[Federal Register Volume 61, Number 118 (Tuesday, June 18, 1996)]
[Rules and Regulations]
[Pages 30808-30814]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15390]
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LIBRARY OF CONGRESS
Copyright Office
37 CFR Part 201
[Docket No. 93-2B]
Digital Audio Recording Devices and Media; Verification of
Statements of Account
AGENCY: Copyright Office, Library of Congress.
ACTION: Interim regulation.
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SUMMARY: The Audio Home Recording Act of 1992 requires the Register of
Copyrights to issue regulations that provide for the verification of
the information contained in digital audio recording technology (DART)
Statements of Account filed with the Office. The Copyright Office is
adopting Interim Regulations that establish procedures for requesting
verification, the scope of the verification, and the allocation of
costs. The regulations are intended to ensure that proper payments have
been made to copyright owners.
DATES: This interim regulation is effective June 18, 1996. Comments
must be submitted on or before September 16, 1996. Reply comments must
be
[[Page 30809]]
submitted on or before October 16, 1996.
ADDRESSES: If sent by mail, fifteen copies of written comments should
be addressed to Marilyn J. Kretsinger, Acting General Counsel,
Copyright GC/I&R, P.O. Box 70400, Southwest Station, Washington, D.C.
20024. Telephone: (202) 707-8380. Telefax: (202) 707-8366. If by hand,
fifteen copies should be brought to: Office of the General Counsel,
Copyright Office, James Madison Memorial Building, Room LM-407, First
and Independence Avenue, S.E., Washington, D.C. 20540.
FOR FURTHER INFORMATION CONTACT: Marilyn J. Kretsinger, Acting General
Counsel, Copyright GC/I&R, P.O. Box 70400, Southwest Station,
Washington, D.C. 20024, or Tanya Sandros. Telephone: (202) 707-8380.
Telefax: (202) 707-8366.
SUPPLEMENTARY INFORMATION:
I. Background
The Audio Home Recording Act (AHRA) requires manufacturing and
importing parties that distribute digital audio recording devices or
media in the United States to file Statements of Account with, and make
royalty payments to, the Copyright Office. It also requires the
Register of Copyrights to issue regulations to protect the
confidentiality of the information contained in Statements of Account,
to provide for the disclosure, in confidence, of Statements to
interested copyright parties, and to provide for the verification of
Statements of Account. 17 U.S.C. 1003(c)(2).
We published a Notice of Proposed Rulemaking on May 7, 1993. 58 FR
27251 (May 7, 1993). The Notice contained a proposed regulation
concerning access to, and confidentiality of, Statements of Account and
asked for public comment on that proposal and also on the form and
content of a regulation governing audit and verification procedures.
In separate proceedings, we issued interim regulations governing
the filing of Notices of Initial Distribution, 57 FR 55464 (November
25, 1992), and establishing requirements governing the filing dates,
frequency of filing, and content of Statements of Account and the
primary auditor's report that must be filed by persons subject to the
statutory obligation. 59 FR 4586 (February 1, 1994). In a separate
proceeding, we published interim regulations governing access to and
confidentiality of Statements of Account. 60 FR 25995 (May 16, 1995).
II. Verification of Statements of Account
In the Notice of Proposed Rulemaking (NPRM), 58 FR 27251 (1993), we
did not propose the actual language of a verification regulation.
Instead, we noted that the Senate version of AHRA, S. 1623,\1\
contained detailed provisions regarding audit and verification which
were eliminated from the bill as passed, but which we indicated we were
inclined to use as the framework for the regulations. We therefore
solicited public comments and detailed proposals for the form and
content of a verification regulation based on S. 1623. In addition, we
asked ten specific questions.
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\1\ S. 1623, 102d Cong., 1st Sess. (1991).
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The Office received eleven comments, including direct, reply, and
surreply comments, from four parties. Comments were received from (1)
the American Institute of Certified Public Accountants (AICPA); (2) the
American Society of Composers, Authors, and Publishers, Broadcast
Music, Inc., Copyright Management, Inc., the National Music Publishers'
Association, Inc., SESAC, Inc., and the Songwriters Guild of America
(The Copyright Parties); (3) the Alliance of Artists and Recording
Companies (AARC); and (4) the Electronic Industries Association (EIA).
The comments revealed that while there was general agreement on a
number of issues, there were sharp differences among the parties on
certain key issues, especially, the scope of the verification
procedure, the possible role of an arbitrating accountant or the
Copyright Office in resolving disputes, and the standards to measure
the independence of the verifying auditor. The Office believes these
issues need to be resolved through another round of comments. However,
the Office believes that interim regulations need to be adopted to
allow for the verification of the Annual Statements of Accounts that
have already been received.\2\ Therefore, in order to go forward, the
Copyright Office has had to take a certain approach, but these interim
regulations represent only the Office's initial position, and are not
intended necessarily to indicate the Office's final conclusions.
Comments on the specific regulatory language and the issues they raise
are particularly solicited.
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\2\ The first Annual DART Statement of Account was filed with
the Office March 1, 1994. Since we are proposing that a verification
procedure of an Annual Statement of Account can be invoked no later
than three years after the filing deadline, it is important to
provide interim regulations even while the verification procedure is
being further refined.
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What follows is a discussion of the comments and a description of
the interim regulations adopted by the Office.
III. Period for Invoking a Verification Procedure
The first issue is one of timing: when should the Annual Statements
of Account be available for a verification procedure and for how long?
How often should the Annual Statements be audited?
S. 1623 did not provide for a time limit for initiating a
verification procedure, but did state that no filer should be audited
more than once a year.
EIA said it would accept a two or three year time limit following
the filing of the Annual Statement of Account for verification. EIA,
comments at 28. The Copyright Parties supported a rule stating that the
verification procedure should not be conducted more than three years
after the filing date of the Annual Statement of Account. Copyright
Parties, reply at 25. AICPA supported a deadline beyond which
verification procedures could not be conducted, and in its reply
comments supported the three-year rule advanced by the Copyright
Parties. AICPA, comments at 5, reply at 6.
AICPA recommends that only one verification audit should be
permitted per Statement of Account. AICPA, comments at 5. EIA states
there should be no more than one verification audit per year per
Statement of Account. EIA, comments at 27. The Copyright Parties urge
the adoption of regulations that permit interested parties to
consolidate the verification procedure for several Annual Statements.
The Copyright Parties agree that no manufacturer or importer should be
audited more than once in a calendar or fiscal year and the Annual
Statements should be verified no more than once. Copyright Parties,
comments at 29, reply at 24.
While there was general agreement among the commentators supporting
a time limit, because of the procedure for selecting a verifying
auditor discussed below, we are measuring the time limit somewhat
differently from the measurements proposed in the comments.
First, within three months of the filing deadline of the Annual
Statement of Account, no verification procedure may be invoked. This
will give the Licensing Division time to review the Annual Statement
and resolve any discrepancies.
Second, after the three months, any interested copyright party will
have until the third year anniversary of the filing deadline of the
Annual Statement to notify the Copyright Office, the filer
[[Page 30810]]
and the primary auditor of his or her intent to invoke a verification
procedure. The notice of one party will preserve the right of all
interested copyright parties to participate in a verification
procedure. While EIA's and the Copyright Parties' comments contemplated
that the verification procedure itself would have to commence within
three years of the filing of the Annual Statement of Account, the
Office believes that this is not workable, because too many events,
such as the Office publishing a notice in the Federal Register, and the
subsequent coordination and selection of the verifying auditor, are
beyond the petitioning party's sole control. The interested copyright
party could not know how much time before the end of the three years he
or she needed to allow to assure that the verification procedure began
within three years of the filing deadline. Therefore, the Office has
moved the tolling of the deadline from the time the verification
procedure commences to the time when notice is filed by the interested
copyright party that he or she wants to begin a verification procedure.
The interim regulations provide that there can be no more than one
verification procedure a year of any manufacturing or importing party,
but the verification procedure may include more than one Annual
Statement of Account.
IV. Selection of Verifying Auditor
Assuming that one or more copyright parties wants to invoke a
verification procedure, how do they coordinate the selection of the
verifying auditor? S. 1623 provided that the Register of Copyrights
should establish a procedure by which interested copyright parties will
coordinate the engagement of a verifying auditor to perform the
verification procedure.
EIA commented that all parties would be best served by a formal
procedure by which interested copyright parties provide public notice
of their intent to invoke a verification procedure, permit other
interested copyright parties to express an interest, and then jointly
select a verifying auditor. EIA, comments at 29. The Copyright Parties
recommended that we establish procedures by which interested copyright
parties may coordinate the engagement of a verifying auditor to ensure
that no manufacturing or importing party is audited more than once per
year. Copyright Parties, comments at 10-11.
The Office believes that it is the responsibility of the copyright
parties to select the verifying auditor and coordinate the verification
procedure. The Office can only play a limited role in this process,
acting to notify the copyright parties that a verification procedure is
contemplated and who is proposing the procedure.
The Office will perform that role by publishing a notice in the
Federal Register when it has been informed by an interested copyright
party that he or she is interested in invoking a verification
procedure. The notice will include whom to contact so that all
interested copyright parties who want to be involved may coordinate
their selection of the auditor. The party, or, if more than one, the
joint interested parties will select the verifying auditor and will
notify, within two months of the publication of the original Federal
Register notice, the filer of the Annual Statement of Account, the
primary auditor and the Register of Copyrights whether or not they wish
to start a verification procedure.\3\
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\3\ The interested copyright parties may, after consultation
with each other, decide not to conduct a verification procedure. In
that case, they will not select a verifying auditor, but will,
instead, notify the filer, the primary auditor and the Register of
Copyrights that they do not intend to proceed.
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V. Notice and Length of Verification Procedure
The NPRM also asked what would be reasonable notice before
commencing a verification procedure, and how long the verification
procedure should take.
EIA recommended that at least 30 days notice should be required and
the manufacturer, importer, or primary auditor should be able to
postpone the verification up to 60 days. EIA, comments at 6The
Copyright Parties stated that 60 days is a reasonable notice before the
verification procedure commences. The Copyright Parties observed that
the duration of a verification procedure will vary from case to case,
and that the duration is as much in the control of the manufacturer or
importer as of the interested copyright parties or their verifying
auditor. Copyright Parties, comments at 21-22. AICPA had no comment on
the length of time required for notice of a verification procedure. It
did suggest that the length of time to perform the procedure should be
90 to 120 days. AICPA, comments at 3.
The Office's interim regulations state that after the joint
interested parties notify the filer of their intent to conduct a
verification procedure, the verification procedure can begin one month
later, or up to two months later if the filer or the primary auditor
asks for a postponement. The Office agrees with the comments of the
Copyright Parties that the duration of the verification procedure can
vary from case to case and, therefore, the Office has not adopted any
rules concerning how long the verification procedure should take.
VI. Scope of Verification Procedure
The scope of the verification procedure has been one of the most
contentious issues faced by the Office in drafting regulations to
implement the AHRA. The Office is required to balance the need of the
manufacturing and importing parties to avoid the disruption of their
business and the exposure of confidential information, with the need of
the interested copyright parties to be assured that sufficient
royalties are deposited for distribution. EIA, comments at 2; Copyright
Owners, comments at 2.
Section 1011(e)(1)(D) of S. 1623 provided that the goal of
verification should be limited to examining the accuracy of information
contained in the Statements of Account filed by manufacturing and
importing parties, and that the procedure to achieve this goal should
be no broader than is reasonably necessary in accordance with generally
accepted auditing standards (GAAS). All parties to this proceeding
agreed with these two principles, but nevertheless disagreed on how
much review was needed to verify the information in the Statements of
Accounts.
Of the four commenting parties, EIA advocated the narrowest scope
of review. The Copyright Parties advocated the widest scope of review.
AICPA and AARC took positions somewhere in between.
EIA said that the scope of the verification procedure should be a
review by the verifying auditor of the audit performed by the primary
auditor. This review would encompass an evaluation of the primary
auditor's audit procedures, examination of the primary auditor's work
papers, and consideration of the primary auditor's conclusions. In the
event the verifying auditor believes the audit was not properly
performed, or that additional procedures are needed, he or she would
consult with the primary auditor. If the two auditors are unable to
agree, they would submit the matter to a neutral, independent
accountant selected by both parties to arbitrate the dispute. The role
of this third party accountant would be strictly to determine whether
the primary auditor complied with GAAS in performing the work and to
determine, and possibly perform, the additional procedures needed to
correct noted deficiencies. EIA, comments at 5.
[[Page 30811]]
EIA opposes any regulation that would provide for or permit a
verifying auditor to conduct a duplicative full scope audit or to have
unfettered access to the books and records of a filer that has already
been audited by a primary auditor. Such an approach, in EIA's view,
would impose unreasonable burden and expense, and would be a
prescription for misunderstanding, controversy, and the unanticipated
disclosure of confidential information. Furthermore, such an approach
would not provide additional assurance beyond the assurance provided by
EIA's proposed procedure. EIA, comments at 6.
The Copyright Parties believe that the Copyright Office should
allow for the possibility of a full scale audit without specific
limitations on audit tests and procedures to be performed. The
Copyright Parties assert that the verification procedure should include
``the examination of evidence supporting the amounts and disclosure in
the Statement of Account, an assessment of the accounting principles
used by the manufacturer or importer in preparing the statement, and an
evaluation of the overall presentation of the statement.'' Copyright
Parties, comments at 27.
The Copyright Parties state that the limited review of working
papers proposed by EIA does not contribute to effective enforcement of
royalty obligations under AHRA. Instead, they want the ability to use
an independent verifying auditor to determine whether the Statement of
Account fairly presents, in all material respects, the royalty
obligations of a particular filer. Copyright Parties, reply at 18.
However, the Copyright Parties supported a regulation that would
promote initial reliance on the working papers and related documents
generated in the course of the primary audit to avoid duplication of
effort, and to concentrate the verifying auditor's focus on the
additional work he or she considers necessary under the circumstances.
Copyright Parties, surreply at 13-14.
AICPA commented that consideration should be given to using
``agreed-upon procedures'' which all users of the report would agree to
so that the verifying auditor does not duplicate the effort of the
first auditor. AICPA noted that ``agreed-upon procedures'' are
generally less in scope than an audit under generally accepted auditing
standards, and the verifying auditor would not express an opinion on
the fair presentation of the information. He or she would report the
procedures performed and any findings. Further, users of the report,
namely, the Copyright Office and the interested copyright parties, must
agree upon the procedures that the verifying auditor would perform.
AICPA, comments at 4.
While disagreeing with the Copyright Parties about the wisdom of a
full scale verifying audit, AICPA also did not believe that the
suggested procedures and approach of the EIA were appropriate. AICPA
argued that the procedures to be performed must be more than the EIA
suggested review of the working papers of the initial audit. The
procedures should be objective procedures that test the amounts
reported by the manufacturer or importer. The EIA proposal would
require the auditor to formulate an opinion that the audit was properly
conducted based upon a review of the working papers. This proposal is
more in the nature of a quality review of the primary auditor's work
than an audit of the royalty schedule, and in AICPA's view, not an
appropriate ``agreed-upon procedures'' engagement. AICPA, reply at 2.
AARC took a similar position to AICPA in finding problems with both
EIA's and the Copyright Parties' positions. AARC commented that while
it agrees with the EIA that a full scope audit by a verifying auditor
may be inappropriate, AARC believes that the approach suggested by EIA
does not go far enough. AARC argues that the interested copyright
parties must have the ability to direct their own verifying auditor in
the conduct of a verification procedure. At the same time, while AARC
is generally in agreement with the intent of the approach suggested by
the Copyright Parties, AARC believes the scope of verification sought
in their initial comments may be unnecessarily broad in order to
achieve the intended results.
AARC believes that what is more appropriate is a ``compliance''
type audit; a type customarily used within the music industry to
determine the proper payment of music publishers and/or artist
royalties. When preparing royalty accountings, the manufacturers and
distributors will have to set up a system that will provide information
to their accounting department. The basis of this information will be
their manufacturing, inventory, sales and shipping records. AARC
asserts that the verifying auditor retained by the interested copyright
parties should be able, at minimum, to test these accounting records
and the underlying documents. AARC, reply at 2-3.
With access to the documents described above, AARC does not believe
it would be necessary for the verifying auditor to have access to the
manufacturer's or importer's general ledgers as proposed by the
Copyright Parties, so long as the primary auditor's opinion indicates
that the royalty accountings tie into the general books of account.
AARC, reply at 4.
VII. Discussion of Scope of Verification
Clearly, the most contentious issue in this rulemaking is the very
scope of the verification audit which, in turn dictates the need to
access particular business records to perform the verification
procedure. The Copyright Parties want the potential for a full scale
audit. EIA wants the verifying auditor simply to review the primary
auditor's work. AICPA recommends ``agreed-upon procedures,'' agreed to
by the Copyright Parties and the verifying auditor which is something
more than just a review of the primary auditor's work but something
less than full access to all records. AARC recommends a ``compliance''
audit where the filer is told in advance what business records to
segregate.
The Office has decided to adopt a procedure for these interim
regulations whereby the verifying auditor first reviews the primary
auditor's work papers. If, in the verifying auditor's opinion,
according to generally accepted auditing standards (GAAS), he or she
needs access to the business records of the filer, the verifying
auditor, after consulting with the primary auditor, shall be able to
have access to those records as well.4
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\4\ The consultation with the primary auditor is not intended to
give the primary auditor any veto over the decision of the verifying
auditor to require additional records. It is only intended as a
means to get additional advice on what records may or may not be
needed.
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The Office believes that two independent accountants--the verifying
auditor and the primary auditor--acting in good faith, are the best
judge of what additional information is needed from the filer.
However, we highlight this provision in our interim regulations as
one in which we particularly solicit comments from the parties. If the
parties believe that the question of the scope of the verification
should not rest with the independent accountants, they should so notify
the Office in their comments. Moreover, the Office asks the parties
whether they could agree upon which business records the filer should
make available, in addition to the primary auditor's work papers, that
would assure the accuracy of the Annual Statement of Account but at the
same time would not create an overly extensive demand on the filer.
[[Page 30812]]
VIII. Independence of the Verifying Auditor
AICPA states that GAAS requires that a verifying auditor be
independent. AICPA recommends that if there is a question about an
auditor's independence, it should be referred to the AICPA Professional
Ethics Division and/or the State Board of Accountancy. AICPA, comments
at 3.
The Copyright Parties believe the Office should require that the
verifying auditor be independent within the meaning of AICPA's Code of
Professional Conduct. In addition, the Copyright Parties recommend that
we establish a procedure to accept petitions from parties wishing to
challenge the use of a particular auditor. Such petition should explain
why the verifying auditor should not be used and should provide
specific facts to support the petition. Where the Office considers that
the petition raises a question as to whether the verifying auditor is
independent, the matter should be referred to the proper professional
authorities. Copyright Owners, comments at 17-19.
EIA believes that the Office need not become involved in the
question of a verifying auditor's independence, but it opposes sending
the question to the AICPA Professional Ethics Division and/or the
appropriate State Board because ``(1) these bodies have not applied a
financial dependence standard and (2) they apply the traditional
independence standard most often in a disciplinary context, where
generally the presumptions and burdens favor the accused accountant.''
EIA, reply at 13. It suggested that an independent arbitrating
accountant, chosen by the primary auditor and the verifying auditor,
should help determine the independence of the verifying auditor. EIA,
comments at 30-32, reply at 13.
The Office agrees that it should not become involved in deciding
whether a verifying auditor is independent, and any disputes involving
the independence of an auditor should be referred to the AICPA or State
Boards of Accountancy. EIA's opposition, notwithstanding, the Office
considers that referring the matter to AICPA or State Boards is
preferable to referring it to an independent arbitrating accountant.
See, discussion at X, below. If there is a challenge to the verifying
auditor's independence, the interim regulations nonetheless call for
the verification procedure to continue while the question of the
auditor's independence is being resolved.
The Office considered two specific proposals concerning a verifying
auditor's independence, but ultimately decided not to adopt them in the
interim regulations. They were that the auditing firm retained to
perform the verification procedure does not receive more than 15% of
its gross revenues from services performed for the interested copyright
parties, and that the auditor is not performing the verification
procedure for a contingent fee. These proposals were supported by EIA
but opposed by AICPA. EIA, comments at Appendix 2, at 18; AICPA, reply
at 5. The Office solicits comments on whether these two specific
proposals should be added to the definition of an independent verifying
auditor. The Office also is aware that its current regulations on the
primary auditor found in Sec. 201.28 do not discuss the primary
auditor's independence beyond stating that the primary audit shall be
performed according to GAAS. The Office solicits comments on whether
any additional provisions should be adopted to assure the primary
auditor's independence.
IX. Work Papers of the Verifying Auditor
Section 1011(e)(2) of S. 1623 provided that the certification and
results of all verification procedures shall be filed with the Register
of Copyrights. In our Notice we asked if we should require the filing
of the verifying auditor's work papers along with the results of a
verification procedure.
AICPA filed a strong objection to any requirement to file work
papers in addition to the results of the verification procedure. It
states that the auditor's report, not the work papers, provides the
auditor's opinion as to the fairness of the presentation of figures on
the Statement of Account and the primary auditor's report. The work
papers are considered the personal property of the independent auditor.
AICPA, comments at 4.
EIA believes that work papers will contain extremely confidential
information and should not be filed in the Office. EIA, comments at 2.
The Copyright Parties believe that only the auditor's report must
be filed with the Office. They propose that all work papers be
deposited only if the verification procedure results in a dispute.
Copyright Parties, comments at 24-25.
In our interim regulations, therefore, the auditor's report to the
Copyright Office will contain only the auditor's conclusions. If the
verifying auditor concludes that there was any failure of the primary
auditor to conduct properly the primary audit or obtain a reliable
result, or that there was any error in the Annual Statement of Account,
the supporting documentation will be included in an appendix to the
report and distributed to the interested copyright parties, the filer,
and the primary auditor only. It will not be included in the report
sent to the Copyright Office.
X. Disputes Regarding Conduct of Verification Procedure
AICPA had no comment on whether the Copyright Office has a role in
the event there is a dispute in the conduct or the result of the
verification procedure. It recommended requiring arbitration of
disputes. AICPA, comment at 4. EIA said the Office should not be
burdened with the task of resolving disputes. Disputes would best be
handled between the primary auditor and the verifying auditor. If such
discussions do not resolve the dispute, the auditors should mutually
select a neutral arbitrating accountant who will examine all work
papers and decide if additional procedures are required. EIA, comments
at 22. The Copyright Parties also stated that ``there is no statutory
role for the Office in resolving disputes arising from the conduct of a
verification procedure or the primary audit.'' They said that, in
practice, disputes will be resolved through negotiation. Copyright
Parties, comments at 23.
From the Office's viewpoint, there are three key points in the
verification procedure when a dispute could take place. One, the filer
could refuse to produce business records the verifying auditor
considers necessary. Two, the filer could object that the verifying
auditor is not independent. Three, the verifying auditor could file a
report that there was a failure of the primary auditor to conduct the
primary audit properly or to obtain a reliable result, or there was an
error in the Annual Statement of Account.
At this point, the Office has decided not to institute binding
arbitration in these interim regulations. The Office solicits comments
on how such disputes should be resolved. If the commentators believe
binding arbitration should be established, the Office solicits comments
on how it would work, and whether the Office has the authority to
require it.
XI. Cost of Verification Procedure
Sec. 1011(f) of S. 1623 specified that in the case of a
verification procedure that ``leads ultimately to recovery of an annual
royalty payment of 5 percent or more of the annual payment made, the
[[Page 30813]]
importing or manufacturing party shall provide reimbursement of the
reasonable cost'' of such procedure.
In all other cases, ``any recovery of royalty underpayments as a
result of the audit shall be used first to provide reimbursement for
the reasonable costs of such audit,'' and ``any remaining recovery
shall be deposited with the Register.''
EIA did not object to the cost allocation scheme proposed in S.
1623, provided that the verification procedure is limited to an
``agreed-upon procedures'' audit and there is arbitration between the
primary and verification auditors in case of dispute to avoid
duplication of audit work. EIA, comments at 30, and Appendix 2, at 16.
The Copyright Parties recommended that the interested copyright parties
who initiate the engagement of a verifying auditor should bear the cost
of the verification procedure, but such cost should be reimbursable
under the system proposed in S. 1623. Copyright Parties, comments at
28. AICPA recommended that the cost of the verification procedure
should be borne by the copyright party(s) that engage the verification
auditor, but was silent on the 5% provision in S. 1623. AICPA, comments
at 5.
The interim regulation is based upon the system detailed in S.
1623, described above, with which the Copyright Parties and EIA agree.
XII. Miscellaneous--Retention of Report; Use of the Word
``Verification''
AICPA had no comment on the length of time verification procedure
reports should be retained by the Office. EIA and the Copyright Parties
proposed that they be retained for three years. EIA, comments at 28;
Copyright Parties, comments at 13. AICPA supported EIA's and the
Copyright Parties' three-year proposal in its reply comments. AICPA,
reply at 6. The Office has adopted the proposed three-year retention,
but seeks more comments on how it should work. Should it apply equally
to positive as well as negative verification procedure reports? Should
it include follow-up reports if the filer and the verifying auditor
come to subsequent agreements addressing the concerns of a negative
report? May the Office, in its discretion, retain the report more than
three years?
Last, AICPA commented that the word ``verification'' is a misnomer
because it implies a full scale audit while the scope of the verifying
auditor's work might be well less than that. AICPA recommends that the
procedure to be followed by the verifying auditor be called a ``second
audit'' or a ``special audit.'' We have chosen to call it a
``verification procedure,'' because the word ``verification'' was used
in the AHRA, but we have given it its own special definition in
Sec. 201.30(b)(5), so that it will not carry the implication of a full
scale audit.
List of Subjects in 37 CFR Part 201
Copyright; Digital audio recording products.
Interim Regulations
In consideration of the foregoing, the Copyright Office is amending
part 201 of 37 CFR, chapter II in the manner set forth below:
PART 201--GENERAL PROVISIONS [AMENDED]
1. The authority citation for part 201 is revised to read as
follows:
Authority: 17 U.S.C. 702; 17 U.S.C. 1003.
2. Section 201.30 is added to read as follows:
Sec. 201.30 Verification of Statements of Account.
(a) General. This section prescribes rules pertaining to the
verification of information contained in the Statements of Account by
interested copyright parties pursuant to section 1003(c) of title 17 of
the United States Code.
(b) Definitions.
(1) Annual Statement of Account, generally accepted auditing
standards (GAAS), and primary auditor have the same meaning as the
definition in Sec. 201.28 of this part.
(2) Filer is a manufacturer or importer of digital devices or media
who is required by 17 U.S.C. 1003 to file with the Copyright Office
Quarterly and Annual Statements of Account and a primary auditor's
report on the Annual Statement of Account.
(3) Interested copyright party has the same meaning as the
definition in Sec. 201.29 of this part.
(4) Verifying auditor is the person retained by interested
copyright parties to perform a verification procedure. He or she is
independent and qualified as defined in paragraphs (j)(2) and (j)(3) of
this section.
(5) Verification procedure is the process followed by the verifying
auditor to verify the information reported on an Annual Statement of
Account.
(c) Purpose of Verification. The purpose of verification is to
determine whether there was any failure of the primary auditor to
conduct the primary audit properly or to obtain a reliable result, or
whether there was any error in the Annual Statement of Account.
(d) Timing of Verification Procedure.
(1) Requesting a verification procedure. No sooner than three
months nor later than three years after the filing deadline of the
Annual Statement of Account to be verified, any interested copyright
party shall notify the Register of Copyrights of its interest in
instituting a verification procedure. Such notification of interest
shall also be served at the same time on the filer and the primary
auditor identified in the Annual Statement of Account. Such
notification shall include the year of the Annual Statement of Account
to be verified, the name of the filer, information on how other
interested copyright parties may contact the party interested in the
verification including name, address, telephone number, facsimile
number and electronic mail address, if any, and a statement
establishing the party filing the notification as an interested
copyright party. The notification of interest may apply to more than
one Annual Statement of Account and more than one filer.
(2) Coordination and selection of verifying auditor. The Copyright
Office will publish in the Federal Register notice of having received a
notification of interest to institute a verification procedure.
Interested copyright parties have one month from the date of
publication of the Federal Register notice to notify the party
interested in instituting the verification procedure of their intent to
join with it and to participate in the selection of the verifying
auditor. Any dispute about the selection of the verifying auditor shall
be resolved by the parties themselves.
(3) Notification of the filer and primary auditor. As soon as the
verifying auditor has been selected, and in no case later than two
months after the publication in the Federal Register of the notice
described in paragraph (d)(2) of this section, the joint interested
copyright parties shall notify the Register of Copyrights, the filer,
and the primary auditor identified in the Annual Statement of Account
to be verified, that they intend or do not intend to initiate a
verification procedure.
(4) Commencement of the verification procedure. The verification
procedure shall begin no sooner than one month after notice of intent
to initiate a verification procedure was given to the filer and the
primary auditor by the joint interested copyright parties. The joint
interested copyright parties shall grant the filer or the primary
auditor a postponement of the beginning of the verification procedure
of up to one additional month if either one requests
[[Page 30814]]
it. Verification procedures shall be conducted at reasonable times
during normal business hours.
(5) Anti-duplication rules. A filer shall be subject to no more
than one verification procedure per calendar year. An Annual Statement
of Account shall be subject to a verification procedure only once.
(e) Scope of verification. The verifying auditor shall limit his or
her examination to verifying the information required in the Annual
Statement of Account. To the extent possible, the verifying auditor
shall inspect the information contained in the primary auditor's report
and the primary auditor's working papers. If the verifying auditor
believes that access to the records, files, or other materials in the
control of the filer is required according to GAAS, he or she may,
after consultation with the primary auditor, require the production of
these documents as well. The verifying auditor and the primary auditor
shall act in good faith using reasonable professional judgment, with
the intention of reaching a reasonable accommodation as to the
necessity and scope of examination of any additional documents, but the
decision to require the production of additional documents is solely
that of the verifying auditor.
(f) Verification Report. Upon concluding the verification
procedure, the verifying auditor shall render a report enumerating in
reasonable detail the procedures performed by the verifying auditor and
his or her findings. Such findings shall state whether there was any
failure of the primary auditor to conduct properly the primary audit or
obtain a reliable result, and whether there was any error in the Annual
Statement of Account, itemized by amount and by the filer's elected
fiscal year. If there was such failure or error, the report shall
specify all evidence from which the verifying auditor reached such
conclusions. Such evidence shall be listed and identified in an
appendix to the report in sufficient detail to enable a third party to
reasonably understand or interpret the evidence on which the verifying
auditor based his or her conclusion. If there was no such failure or
error, the report shall so state.
(g) Distribution of Report. Copies of the verifying auditor's
report shall be subject to the confidentiality provisions of
Sec. 201.29 and shall be distributed as follows:
(1) One copy, excluding the appendix, if applicable, shall be filed
with the Register of Copyrights.
(2) One copy, with the appendix, if applicable, shall be submitted
to each of the interested copyright parties who retained the services
of the verifying auditor and who are authorized to receive such
information according to Sec. 201.29.
(3) One copy, with the appendix, if applicable, shall be submitted
to the filer of the Annual Statement of Account.
(4) One copy, with the appendix, if applicable, shall be submitted
to the primary auditor.
(h) Retention of Report. The Register of Copyrights will retain his
or her copy of the verifying auditor's report for three years following
the date the copy of the verifying auditor's report is filed.
(i) Costs of Verification. The joint interested copyright parties
who requested the verification procedure shall pay the fees of the
verifying auditor and the primary auditor for their work performed in
connection with the verification procedure, except, if the verification
procedure results in a judicial determination or the filer's agreement
that royalty payments were understated on the Annual Statement of
Account, then,
(1) if the amount is less than five percent (5%) of the amount
stated on the Annual Statement of Account, that amount shall first be
used to pay the fees of the verifying auditor and the primary auditor,
and any remaining amount plus any applicable interest on the total
amount shall be deposited, allocated by the filer's elected fiscal
year, with the Register of Copyrights, or
(2) if the amount is equal to or greater than five percent (5%) of
the amount stated on the Annual Statement of Account, the filer shall
pay the fees of the verifying auditor and the primary auditor, and, in
addition, shall deposit the amount found to be due plus any applicable
interest on the total amount, allocated by the filer's elected fiscal
year, with the Register of Copyrights.
(j) Independence and qualifications of verifying auditor.
(1) The verifying auditor shall be qualified and independent as
defined in this section. If the filer has reason to believe that the
verifying auditor is not qualified or independent, it shall raise the
matter with the joint interested copyright parties before the
commencement of the verification procedure, and if the matter is not
resolved, it may raise the issue with the American Institute of
Certified Public Accountants' Professional Ethics Division and/or the
verifying auditor's State Board of Accountancy while the verification
procedure is being performed.
(2) A verifying auditor shall be considered qualified if he or she
is a certified public accountant or works under the supervision of a
certified public accounting firm.
(3) A verifying auditor shall be considered independent if:
(i) he or she is independent as that term is used in the Code of
Professional Conduct of the American Institute of Certified Public
Accountants, including the Principles, Rules and Interpretations of
such Code applicable generally to attest engagements (collectively, the
``AICPA Code''); and (ii) he or she is independent as that term is used
in the Statements on Auditing Standards promulgated by the Auditing
Standards Board of the AICPA and Interpretations thereof issued by the
Auditing Standards Division of the AICPA.
Dated: June 6, 1996.
Marybeth Peters,
Register of Copyrights.
Approved by:
James H. Billington,
The Librarian of Congress.
[FR Doc. 96-15390 Filed 6-17-96; 8:45 am]
BILLING CODE 1410-30-P
