Notice2025-00119
Public Company Accounting Oversight Board; Order Granting Approval on Constructive Requests To Withdraw From Registration
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Published
January 7, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 4 (Tuesday, January 7, 2025)</title>
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[Federal Register Volume 90, Number 4 (Tuesday, January 7, 2025)]
[Notices]
[Pages 1212-1215]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-00119]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102074; File No. PCAOB-2024-05]
Public Company Accounting Oversight Board; Order Granting
Approval on Constructive Requests To Withdraw From Registration
January 2, 2025.
I. Introduction
On November 14, 2024, the Public Company Accounting Oversight Board
(the ``PCAOB'') filed with the Securities and Exchange Commission (the
``Commission''), pursuant to section 107(b) \1\ of the Sarbanes-Oxley
Act of 2002 (``SOX'') and section 19(b) \2\ of the Securities Exchange
Act of 1934 (the ``Exchange Act''), a proposed amendment to PCAOB Rule
2107, Withdrawal from Registration (the ``Amendment'').\3\
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\1\ 15 U.S.C. 7217(b).
\2\ 15 U.S.C. 78s(b).
\3\ See Public Company Accounting Oversight Board; Notice of
Filing of Proposed Rules on Constructive Requests to Withdraw from
Registration, Release No. 34-101644 (Nov. 15, 2024) [89 FR 92213
(Nov. 21, 2024)] (``Notice of Filing of Proposed Rules''), available
at <a href="https://www.sec.gov/files/rules/pcaob/2024/34-101644.pdf">https://www.sec.gov/files/rules/pcaob/2024/34-101644.pdf</a>.
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The Amendment was published for comment in the Federal Register on
November 21, 2024.\4\ The Commission received one comment letter from
the public regarding the Amendment.\5\ This order approves the
Amendment, which we find to be consistent with the requirements of
Title I of SOX and the rules and regulations issued thereunder and
necessary or appropriate in the public interest or for the protection
of investors.\6\ The Amendment and the Commission's findings with
respect thereto are discussed in further detail below.
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\4\ Id.
\5\ A copy of the comment letter received on the Commission
notice of the Amendment is available on the Commission's website at
<a href="https://www.sec.gov/comments/pcaob-2024-05/pcaob202405.htm">https://www.sec.gov/comments/pcaob-2024-05/pcaob202405.htm</a>.
\6\ See section 107(b)(4)(A) through (B) of SOX, 15 U.S.C.
7217(b)(4)(A) through (B).
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II. Description of the Amendment
On November 14, 2024, the PCAOB adopted the Amendment.\7\ The
Amendment was preceded by a proposal on February 27, 2024, ``Proposals
Regarding False and Misleading Statements Concerning PCAOB Registration
and Oversight and Constructive Requests to Withdraw from Registration''
(the ``Proposing Release'').\8\ The PCAOB's process to develop the
Amendment included consideration of the comments received on the
Proposing Release.
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\7\ See Constructive Requests to Withdraw from Registration,
PCAOB Release No. 2024-011 (Nov. 14, 2024) (``Adopting Release''),
available at <a href="https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-054/2024-011-registration.pdf?sfvrsn=35f8b138_2">https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-054/2024-011-registration.pdf?sfvrsn=35f8b138_2</a>.
\8\ 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), available at <a href="https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-054/2024-001-registration.pdf?sfvrsn=51869da_2">https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-054/2024-001-registration.pdf?sfvrsn=51869da_2</a>.
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In the Notice of Filing of Proposed Rules,\9\ the PCAOB stated that
it was proposing the Amendment to enhance its registration program by
creating a more accurate public record of registered public accounting
firms in operation that wish to remain registered.\10\ Under current
rules, a registered public accounting firm can be removed from PCAOB
registration only if the PCAOB either: (1) authorizes a withdrawal from
registration based on a firm-initiated withdrawal request \11\ or (2)
imposes a disciplinary sanction revoking the firm's registration.\12\
The
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Amendment establishes a new procedural mechanism 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,
for at least two consecutive reporting years, to both (1) file annual
reports (PCAOB Form 2, Annual Report) and (2) pay annual fees.
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\9\ Public Company Accounting Oversight Board; Notice of Filing
of Proposed Rules on Constructive Requests to Withdraw from
Registration, Release No. 34-101644 (Nov. 15, 2024) [89 FR 92213]
(Nov. 21, 2024) (``Notice of Filing of Proposed Rules''), available
at <a href="https://www.sec.gov/files/rules/pcaob/2024/34-101644.pdf">https://www.sec.gov/files/rules/pcaob/2024/34-101644.pdf</a>.
\10\ Notice of Filing of Proposed Rules at 7.
\11\ Rule 2107 provides that a registered firm may request leave
to withdraw from registration at any time by filing Form 1-WD.
\12\ See Adopting Release at 2.
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The PCAOB explains that, despite repeated reminders, a consistent
group of firms neither files annual reports nor pays annual fees each
year.\13\ The presence of continuously delinquent firms on its list of
registered firms hinders several regulatory objectives, including the
PCAOB's ability to maintain an accurate public record of registered
public accounting firms in operation and 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 staff time and resources.\14\ With
the Amendment, the PCAOB aims to have 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.\15\
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\13\ Id. at 3.
\14\ Id. at 4.
\15\ Id. at 5.
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The Amendment, which adds paragraph (h) to existing Rule 2107,
allows the PCAOB to treat failures to both (1) file annual reports
(PCAOB Form 2, Annual Report) and (2) pay annual fees, for at least two
consecutive reporting years, as a constructive request to withdraw from
registration, and to initiate a process to deem the firm's registration
withdrawn. To initiate the constructive withdrawal process, the PCAOB
would furnish the firm with a written Notice of Delinquency and
Impending Withdrawal (the ``Notice''), designed to provide the firm
with notice of the process, the reason for commencement of the process,
and its significance for the firm's registration.\16\ The Notice would
provide that the firm has 60 days to contact the PCAOB's registration
staff by email to avoid withdrawal.\17\ The Notice would be sent to the
firm's primary contact, as identified in the firm's most recent filing
with the PCAOB on Forms 1, 2, 3, or 4, via mail or commercial courier
service, and the PCAOB would obtain a confirmation of actual or
attempted delivery.\18\ In addition to the mailed Notice, the PCAOB
would also publish notice of the impending withdrawal on its public
website.\19\
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\16\ Id. at 14.
\17\ Id. at 16.
\18\ Id. at 15.
\19\ Id.
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III. Effective Date
The Amendment will be effective initially for annual reports and
annual fees that are due in 2025. This means that a registered firm
that does not file an annual report and does not pay an annual fee in
2025 and 2026 could have its registration deemed withdrawn under Rule
2107(h) beginning in the fall of 2026.
IV. Discussion and Commission Findings
a. Existing Requirements and Current Non-Compliance
Section 102(d) of SOX requires each registered firm to submit an
annual report to the PCAOB, while section 102(f) directs the PCAOB to
assess and collect annual fees from each registered firm. Registration
of firms and collecting annual fees to recover the cost of processing
and reviewing registration applications and annual reports \20\ are
important components of the framework that enables the PCAOB to fulfill
its investor protection mandate. Despite the express statutory
requirements set forth in SOX, and repeated reminders from the PCAOB,
however, a consistent group of firms neither files annual reports nor
pays annual fees each year.\21\ Moreover, PCAOB 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.\22\ The PCAOB states that this pattern of
delinquency may be a result of firms that have ceased to exist, are
non-operational, or otherwise do not wish to remain registered.\23\
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\20\ See SOX section 102(f), 15 U.S.C. 7212(f).
\21\ See Adopting Release at 3.
\22\ Id. at 10.
\23\ Id. at 3.
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The presence on PCAOB's registration list of firms that
continuously fail to meet their basic obligations to maintain
registration hinders several important PCAOB regulatory objectives:
maintaining an accurate public record of registered public accounting
firms in operation that wish to remain registered; ensuring that the
public has access to information required by the annual report;
collecting fees to support operation of its registration program; and
efficiently using staff time and resources.\24\ We note that the PCAOB
currently has only two mechanisms for removing a registered public
accounting firm from PCAOB registration: (1) authorizing a withdrawal
from registration based on a firm-initiated withdrawal request \25\ or
(2) imposing a disciplinary sanction revoking the firm's
registration.\26\ Both mechanisms require some active engagement with
the firms--they begin with either the firm initiating a request for
withdrawal or the PCAOB's Office of Secretary providing notice of an
Order Instituting Disciplinary Proceedings to the firm, which may not
be possible in circumstances where the firm has ceased to exist, is
non-operational, or for some other reason fails to comply with the
basic requirements of registration.\27\ By allowing the PCAOB to deem a
firm's registration withdrawn under specified conditions and subject to
certain procedural safeguards, the Amendment will help the PCAOB use
its resources more efficiently and enhance its registration program by
maintaining an accurate public record.
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\24\ Id. at 4.
\25\ Id. at 2.
\26\ Id.
\27\ Id. at 6. To initiate withdrawal from registration, a
registered firm must file a Form 1-WD. See Rule 2107(d), while a
revocation begins with the PCAOB's Office of the Secretary providing
notice of an Order Instituting Proceedings to the firm. See PCAOB
Rule 5201, Notification of Commencement of Disciplinary Proceedings.
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b. Rule 2107(h) Mechanism for Constructive Withdrawal and Procedural
Protections
Under the new procedural mechanism in Rule 2107(h), the PCAOB would
be able to deem a firm to have made a constructive request to withdraw
if the firm has, for at least two consecutive reporting years, failed
to both (1) file annual reports (PCAOB Form 2, Annual Report) and (2)
pay annual fees.
Given that these represent two of the primary obligations of
registered firms, we believe it is appropriate for the PCAOB to deem
such failures as a constructive request to withdraw, and that in these
circumstances the PCAOB should, with adequate procedural protections,
take steps to withdraw such firm from registration. We note that the
Rule 2107(h) process is discretionary, and the PCAOB has stated that
its staff will continue to send warning letters each year to delinquent
registered firms.\28\
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\28\ See Adopting Release at 14.
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The PCAOB concluded that the two-year benchmark is an appropriate
proxy for firms that have ceased to exist, are non-operational, or no
longer wish to remain registered, whereas one reporting year of
delinquency was an
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insufficient basis upon which to infer that a firm no longer wished to
remain registered, and three or more years may unduly delay appropriate
regulatory action.\29\ We agree that two years of delinquencies in
complying with the basic obligations for registration of paying fees
and filing reports strikes the appropriate balance of regulatory
efficiency and fairness to firms.
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\29\ Id. at 13.
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As described above in more detail, to initiate the constructive
withdrawal process, the PCAOB would furnish the firm with a written
Notice of Delinquency and Impending Withdrawal (the ``Notice''), to the
firm's primary contact as identified in the firm's most recent PCAOB
filing on Forms 1, 2, 3, or 4.\30\ In addition to written notice, the
PCAOB will also publish notice of the impending withdrawal on its
public website.\31\ We believe that these two methods are reasonably
designed to provide firms with notice of the constructive withdrawal
process, particularly in light of the fact that firms are required to
maintain updated contact information.\32\
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\30\ Id. at 15.
\31\ Id.
\32\ Id.
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After the date the PCAOB sends the Notice, the firm has a 60-day
period in which to send the PCAOB's registration staff an email
indicating that it wishes to remain registered to stop the constructive
withdrawal process. In evaluating the sufficiency of the procedural
protections, we note that a firm will have approximately two months to
evaluate and respond to the Notice and that it is not required to
become current in its filings or fees to stop the constructive
withdrawal process; the firm need only send an email to the staff to
stop the constructive withdrawal process. This relatively low barrier
to stopping the process should help ensure that firms that are in
existence, operational, and wish to remain registered are not removed
pursuant to this procedural mechanism, which is intended principally to
address delinquencies that are due to firms ceasing to exist or
operate, or otherwise no longer wishing to remain registered. In
reaching this conclusion, however, we reiterate that, as observed by
the PCAOB, violations of the PCAOB's reporting and fee requirements
remain subject to enforcement.\33\
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\33\ Id. at 13.
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c. Withdrawal From Registration
If a firm does not notify the PCAOB that it wishes to remain
registered in the 60-day period, the PCAOB is able to treat its
consecutive failures for two years to file an annual report and pay
annual fees as a constructive request to withdraw and to deem the
firm's registration withdrawn. We note that, as a withdrawal-based
mechanism, Rule 2107(h) is not a disciplinary proceeding or process,
and, accordingly, withdrawal pursuant to this provision is not reported
as a disciplinary sanction to any interested authorities.\34\ Further,
a firm whose registration is withdrawn, if it were in existence and
operational notwithstanding the consecutive delinquencies triggering
constructive withdrawal, would retain eligibility to perform work on
audits of issuers or broker-dealers, provided such work remains below
the substantial role threshold established by Rule 1001(p)(ii) and
PCAOB Rule 2100.\35\ Finally, 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
PCAOB.\36\
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\34\ Id. at 7.
\35\ Id.
\36\ Id.
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The comment period closed on the Amendment on December 12, 2024. We
received one comment letter, from an accounting firm. The commenter
supported the Amendment, stating that the Amendment would create a more
accurate public record of registered public accounting firms in
operation that wish to remain registered.
V. Effect on Emerging Growth Companies
Section 103(a)(3)(C) of SOX requires that any rules of the PCAOB
requiring mandatory audit firm rotation or a supplement to the
auditor's report in which the auditor would be required to provide
additional information about the audit and the financial statements of
the issuer (auditor discussion and analysis) shall not apply to an
audit of Emerging Growth Companies (``EGCs'').\37\ The provisions of
the Amendment do not fall into these categories.
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\37\ 15 U.S.C. 7213(a)(3)(C). The term ``emerging growth
company'' is defined in section 3(a)(80) of the Exchange Act (15
U.S.C. 78c(a)(80)). See also Inflation Adjustments under Titles I
and III of the JOBS Act, Release No. 33-11098 (Sept. 9, 2022) [87 FR
57394 (Sept. 20, 2022)], available at <a href="https://www.sec.gov/files/rules/final/2022/33-11098.pdf">https://www.sec.gov/files/rules/final/2022/33-11098.pdf</a>.
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Section 103(a)(3)(C) further provides that ``[a]ny additional
rules'' adopted by the PCAOB after April 5, 2012, do not apply to
audits of EGCs ``unless the Commission determines that the application
of such additional requirements is necessary or appropriate in the
public interest, after considering the protection of investors and
whether the action will promote efficiency, competition, and capital
formation.'' \38\ In the Notice of Filing of Proposed Rules, the Board
expressed its view that section 103(a)(3)(C) does not apply to the
Amendment because the Amendment does not compose any additional
requirements on audits. To the extent that section 103(a)(3)(C) does
apply, however, the Board recommended that the Commission determine
that the Amendment apply to audits of EGCs.\39\
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\38\ Id.
\39\ See Notice of Filing of Proposed Rules, Special
Considerations for Audits of Emerging Growth Companies.
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With respect to the Commission's determination of whether the
Amendment will apply to audits of EGCs, the PCAOB provided information,
including data and analysis of EGCs, that sets forth its views as to
why it believes the Amendment should apply to audits of EGCs. The PCAOB
stated that an annual white paper prepared by its staff concluded that
there were 3,031 companies that self-identified with the Commission as
EGCs and filed audited financial statements in the preceding 18
months.\40\ The PCAOB further stated that EGCs are likely to be newer
companies, with audit committees having more limited experience in
managing the process for finding and selecting a PCAOB-registered
public accounting firm. Removal of consecutively delinquent firms, that
are likely to be non-existent, non-operational, or no longer wish to be
registered, could help reduce the search costs associated with making
this decision. Further, the PCAOB indicated that it had 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, which are, in either case, likely to be incremental for
operating firms that wish to remain registered. The PCAOB also noted
that 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.
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\40\ See Notice of Filing of Proposed Rules (citing PCAOB Office
of Economic and Risk Analysis, Characteristics of Emerging Growth
Companies and Their Audit Firms at November 15, 2022 (Feb. 20,
2024), available at <a href="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">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</a>).
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We agree with the PCAOB's assessment as to the costs and benefits
of the Amendment to EGCs. In particular, we agree that the Amendment
may be of particular benefit to EGCs where audit committees may have
less experience searching for and engaging audit firms, and may stand
to benefit most from improved data quality as it relates to auditors.
Accordingly, to the extent that section 103(a)(3)(C) applies, and after
considering the protection of investors and whether the action will
promote efficiency, competition, and capital formation, we believe
there is a sufficient basis to determine that applying the Amendment to
the audits of EGCs is necessary or appropriate in the public interest.
VI. Conclusion
The Commission has reviewed and considered the Amendment, the
information submitted therewith by the PCAOB, the comment letter
received, and the recommendation of the Commission's staff. The
Commission concludes that the determinations made by the PCAOB as
described in the Adopting Release are reasonable. The Amendment
establishes an efficient procedural mechanism for the PCAOB to remove
from registration firms that have ceased to exist, are non-operational,
or no longer wish to remain registered. We agree that, as the PCAOB
explains, the presence of continuously delinquent firms on the PCAOB'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 and 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.\41\
The Amendment will provide the PCAOB with an efficient mechanism to
achieve these regulatory goals, while, through various procedural
safeguards, balancing the need for reasonable and fair notice to firms
that do indeed wish to maintain their registration.
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\41\ See Adopting Release at 4.
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Therefore, in connection with the PCAOB's filing and the
Commission's review,
A. The Commission finds that the Amendment is consistent with the
requirements of Title I of SOX and the rules and regulations thereunder
and are necessary or appropriate in the public interest or for the
protection of investors; and
B. Separately, to the extent that section 103(a)(3)(C) of SOX
applies, the Commission finds that the application of the Amendment to
the audits of EGCs is necessary or appropriate in the public interest,
after considering the protection of investors and whether the action
will promote efficiency, competition, and capital formation.
It is therefore ordered, pursuant to section 107 of SOX and section
19(b)(2) of the Exchange Act, that the Amendment (File No. PCAOB-2024-
05) be and hereby is approved.
By the Commission.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2025-00119 Filed 1-6-25; 8:45 am]
BILLING CODE 8011-01-P
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