These proposals would revise the Board's rules in light of the Dodd-Frank Act and would also make an assortment of other updating and clarifying changes. The principal PCAOB impacts of the Dodd-Frank Act are to give the Board regulatory authority over auditors of securities brokers and dealers and to empower the Board to share nonpublic inspection information with foreign regulators. The new law also made some technical changes to the Board's authority unrelated to those two objectives, such as clarifying that the Board retains enforcement jurisdiction over people who violate Board rules or standards, but leave the accounting profession before the Board has a chance to commence disciplinary action against them.
Clearly, the Board needs to conform its rules to changes in the statutes that govern its work, and I support the proposals. To the extent they flow from Dodd-Frank, the amendments the staff has proposed should be largely non-controversial.
However, mixed in with this regulatory housekeeping are some more significant issues. I hope that investors, public companies, broker-dealers, and auditors will not let their eyes glaze over as they wade through the regulatory minutiae and miss the nuggets of policy. I would particularly direct attention to three areas.
First, as we have discussed at other public meetings, most broker-dealers are small, non-public companies. The rules that work for public company auditors may not always make sense for closely-held, mom-and-pop operations. For example, the Board is not proposing to extend the requirement for audit committee pre-approval of auditor non-audit services to broker-dealer engagements. The Board is, however, proposing to apply the same prohibition against the auditor providing tax services to individuals who are involved in the financial reporting process to broker-dealer auditors as already apply to issuer auditors.
While in general the lines drawn in the proposed amendments make sense, I have doubts about the personal tax services provision. As the proposing release explains, the Board adopted that part of its independence rules in 2005, in response to situations in which the auditor's tax advice to corporate executives seemed to be in conflict with the best interests of the public company. Clearly, the auditor should not be involved in situations in which corporate insiders responsible for financial reporting cause a publicly-held company to structure their compensation in a way that reduces the insiders' taxes, but increases the company's. But it is far from clear — at least to me — that the same concerns apply to privately-held brokerage firms, especially ones that are owned by a single individual or a small group of partners. In those cases, the conflict between the audit client and the insider does not exist, since there are no public shareholders.
Second, there are some significant proposals in this release that would affect public company auditors. For example —
- The Board is proposing to require the filing of a special report if a registered accounting firm resigns, declines to stand for re-appointment, or is dismissed from an issuer audit engagement and the issuer fails to file the required Form 8-K report with the SEC. This proposed change addresses the potential risk posed when issuers (including significant subsidiaries) change auditors, but fail to notify the Commission and the investing public.
- The Board is also proposing to revise it annual reporting form, Form 2, to reflect the Dodd-Frank requirement that certain foreign public accounting firms must designate the Board or the Commission is the firm's agent for service of process under Section 106 of the Act. Designating such an agent makes it more feasible for the Commission to compel foreign firms to produce work papers in SEC investigations. In effect, the proposal would require firms to indicate in their annual reports to the Board whether or not they have complied with this new law.
I have no particular problem with these proposals, but they may raise issues of the extent to which the Board should use its authority to require firms to file reports as a lever to encourage compliance, or to compensate for non-compliance, with other laws or with the SEC's 8-K requirements. Commenters may want to consider that issue.
Finally, these amendments include changes to the rules that govern Board disciplinary proceedings, including increasing the level of fines, specifying the burden of proof with respect to affirmative defenses, and encouraging affidavits in support of Wells submissions. While I don't think any of these will have a major effect on the way Board enforcement proceedings are conducted, those who regularly practice before the Board should certainly pay attention to them. PCAOB enforcement practitioners may also have ideas for other ways in which the procedural framework that governs the enforcement process could be improved.
As the Board gains more experience with its new authority under Dodd-Frank, I expect that further revisions to the Board's rules and procedures will be necessary. In the meantime, I hope that commenters will provide any insights they may have on the practical application of these proposals and on whether there are other amendments that should be considered now.
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I want to close by recognizing the staff members who have worked hard over the last several months to prepare this release and the related rule changes. The work was, I am sure, at some points interesting and stimulating, but at others tedious, if not mind-numbing. The main authors of the release were Nancy Doty, Associate General Counsel, and Vincent Meehan, Assistant General Counsel. Bob Burns, Associate General Counsel, also played a key role. Thanks to all of you for your efforts. Thanks also to our colleagues at the SEC for their helpful suggestions.