market. Firms that
are complying with the annual reporting and fee requirements may form a
mistaken belief that they also may be able to forgo compliance with
their reporting and fee obligations when they observe that these
consecutively delinquent firms remain registered with the Board. It is
also possible that this conduct could persist,\47\ necessitating
resolution to maintain confidence in the capital markets.
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\47\ The accumulation of possibly defunct or nonoperational
firms on the PCAOB's registration list potentially reflects a
growing issue. See Figure A and the accompanying description. If a
significant portion of all registered firms is perceived as never
filing annual reports or paying annual fees without apparent
consequence, it risks creating a perception of widespread
noncompliance and PCAOB inaction.
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In addition, PCAOB staff spend time and resources seeking to
contact these firms year after year so that they will comply with their
basic legal obligations, including annual reporting and the payment of
annual fees that contribute to funding the PCAOB's registration
program. Also, utilizing enforcement mechanisms to pursue these firms
would not always be feasible, and even where feasible, would further
strain staff time and resources. These firms' inattention, inactivity,
or inanimacy would cause the PCAOB to incur recurring costs with no
expected improvement in sight.
Rule 2107(h) would address the need to make the PCAOB's oversight
more effective and efficient by providing an effective procedural
mechanism to withdraw from PCAOB registration firms that have ceased to
exist or are otherwise defunct, or no longer wish to remain registered.
Commenters were generally supportive of the proposed amendment to
Rule 2107 and stated that they understood the rationale for the
amendment to the rule. In particular, one commenter expressed agreement
that the proposed amendment to Rule 2107 would result in more efficient
use of PCAOB resources.
Furthermore, commenters agreed that the proposed amendment to Rule
2107(h) would address the need to make the PCAOB's oversight more
effective and efficient. One commenter agreed that the amendment
generally will accomplish the objective of providing a mechanism for
the Board to remove from the PCAOB's registration records firms that
are delinquent in filing their annual reports with the PCAOB and paying
their annual fees. Another commenter indicated the proposed amendment
to Rule 2107 would provide the PCAOB with a mechanism to keep its
registration records updated, providing issuers and broker-dealers in
the process of selecting an appropriate accounting firm greater
confidence that any accounting firm they consider hiring is operational
and wishes to remain registered with the PCAOB.
In general, commenters did not introduce arguments or data that
caused the Board to change its assessment of the need for the final
rule amendment. The Board believes the final rule amendment addresses
the problem discussed above, yielding the economic impacts discussed
further below.
Economic Impacts
This section discusses the expected benefits and costs of the final
rule amendment and potential unintended consequences. One commenter
expressed agreement with the benefit and cost evaluation provided in
the Proposing Release and stated that it was not currently aware of any
additional academic studies or data related to the economic impacts of
the proposals that could be used to quantify the benefits and costs.
1. Benefits
Rule 2107(h) would provide an effective procedural mechanism to
withdraw from PCAOB registration firms that have ceased to exist, are
nonoperational, or no longer wish to remain registered. Therefore, it
would facilitate the PCAOB's regulatory objectives discussed above by
enabling
[[Page 92224]]
the public and the PCAOB to have a higher quality list of registered
firms. Such an improvement could provide informational benefits to
investors, audit committees, and other stakeholders by reducing their
information search and processing costs. Additionally, it would reduce
the gaps in information about the operational status of registered
firms.
Additionally, Rule 2107(h) would reduce resources spent by the
PCAOB in efforts to bring delinquent firms into compliance with the
annual reporting and fee payment requirements. This would allow the
PCAOB to more effectively allocate PCAOB staff resources that are
currently used to attempt to contact delinquent firms, which could
enhance the PCAOB's ability to advance its investor protection mission.
One commenter agreed that, by allowing the PCAOB to reallocate staff
resources away from contacting delinquent firms, Rule 2107(h) would
enhance the PCAOB's ability to further its mission.
Further, removing firms that consistently fail to meet their annual
reporting and annual payment obligations will help promote the
integrity of the list of registered firms. By treating consecutive
delinquencies as a constructive request for leave to withdraw, the
PCAOB may foster a sense of fairness among all registered firms, and a
level playing field where compliance with basic requirements, such as
filing annual reports and paying annual fees, is maintained.
Given the nature of these benefits, the PCAOB does not expect a
substantial influence on efficiency, competition, or capital formation
as a result of the rule amendment.
2. Costs
Rule 2107(h) would impose potential incremental costs only on
operating firms with at least two years of consecutive delinquencies.
As discussed above, 80 firms currently meet the criterion for Rule
2107(h)'s withdrawal process. For firms that no longer exist, are
nonoperational, or no longer wish to remain registered, the Board does
not anticipate any costs with respect to being removed from the PCAOB's
registration records.\48\
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\48\ As discussed above, among the 80 firms that meet the
criterion for Rule 2107(h)'s constructive-withdrawal-request process
based on the 2022 and 2023 reporting years, 58 had not filed annual
reports and had not paid annual fees since at least 2019. The PCAOB
staff's analysis has found that only one of the 80 firms has any
indication that it may have performed services requiring
registration in recent years. Should this firm's noncompliance
persist, it could be subject to the Rule 2107(h) constructive-
withdrawal-request process and could utilize the rule's safeguards
to stop the withdrawal process if it wishes to remain registered.
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For any firms that wish to remain registered, they would incur the
cost of stopping the withdrawal process under Rule 2107(h), by
preparing and submitting an email to the PCAOB notifying the staff of
their desire to remain registered with the Board as directed in the
Notice of Delinquency and Impending Withdrawal within the 60-day
period.
Rule 2107(h) includes several safeguards to protect firms that wish
to remain registered but may be unaware that the withdrawal process has
commenced. These include multiple forms of notice, a 60-day window
during which firms can stop the withdrawal process, and a
straightforward process to stop the withdrawal. These measures should
significantly reduce the likelihood of a firm being withdrawn under
Rule 2107(h) without its knowledge, which should attenuate any
potential costs or disruptions associated with an unexpected
withdrawal.\49\
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\49\ While unlikely, there exists a possibility that a firm
might unexpectedly discover that its registration has been withdrawn
under Rule 2107(h), despite the rule's safeguards. Should this
occur, the firm would need to undertake the process of re-
registering with the PCAOB if it wished to provide services
requiring registration, thereby incurring the costs associated with
registration. Additionally, the firm could lose business from
issuers or broker-dealers that might have engaged the firm's audit
services had it maintained its PCAOB registration.
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The Board did not receive specific comments on the costs of Rule
2107(h). However, a commenter expressed the belief that the expected
implementation costs of the proposals as a whole would be minimal,
which would result in a net positive economic impact. Based on the
above discussion of the incremental costs expected to result from this
amendment, the Board does not anticipate a significant impact on
efficiency, competition, or capital formation.
3. Potential Unintended Consequences
In addition to the benefits and costs discussed above, the final
rule amendment could have unintended economic consequences. One
commenter noted that the potential unintended consequences discussed in
the proposals are adequate. There were no other comments related to
potential unintended consequences with respect to the proposed
amendment to Rule 2107. The following discussion describes potential
unintended consequences considered by the Board and, where applicable,
factors that mitigate those potential consequences.
Rule 2107(h) provides a new procedural mechanism that would make
consecutively delinquent registered firms eligible for withdrawal from
PCAOB registration. Because this mechanism does not require affirmative
action by a firm, an unintended consequence could arise if a firm was
withdrawn from registration contrary to the firm's wishes. This could
potentially impact clients, potential clients, and the public. However,
as noted above, Rule 2107(h) includes several safeguards--including
multiple forms of notice and a straightforward process to stop the
withdrawal process--that should significantly reduce the likelihood of
such an occurrence. Should such an exceptional situation arise, the
firm has the option to reapply for registration and present to the
PCAOB any special circumstances that led to the firm's noncompliance
with the PCAOB's annual reporting and fee payment rules and its
inability to stop the Rule 2107(h) withdrawal procedure.\50\
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\50\ While unlikely, it is conceivable that, despite the PCAOB's
best efforts to provide notice, a firm deemed withdrawn under Rule
2107(h) may issue an audit report, or update or dual-date a
previously-issued report, that gets included in a filing with the
Commission. In such a scenario, the Commission has authority to
bring an enforcement action against the firm; the Board may consider
such conduct if the firm applies to re-register; and issuer and
broker-dealer clients of the firm may incur costs to engage a new
accounting firm, as well as reputational costs.
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Alternatives Considered
The Board considered alternatives to the final rule amendment,
taking into account feedback from commenters on alternative approaches
considered in the Proposing Release, as well as other alternatives
suggested by commenters. This section considers all of the alternative
approaches and discusses what the Board believes to be the most
reasonable alternatives.
Rather than a constructive-withdrawal-request approach to
delinquent annual reports and annual fees, the Board considered an
expedited enforcement approach. Although issuing an order imposing a
disciplinary sanction on these firms, upon a finding of consecutive
violations of the Board's annual reporting and annual payment
requirements, is a possibility, instituting and resolving an expedited
disciplinary proceeding would require significantly more PCAOB staff
time and other Board resources than the approach outlined in Rule
2107(h).\51\ Furthermore, revocation
[[Page 92225]]
would take significantly longer as compared to the approximately 60
days it would take following the approach outlined in Rule 2107(h).
Therefore, the Board has adopted the constructive-withdrawal-request
approach largely as it was originally proposed.
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\51\ In such litigation, even in circumstances where the firm is
defunct, the hearing officer may need to address service issues
(including for non-U.S. firms), issue a show-cause order, enter
default (after DEI files a motion), and issue an initial decision
specifying and justifying sanctions. Such litigation also consumes
significant DEI staff time, in light of the production requirements
of PCAOB Rule 5422, Availability of Documents For Inspection and
Copying, as well as the motion practice and briefing that is
expected on sanctions. The adopted approach would avoid these
delays.
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Some commenters stated they would be supportive of constructive
withdrawal requests if a firm fails to file annual reports or fails to
pay annual fees. The Board believes the dual condition of both failure
to file annual reports and failure to pay annual fees appropriately
identifies firms that cease to exist, are nonoperational, or no longer
wish to remain registered. A firm that has done one or the other but
not both implies some level of activity at the firm and wish to remain
registered, indicating that other tools in the PCAOB's toolkit may be
available to promote compliance.
One commenter suggested reducing the threshold for constructive
withdrawal requests to one year of noncompliance, but the Board
concluded that this could increase the risk of withdrawing from
registration operational firms that wish to remain registered.\52\
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\52\ As discussed above, the minimum amount of time that a firm
must be delinquent in filing annual reports and paying annual fees
before meeting the threshold of two consecutive reporting years is
13 months. In contrast, under a framework that considers only a
single reporting year's noncompliance, a firm would be eligible for
the constructive-withdrawal-request mechanism after only one month
of delinquency, spanning from the firm's failure to file an annual
report by June 30 of the reporting year to the firm's failure to pay
the annual fee by July 31 of the same reporting year. The Board
believes that such a brief period of delinquency is not sufficient
to indicate that a firm has ceased to exist, is nonoperational, or
no longer wishes to remain registered.
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The Board believes that both of these alternative processes
suggested by commenters would enhance the risk of a withdrawal from
registration of operational firms that wish to remain registered. The
procedural safeguards in Rule 2107(h), including the timing parameters,
help ensure that the Rule 2107(h) process does not impose a significant
burden on firms that inadvertently fail to comply with the annual
reporting and annual payment requirements or on other entities
(clients, investors, etc.). The requirements set forth in Rule 2107(h)
provide firms sufficient notice and a clear process that governs how
and when a firm's registration would be withdrawn based on a
constructive withdrawal request.
In response to a commenter's suggestion, the Board extended from 30
days to 60 days the time that these firms have to decide whether to
send an email to the Registration staff so that firms can remain
registered. This change may incrementally reduce the likelihood of
withdrawals from registration of a firm that is operational and wishes
to remain registered.
Special Considerations for Audits of Emerging Growth Companies
Pursuant to Section 104 of the Jumpstart Our Business Startups
(``JOBS'') Act, rules adopted by the Board subsequent to April 5, 2012,
generally do not apply to the audits of emerging growth companies
(``EGCs''), as defined in Section 3(a)(80) of 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.'' \53\ As a
result of the JOBS Act, the rules that the Board adopts are generally
subject to a separate determination by the Commission regarding their
applicability to audits of EGCs.
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\53\ See Public Law 112-106 (Apr. 5, 2012). Section 103(a)(3)(C)
of the Act, as added by Section 104 of the JOBS Act, also provides
that any rules of the Board requiring (1) mandatory audit firm
rotation or (2) 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 of the issuer (auditor
discussion and analysis) shall not apply to an audit of an EGC. The
final rule amendment does not fall within either of these two
categories.
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The final rule amendment does not impose any additional
requirements on emerging growth company audits. Accordingly, the Board
believes that Section 103(a)(3)(C) of the Act does not apply.
Nevertheless, the Board has included this analysis to inform the
rulemaking. The discussion of benefits, costs, and unintended
consequences above generally applies to audits of EGCs.
To inform consideration of the application of PCAOB rules and
standards to audits of EGCs, PCAOB staff prepares a white paper
annually that provides general information about characteristics of
EGCs.\54\ As of the November 15, 2022 measurement date, PCAOB staff
identified 3,031 companies that self-identified with the Commission as
EGCs and filed audited financial statements in the 18 months preceding
the measurement date.\55\
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\54\ See PCAOB Office of Economic and Risk Analysis,
Characteristics of Emerging Growth Companies and Their Audit Firms
at November 15, 2022 (Feb. 20, 2024) (``EGC Staff White Paper''),
available at https://assets.pcaobus.org/pcaob-dev/docs/default-source/economicandriskanalysis/projectsother/documents/white-paper-on-characteristics-of-emerging-growth-companies-as-of-nov-15-2022.pdf?sfvrsn=a8294f3_4.
\55\ The EGC Staff White Paper uses a lagging 18-month window to
identify companies as EGCs. Please refer to the ``Current
Methodology'' section in the Staff White Paper for details. Using an
18-month window enables staff to analyze the characteristics of a
fuller population in the EGC Staff White Paper but may tend to
result in a larger number of EGCs being included for purposes of the
present EGC analysis than would alternative methodologies. For
example, an estimate using a lagging 12-month window would exclude
some EGCs that are delinquent in making periodic filings. An
estimate as of the measurement date would exclude EGCs that have
terminated their registration, or that have exceeded the eligibility
or time limits. In the EGC Staff White paper, PCAOB staff identified
263 registered audit firms that issued audit reports for the 3,031
EGCs as of the November 15, 2022 measurement date. None of these 263
audit firms are among the 80 firms that failed to file annual
reports and pay annual fees for reporting years 2022 and 2023.
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EGCs are likely to be newer companies, and their audit committees
may have limited experience in seeking and selecting PCAOB-registered
public accounting firms. The removal of consecutively delinquent firms
from the PCAOB registration database, as facilitated by Rule 2107(h),
could enhance the quality of the information available and reduce
information search costs, thereby aiding the decision-making of these
stakeholders. As for the costs associated with the final rule
amendment, which are likely to be incremental for operating firms that
wish to remain registered, the Board has no reason to believe that
registered firms providing services to EGCs will incur costs that are
greater than those incurred by firms providing services to non-EGCs.
Commenters agreed that the proposals generally should apply to
audits of EGCs and that excluding the application of the proposals from
audits of EGCs would be inconsistent with protecting the public
interest.
Accordingly, and for the reasons explained above, the Board has
requested that the Commission determine, to the extent that Section
103(a)(3)(C) of the Act applies, 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 final rule amendment to audits of EGCs.
III. Date of Effectiveness of the Proposed Rules and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal
[[Page 92226]]
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Board consents, the Commission will:
(A) By order approve or disapprove such proposed rules; or
(B) Institute proceedings to determine whether the proposed rules
should be disapproved.
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 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); or
Send an email to [email protected]. Please include
PCAOB-2024-05 on the subject line.
Paper Comments
Send paper comments in triplicate to Vanessa A.
Countryman, Secretary, Securities and Exchange Commission, 100 F Street
NE, Washington, DC 20549-1090.
All submissions should refer to PCAOB-2024-05. 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 website (https://www.sec.gov/rules/pcaob). 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 website viewing and printing in the Commission's
Public Reference Room, 100 F Street NE, Washington, DC 20549, on
official business days between the hours of 10 a.m. and 3 p.m. Copies
of such filing will also be available for inspection and copying at the
principal office of the PCAOB. Do not include personal identifiable
information in submissions; you should submit only information that you
wish to make available publicly.
We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to PCAOB-2024-05 and should be submitted
on or before December 12, 2024.
By the Commission.
Vanessa A. Countryman.
Secretary.
[FR Doc. 2024-27247 Filed 11-20-24; 8:45 am]
BILLING CODE 8011-01-P