The Public Company Accounting Oversight Board (PCAOB) on November 14, 2024, voted unanimously to adopt a portion of a proposing release related to firm registration with the board. The new rule will allow the board to deregister firms that both did not file annual reports on Form 2 and did not pay annual fees to the board for at least two consecutive years.
The rule was proposed late February this year in Release No. 2024-001. But today, the PCAOB did not adopt the other—more prominent—part of the proposing release. New Rule 2400, False or Misleading Statements Concerning PCAOB Registration and Oversight, would ban auditors from misleading capital market participants and others about their oversight by the board, which lends an aura of credibility to their services.
It is unclear why the PCAOB did not adopt Rule 2400, and board member Christina Ho asked the general counsel, James Cappoli, for an explanation. But he said it is best discussed in private since the rule is not being considered today. She answered that there should be more transparency, and the board should have provided an explanation to the public.
The reasons behind the inaction are unclear, but comment letters from accounting firms asked the board to tweak or clarify the proposed rules to be workable in practice. Moreover, the U.S. Chamber of Commerce, which has been concerned about the current board’s aggressive enforcement approach, asserted that the proposal is also part of the board’s goal to strengthen its enforcement program.
“Consistent with this goal, the Proposal emphasizes that violations of the general provision would provide a basis for PCAOB inspection findings and, where appropriate, enforcement actions,” the Chamber wrote in a comment letter in response to the proposal. “Given these objectives and its broad sweep, proposed Rule 2400 raises issues of intent and consequences that the Chamber strongly encourages the Board to consider.”
During the meeting, the PCAOB staff said that this part of the project is ongoing.
Deregistration Final Rule
The final rule institutes a new procedure under existing Rule 2107, Withdrawal from Registration, that allows the PCAOB to withdraw the registration of a firm that no longer exists, is no longer operating, or no longer wants to be registered with the board. Accounting firms that want to audit public companies or broker-dealers that are regulated by the SEC must register with the board and follow its standards and rules.
“Firm registration is a cornerstone of the PCAOB’s operations,” Chair Erica Williams said. “In addition to registering, filing an annual report through what’s called Form 2, allows the PCAOB to keep track of the firms that are eligible to perform those audits and to understand which audits, if any, they are performing. In turn, the PCAOB then uses that information for many purposes, including planning its inspections program, which inspects over 800 issuer audits in more than 30 jurisdictions around the world each year.”
A non-trivial number of firms did not file annual reports or paid their annual fees for both 2022 and 2023. As of August 31, 2024, there were 80 such firms.
Moreover, 13 firms failed to file annual reports or pay their fees in 2010, and such noncompliance continued through 2023, Williams said.
“A firm’s failure to meet the annual reporting and fee requirements prevents the PCAOB from maintaining an accurate list of registered firms that exist, are operating, and want to maintain their registration status,” she explained. “It also prevents the PCAOB from ensuring that Form 2 information is reported to the public for all registered firms. This means that the PCAOB’s list of registered firms does not provide audit committees, investors, and other stakeholders with the most accurate list of firms that wish to maintain their registrations with the PCAOB and may increase the amount of work these stakeholders must do in selecting an auditor.”
In addition, “a firm’s failure to file can also create additional work for PCAOB staff trying to track down information from firms that may or may not be responsive,” she said.
PCAOB member George Botic pointed out that organizational effectiveness is one of the board’s strategic goals, and “the amendment before us today will allow us to use our resources more effectively. This rule amendment is a sensible and practical approach for all parties.”
In particular, revised Rule 2107 would give firms 60 days after the PCAOB’s written notice to send an email to the board’s registration staff to remain registered. Williams said that the 60 days timeline is in response to comment letters. Originally, the PCAOB proposed firms to respond within 30 days.
“The extended time period is designed as an additional safeguard for firms that are delinquent but wish to remain registered,” Williams said.
The final rule is in PCAOB Release No. 2024-011, Constructive Requests to Withdraw from Registration.
The release states that after a notice of delinquency is sent, the PCAOB will publish that notice of the impending withdrawal on its website.
“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,” the release notes. “Disclosing the firm’s pending withdrawal on our website is also consistent with the current firm-initiated withdrawal process.”
According to the PCAOB’s website, the current annual fee schedule is as follows:
- Firms that audit more than 500 public companies and have more than 10,000 personnel pay $100,000
- Other firms with more than 200 public companies and more than 1,000 personnel pay $25,000
- All other firms pay $500
Firms that have been deregistered are not prohibited from registering again in the future.
The next step for the PCAOB’s new rule is the Securities and Exchange Commission’s approval process. The SEC oversees the board.
If approved, the rule will take effect initially for annual reports and annual fees that are due in 2025, which is one year later than proposed. Thus, a 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 subject to deregistration beginning in the fall of 2026.
This article originally appeared in the November 15, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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