As described by the staff and my fellow Board members, this
project involves 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, particularly
the Act's grant of authority to the PCAOB to oversee the audits of
brokers and dealers.
Many 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 proposing 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.
However, among the technical and clarifying amendments are
several that are more substantive and that require the Board to make
policy decisions. Foremost among these is the Board's proposal
regarding whether and how to apply its independence rules to the
auditors of brokers and dealers. Other amendments that do not follow
directly from the Dodd-Frank Act include the proposals to require
certain special reports on PCAOB Form 3 that affect auditors of
issuers as well as brokers and dealers and to require foreign audit
firms to report annually on PCAOB Form 2 whether they have
designated an agent in the U.S. for service of process pursuant to
Section 106 of the Sarbanes-Oxley Act (as amended by the Dodd-Frank
Act). Finally, the proposals include certain amendments to the
Board's rules governing disciplinary proceedings that reflect the
Board's experience conducting such proceedings in years past.
We welcome comments on all aspects of the proposals, and, in
particular, whether they appropriately server our primary goal of
protecting investors. In addition, I would be particularly
interested in receiving comments in connection with the following
issues:
First, has the Board struck the right balance in connection with
the determinations regarding the applicability of the Board's
independence rules to the auditors of brokers and dealers? We have
signaled in the release some concern about the application of Rule
3523 (Tax Services for Persons in a Financial Reporting Oversight
Role) to auditors of brokers and dealers and have specifically
requested comment on this proposal. I also would be interested in
comments addressing whether the application to brokers and dealers
of Rules 3521 (Contingent Fees) and Rule 3522 (Tax Transactions) is
appropriate in situations where the broker and dealer is a
subsidiary or affiliate of other, non-public entities that are not
otherwise subject to PCAOB or SEC independence rules. As defined,
the scope of the term "audit client" broadly includes various types
of affiliates of the actual audit client. The independence
requirements therefore would apply to the broker-dealer's
affiliates, parent companies, subsidiaries and other types of
related entities, limiting the activities of their auditors, even in
situations where the broker dealer may represent a small and
potentially insignificant portion of a much larger entity or network
of affiliates. I would be interested in receiving comment on the
potential burdens of this result and on whether this is likely to be
a common occurrence. Likewise, I urge investors to provide their
views on why application of all three of these rules is important.
Second, the amendments we are proposing today to PCAOB forms are
largely intended to require basic information relating to a firm's
audits of brokers and dealers, generally tracking the information
currently required for issuer audits. It seems reasonable, at this
point, to wait to impose any additional reporting requirements on
auditors of brokers and dealers until the Board has evaluated its
experiences during the interim broker-dealer auditor inspection
program and determined the final scope of its oversight program. Do
commenters agree that this is the right approach? Are there
additional requirements that should be imposed immediately in order
to better protect investors? On the other hand, are there any
reporting requirements in the proposed amendments that would be
imposed on broker-dealer auditors without providing important
information or a specific benefit?
As always, I know we will receive thoughtful and
thought-provoking comments on our proposals, and I look forward to
reading them.
In the meantime, 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, Vince Meehan, and Bob Burns. Their work on
this project was tedious and unglamorous, but certainly thoughtful
and thorough. I would also like to thank the staff of the SEC who
took time to provide input.