I support the recommendation of the staff that the Board adopt a series of amendments to PCAOB rules and forms, including certain conforming amendments to amend existing Board rules to reflect the provisions of the Dodd-Frank Act and the Act's grant of authority to the PCAOB to oversee the audits of brokers and dealers.
As the staff has noted, most of these amendments follow directly from the Dodd-Frank Act and its grant of authority to the Board over the auditors of brokers and dealers. While largely technical in nature and not based on discretionary policy decisions by the Board, these amendments are intended to reflect the broader investor protection mandate inherent in the Dodd-Frank amendments to the Sarbanes-Oxley Act.
The Board also is adopting a series of amendments to existing PCAOB rules driven by the board's administrative experience, including the clarification of certain areas that may have caused confusion in the past.
I believe that the Board's decisions with regard to the non-technical amendments strike an appropriate balance between investor protection and regulatory burdens. I will comment on just a few of these decisions.
First, with regard to PCAOB Rule 3523 (Tax Services for Persons in a Financial Reporting Oversight Role), we have decided not to apply this rule to the auditors of brokers and dealers at this time, but to consider in connection with our interim inspection program whether there is, in fact, a problem with regard to broker-dealer auditor independence that needs to be addressed. As commenters pointed out, there are some significant differences between broker-dealers and issuers, and the way they are owned and managed, such that the rule may not have the same benefits as it does in the context of issuers. Moreover, because of certain characteristics of the audit market for brokers and dealers, the potential costs of imposing this requirement on auditors of brokers and dealers may need to be more carefully considered. I am hoping that we can gather some data related to this question in connection with our interim inspection program, allowing us to revisit this question when we establish a permanent inspection program.
I would also like to touch on the requirement for auditors to file with the PCAOB, within 30 days, a Form 3 in order to report the fact that a client-auditor relationship has ended and the issuer has not reported the change in auditors on a Form 8-K, as required by the SEC. We received several comments that the proposed requirement would overlap with the SECPS membership requirement that firms report to the SEC's Office of the Chief Accountant if their relationship with the client has ended. However, we are also adopting amendments to that SECPS requirement, to limit the requirement for auditor reporting to the SEC only to those cases where the issuer has failed to file Form 8-K within four business days of an auditor change, as required. Thus, under the framework adopted, the auditor reporting requirements will be as follows:
- Firms that are subject to SECPS requirements who have resigned, declined to stand for re-election or been dismissed as auditors of an issuer must, by the end of the fifth business day after the auditor-client relationship ended, make a non-public notification to the SEC's Office of the Chief Accountant if the issuer has failed to file Form 8-K prior to that time.
- All PCAOB registered firms, regardless of whether they are subject to SECPS requirements, must file Form 3, a public document, within 30 days of the auditor change if the issuer still has not made the required 8-K filing.
Thus, while there is a dual reporting requirement on some firms, the requirements are only triggered if the issuer has failed to submit the required filing for 5 days and 30 days, respectively. I believe that the narrowing of the SECPS requirements to require a non-public filing to the SEC relatively quickly, but only if the 8-K filing is not made, to be followed by a public filing to the PCAOB only if the issuer still has not announced the auditor change almost a month later, is an appropriate approach that makes important information available to investors and the public and does not present an undue burden on auditors.
Also related to this issue is the Board's decision not to extent to brokers and dealers the Form 3 requirement for issuer auditors to report to the PCAOB any instances in which the firm has withdrawn its audit report for an issuer. Because requiring this notification would go beyond current SEC requirements. The Board noted, however, that it may revisit this issue in connection with the consideration and adoption of a permanent inspection program.
I would also like to comment on the effective date for the amendments. As explained in the release, if approved by the SEC, the amendments we adopt today will take effect as follows:
- June 1, 2014 — amendments to the PCAOB's rules, SECPS membership requirements, and Ethics Code
- July 1, 2014 -- amendments to Forms 1, 1-WD, 3, and 4
- April 1, 2015 — the amendments to Form 2
The June 1, 2014 effective date for the PCAOB rule amendments coincides with the effective dates for the SEC's recent amendments to Rule 17a-5, and, if approved, the PCAOB's new attestation standards for the audits of brokers and dealers. This should allow auditors sufficient time to understand and then simultaneously incorporate into their processes many of the new requirements related to broker-dealer audits. With respect to the Form 2 filing, the Board has determined to delay the implementation of those requirements to April 1, 2015, in order to allow audit firms more time to begin to compile relevant information and to allow the Board sufficient time to implement necessary changes in its information technology systems. The first time firms would have to provide broker-dealer information in the amended Form 2, then, would be on or before June 30, 2015 — the usual annual deadline for the filing of the firm's annual PCAOB reports — with respect to information for the 12 months preceding March 31, 2015.
Finally, although not directly relevant to the amendments proposed by the Board last year or adopted today, I would like to comment briefly on PCAOB Rule 5102 and the Board's current practice of not allowing accounting experts employed by the firm under investigation to be present during testimony of the partners or employees of that firm. In response to a general request for other comments, several audit firms and the Center for Audit Quality advocated for a change in this practice, arguing that not allowing such experts to consult with counsel for the respondent during testimony is unfair to respondents and inconsistent with the SEC's investigative practices. The Board is deferring action on this issue today, but we anticipate discussing this issue with our staff in more detail and will consider carefully whether any changes are warranted. Providing fairness and due process in connection with our enforcement investigations and proceedings is paramount, and we take seriously any concerns expressed that our conduct is contrary to this fundamental principle.
In closing, I would like to add my appreciation to that already expressed by my fellow Board members for the hard work on this project by members of the Office of General Counsel, particularly Nancy Doty and Vince Meehan, as well as the assistance of the Office of the Chief Auditor. The staff spent countless hours checking, revising and re-checking the many detailed provisions that make up this project, and we appreciate their efforts. As usual, we also appreciate the input of the staff at the SEC who provided their perspectives.