(The article featured below is a selection from PCAOB Reporter, which is available to subscribers of that publication.)

PCAOB Adopts Rules Governing Succession to Predecessor Firm Registration

The PCAOB has unanimously adopted new rules and a form governing the succession to the registration status of a former firm following a merger or another change in the registered firm's legal form. The rules permit the filing of a Form 4 under certain conditions to allow the registration status to continue for the firm that survives the merger or whose legal form has changed. The Board received five comment letters in response to the proposing release and made a number of refinements to reflect those comments.

A firm must be registered with the Board in order to lawfully audit public issuers, so any disruptions to a firm's registration could have serious implications. The new rules will permit a firm to succeed outright to a predecessor's registration under certain circumstances and in other circumstances would permit the temporary succession for a transitional period while the firm files its own application on Form 1.

A firm may succeed to a predecessor firm's registration where the changes are only to its legal form of organization or the jurisdiction in which it is organized and in transactions in which a registered firm is acquired by an unregistered firm or combines with other entities to form a new legal entity. The Form 4 is available only where the successor firm is under substantially the same ownership. If a registered firm is acquired by an unregistered firm, it may succeed to the predecessor registered firm's registration as long as the predecessor firm ceases to exist as a public accounting firm.

In addition, the successor must answer no to questions about disciplinary history, whether audit reports were issued without registration with the Board and whether the firm is operating without a license or certification issued by an authorizing authority. If the firm answers yes to any of those questions, it would have to file an application on Form 1, but could receive the benefit of a transitional succession for up to 90 days after the acquisition or combination as long as it intends to file on Form 1.

If the Form 4 is filed within the designated time frame to report the required information, the continuity of registration is automatic. The firm must acknowledge that it will cooperate with the Board and that it will assume responsibility for the conduct of the predecessor firm. The affirmation of continuing responsibility is not intended to create any new liability.

Form 4 is a relatively straightforward registration which does not require the Board to make a case-by-case determination of eligibility. Registration is not a commodity subject to transfer, according to Michael Stevenson, the deputy director in the Office of the General Counsel. He added that Form 4 applies to events for which a firm plans, not for unanticipated events.

Board member Daniel Goelzer noted that Form 4 allows for permanent registration only where there is nothing substantive for the Board to decide. While the concept behind the rules is fairly simple, Goelzer said the rules and instructions are somewhat complex. He also pointed out that Form 4 is optional. Firms may instead choose to file the Form 1 registration application. He questioned whether Form 4 would be used very often. Sarah Williams, the associate director in the Division of Registration and Inspections, said she believes the form will be quite useful.