(The news featured below is a selection from the news covered in Federal Securities Law Reporter.)

PCAOB Adopts Budget, Amends Ethics Rule

The Public Company Accounting Oversight Board approved an amendment to its ethics rule in response to SEC concerns that the language in PCAOB Rule 3502 could lead a litigant in a Section 21(c) proceeding to argue that PCAOB Rule 3502's recklessness standard weakened the SEC's standard. The amendment removed the word "cause" from the title and the text of Rule 3502 and replaced it with "contribute" in codifying the principle that persons associated with a registered public accounting firm should not contribute to the firm's violation of the relevant laws, rules and standards. The rule, as amended, carries the same interpretation as the original rule adopted by the board in July 2005.

The board adopted the rule related to the tax services that public auditing firms can provide to their public company audit clients on July 26, 2005, and submitted it to the SEC for approval. The rule addresses concerns about an auditor's independence when the auditor becomes involved in marketing or providing an opinion in favor of an aggressive tax shelter or in selling personal tax services to individuals who prepare the financial statements for the audit client company.

The SEC raised concerns that the rule could create a misperception about the interpretation of the federal securities laws. The board unanimously voted to adopt the change to remove the log jam that has kept the rule in suspension since it was submitted to the SEC on August 2, 2005.

The rule originally was intended to take effect the earlier of December 31, 2005 or 10 days after receiving SEC approval. Given the time lapse since it originally was adopted, the PCAOB voted to amend the effective date to 60 days after SEC approval. The PCAOB hopes that the SEC will approve the revised rule by mid-January 2006, so that it can take effect by mid-March 2006.

The PCAOB also approved a 2006 budget of $128.4 million, a decrease of $8 million from last year's budget. The 2006 accounting support fees will be reduced due to an excess in its working capital reserve. Outgoing Chairman William McDonough said the reduction in the accounting support fee shows fiscal responsibility. He characterized the budget as fairly lean and said that staffing may continue to be difficult in a competitive market. The PCAOB expects to complete its staffing ramp-up in 2006.

The PCAOB has not budgeted for the processing and review of annual reports which the board may adopt as a requirement for accounting firms in 2006, nor for the oversight of auditors for nonpublic broker-dealers. The SEC has delayed until January 1, 2006, its order to permit nonpublic broker-dealers to file with the SEC and to send to their customers documents and information that has been certified by an independent public accountant rather than a registered public accounting firm. Further, if the SEC transfers to the PCAOB the primary responsibility for responding to industry inquiries, the PCAOB will have to increase the staff in the Office of the Chief Auditor.

PCAOB member William Gradison said he hopes the SEC will approve the 2006 budget at the earliest possible time. Chairman McDonough said he has spent significant time meeting with the top eight accounting firms and believes that the PCAOB inspections are having an impact. He has seen a change in attitudes in the profession, he stated, and the chairman believes the auditing profession recognized that it had lost the public's confidence and is working to gain it back.