Dear Secretary Countryman:
The U.S. Chamber of Commerce (“Chamber”) Center for Capital Markets Competitiveness respectfully submits comments on the Notice of Filing of the Public Company Accounting Oversight Board (“PCAOB” or “Board”) Proposed Rules on Firm Reporting (“Proposed Rules” or “adopting release”). The Proposed Rules represent a significant expansion in firm disclosure requirements by imposing reporting to the PCAOB on firm operations, governance and network structures, financial performance, quality controls, and certain events. We believe the Securities and Exchange Commission (“SEC”) should not approve the Proposed Rules because of a lack of proper due process, a failure to improve audit quality and a lack of consideration of investor protection, competition and capital formation.
The Proposed Rules focus on audit firm disclosures and do not update or modernize the PCAOB’s interim auditing standards or otherwise revise auditor performance standards with an objective of improving audit quality. Both active and inactive registered audit firms are subject to the Proposed Rules with a combination of one-time, annual, and episodic reporting.
Updating requirements for audit firm reporting to the PCAOB can be a reasonable response to an evolving environment if such requirements are necessary and appropriate for the protection of investors and will promote efficiency, competition, and capital formation. Any such rulemaking needs to be within the PCAOB’s remit and authority; involve ironclad due process; and reflect robust economic analysis.[1]
Unfortunately, conditions for sound rulemaking have not been followed in this instance. The PCAOB rushed to adopt these transformative and controversial rules without appropriate consideration of comments, adequate economic analysis, and respect for due process. Despite attempts to address some issues raised in the comment process substantive issues remain.
The SEC also rushed due process and ignored options to give stakeholders sufficient time to participate in a robust comment process.[2] The SEC submitted the Proposed Rules to the Federal Register within two business days of Board adoption and allowed only a few weeks for comments (i.e., twenty-one days from publication in the Federal Register). Other factors likewise reinforce the need for an extended comment period.
The Proposed Rules involve complicated legal issues and other matters that require adequate time to consider. The PCAOB adopted the Proposed Rules just before the Thanksgiving holiday and the SEC comment period ends the day after Christmas. The short SEC comment period also coincides with a time-constrained period for stakeholders, given other year-end financial reporting and audit-related demands during December. Further, the PCAOB adopted the Proposed Rules together with others on Firm and Engagement Metrics and the SEC submitted both rulemakings to the Federal Register the same day,[3] which challenges stakeholders with overlapping comment periods on two significant PCAOB rulemakings.
The SEC’s approach to due process regarding this rule risks signaling that the agency is not interested in receiving comments and relegating the requisite notice and comment process to a check-the-box exercise. The approach also risks contravening the SEC’s responsibilities for objective and independent oversight of the PCAOB, as required by the Sarbanes-Oxley Act of 2002 (“SOX”).
The rushed approach to finalize rulemaking is also counter to views expressed by members of the U.S. Congress.[4] Any final order by the Commission approving the Proposed Rules is likely subject to the requirements of the Congressional Review Act, which can be used to address “midnight rulemaking.”
Flaws with the Proposed Rules and the process for finalizing them cannot be corrected by the PCAOB submitting a comment letter to the SEC or cured with additional work, including economic analysis, by SEC staff.[5] The only solution is for the Commission to disapprove the Proposed Rules and return them to the PCAOB for reconsideration.
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[1] For the importance of ironclad due process and robust economic analysis, see the remarks on SEC rulemaking by former Chair Mary Shapiro during the SEC Historical Society 90th Anniversary of the SEC Celebration Program and the letter to PCAOB Chair Erica Y. Williams from the U.S. Chamber of Commerce Center for Capital Markets Competitiveness dated August 20, 2024.
[2] See the Letter to the SEC from the Center for Audit Quality (“CAQ”) on Firm Reporting and Firm and Engagement Metrics dated November 22, 2024.
[3] See the SEC Notice of Filing of PCAOB Proposed Rules on Firm and Engagement Metrics and Related Amendments to PCAOB Standards (Release No. 34-101724; File No. PCAOB-2024-06) (November 25, 2024).
[4] See letters from Representative French Hill and Senator Tim Scott. Available at: Scott Letter on Rulemaking and Nominations; e559a2dd-e8c4-4f98-85e3-29ebfbe0ad06.pdf.
[5] Further, the flaws in the Proposed Rules cannot be cured through subsequent PCAOB guidance or pre-committing to a post-implementation review sometime in the future.
