Client Alert

SEC Publishes Proposed PCAOB Rules For Funding

7/8/2003
On June 23, 2003 the Securities and Exchange Commission (the "SEC") published for public comment the funding proposal of the Public Company Accounting Oversight Board (the "Board"), [fn1] which was created by the Sarbanes-Oxley Act of 2002 (the "Act"). The Act requires that the funds to cover the Board's annual budget (less registration and annual fees paid by public accounting firms) are to be collected from public companies (i.e., "issuers" as defined in the Act) as "accounting support fees." The proposed rules provide for the allocation, assessment and collection of the accounting support fee.

The proposed rules provide that the accounting support fee would be allocated to, and payable by, two classes of issuers: (1) publicly-traded companies with average, monthly U.S. equity market capitalizations during the preceding year, based on all classes of common stock, of greater than $25 million (excluding the market value of securities traded outside the United States but including all common equity traded in the United States, whether or not the issuer is a domestic company), and (2) investment companies with average, monthly U.S. equity market capitalizations (or net asset values) of greater than $250 million. In recognition of the structure of investment companies and the relatively less-complex nature of investment company audits (as compared to operating company audits), investment companies would be assessed at a lower rate. All other issuers would not be allocated accounting support fees, including (i) issuers that are not required to file audited financial statements with the SEC, (ii) employee stock purchase, savings and similar plans, (iii) bankrupt issuers that file modified reports, (iv) publicly traded companies or investment companies with average monthly U.S. equity market capitalization during the preceding year of less than $25 million or $250 million, respectively, and (v) issuers whose only outstanding publicly-traded securities are debt securities.

The accounting support fee would be payable by each issuer yearly during the first quarter of the calendar year. The Board would set the aggregate accounting support fee at an amount equal to the Board's budget for the year in question less the amount of registration and annual fees received during the prior year from public accounting firms. Issuers would pay their allocable percentage of the aggregate accounting support fee based upon their respective market values and net asset values, multiplied by the applicable assessment rate and then rounded to the nearest $100. Issuers whose fee is calculated to be less than $50 would not be required to pay any fee.

The determination whether an issuer must pay the accounting support fee would be made annually as of the date the aggregate fee is determined by the Board. If the issuer does not meet the market capitalization threshold, it would be exempt for only that year. Issuers would have the right to petition the Board to correct both the amount of any fee demanded as well as whether they are obligated to pay the fee at all. Failure to pay the fee would be a violation of Section 13(b)(2) of the Securities Exchange Act of 1934, which could result in administrative, civil or criminal sanctions.

The proposed rules also require that no registered public accounting firm may sign an unqualified audit opinion or issue a consent with respect to an issuer's financial statements if that issuer has outstanding any past-due accounting support fee not being contested by that issuer. However, the proposed rules would permit a qualified, adverse or disclaimed opinion irrespective of whether the fee had been paid. A registered public accounting firm can confirm an issuer's payment of the required fee by obtaining a management representation of payment.

All comments on the proposed rules should be submitted within 21 days of the proposal's publication in the Federal Register, expected to be approximately July 14, 2003.


FN1: Release No. 34-48075; File No. PCAOB-2003-02; http://www.sec.gov/rules/pcaob/34-48075.htm.

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