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SEC Amends PCAOB Budget Process

The SEC has amended the process by which the PCAOB submits, and the SEC approves, the PCAOB's annual budget (Rel. No. 33-8724, July 18, 2006). The SEC found from its early experience with the approval of the PCAOB's budget that a more formal process was needed, including a timetable for each step, in order to improve the timeliness and transparency of the process. The timetable will provide the SEC and the PCAOB with a framework for a more meaningful dialogue about the content of each year's budget.

The PCAOB has a calendar fiscal year. Under the timetable, it will submit to the SEC, by March 15th, a narrative description of the issues and outlook for the budget year, including any significant factors that may impact its resource needs for that year. The SEC will review the narrative and respond with any guidance by April 30. The guidance may include information about the securities markets, the accounting profession or other facts that may impact the PCAOB's budget resources.

The PCAOB will provide the SEC with a preliminary budget for its next fiscal year by the end of July, which should include a detailed budget plan, an analysis of its programs and its goals for the coming budget year. The timetable then allows three months for the SEC to consider the background materials and the documentation supporting the PCAOB's budget. The SEC will provide any suggested revisions and preliminary views by the end of the three month period. The PCAOB will approve its final budget by November 30 and submit it to the SEC which will vote on the budget by December 23.

The SEC may ask the PCAOB to participate in meetings to discuss matters related to the budget. The PCAOB has expressed its willingness to participate if requested.

New rule 11 will require the PCAOB to include in each budget its projected and actual expenditures and receipts for the budget year, the current year and the previous year. The budget must also include headcounts for the beginning and end of the year in each program area. The PCAOB's budget justification should explain any deviations from the guidance and economic assumptions that the SEC has provided.

The new rule will permit the PCAOB to include in its budget and accounting support fee amounts necessary to build a reserve sufficient to cover five months of the following budget year. The reserve will prevent any delays in the billing and collection of the accounting support fee from threatening the PCAOB's liquidity. The reserves may only be used in accordance with the budget for the following fiscal year, or for any supplemental budget that has been approved by the SEC. If the SEC has not approved a budget before the PCAOB's new fiscal year begins, the PCAOB may spend funds from the reserve and continue to incur obligations as if the last budget approved by the SEC was still in effect.

The SEC may not directly change the PCAOB's budget, but may make its approval conditional on changes to the budget. If there are differences that are not resolved by December 23 under the timetable, the terms of the most recent conditional approval will become the final budget.

The rule prevents the PCAOB from spending more than an amount specified in the approved budget or from transferring $1 million or more into or out of any program area without the SEC's approval pursuant to a supplemental budget. The rule makes clear that the PCAOB cannot use its resources in a manner that is not fairly implied from the approved budget, such as the creation of a new program or the elimination of a program that is described in the budget.

If the PCAOB wishes to spend more than the limitations outlined in the rule, it must submit a supplemental budget to the SEC describing the events or circumstances that call for the additional budget request and why it should not await the next regular annual budget process. The supplemental should outline the proposed source of the additional funds, including any offsets to other programs and activities.

The PCAOB must keep records and make them available to representatives of the SEC upon request. The PCAOB will also be required to prepare quarterly reports of its spending and staffing levels and compare them to its approved budget. The reports must be submitted to the SEC within 30 business days of the end of each quarter. The new requirements are effective 30 days after publication in the Federal Register.