Draft Report Addendum of the Advisory Committee on the Auditing Profession, 33487-33490 [E8-13274]
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Federal Register / Vol. 73, No. 114 / Thursday, June 12, 2008 / Notices
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BILLING CODE 4910–59–P
DEPARTMENT OF THE TREASURY
Draft Report Addendum of the
Advisory Committee on the Auditing
Profession
Office of the Undersecretary for
Domestic Finance, Treasury.
ACTION: Notice; request for comments.
AGENCY:
SUMMARY: The Advisory Committee on
the Auditing Profession is publishing a
Draft Report Addendum and soliciting
public comment.
DATES: Comments should be received on
or before July 9, 2008.
ADDRESSES: Comments may be
submitted to the Advisory Committee by
any of the following methods:
Electronic Comments
• Use the Department’s Internet
submission form (https://www.treas.gov/
offices/domestic-finance/acap/
comments); or
Paper Comments
• Send paper comments in triplicate
to Advisory Committee on the Auditing
Profession, Office of Financial
Institutions Policy, Room 1418,
Department of the Treasury, 1500
Pennsylvania Avenue, NW.,
Washington, DC 20220.
In general, the Department will post
all comments on its Web site (https://
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www.treas.gov/offices/domesticfinance/acap/comments) without
change, including any business or
personal information provided such as
names, addresses, e-mail addresses, or
telephone numbers. The Department
will also make such comments available
for public inspection and copying in the
Department’s Library, Room 1428, Main
Department Building, 1500
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business days between the hours of 10
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make an appointment to inspect
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0990. All comments, including
attachments and other supporting
materials, received are part of the public
record and subject to public disclosure.
You should submit only information
that you wish to make available
publicly.
FOR FURTHER INFORMATION CONTACT:
Kristen E. Jaconi, Senior Policy Advisor
to the Under Secretary for Domestic
Finance, Department of the Treasury,
Main Department Building, 1500
Pennsylvania Avenue, NW.,
Washington, DC 20220, at (202) 927–
6618.
At the
request of the two Co-Chairs of the
Department of the Treasury’s Advisory
Committee on the Auditing Profession,
the Department is publishing this notice
soliciting public comment on the
Advisory Committee’s Draft Report
Addendum. The text of this Draft Report
Addendum is found in the appendix to
this notice and may be found on the
Web page of the Advisory Committee at
https://www.treas.gov/offices/domesticfinance/acap/index.shtml. The Draft
Report Addendum seeks comments on a
variety of issues impacting the
sustainability of a strong and vibrant
public company auditing profession. All
interested parties are invited to submit
their comments in the manner described
above.
SUPPLEMENTARY INFORMATION:
Dated: June 6, 2008.
Taiya Smith,
Executive Secretary.
Appendix: Advisory Committee on the
Auditing Profession
Draft Report Addendum—June 3, 2008
The Department of the Treasury
Addendum to VI. Firm Structure and
Finances
Auditor’s Report
Recommendation: Urge the PCAOB to
undertake a standard-setting initiative to
consider improvements to the auditor’s
reporting model.
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The auditor’s report is the primary means
by which the auditor communicates to the
users of financial statements regarding its
audit of financial statements. The standard
auditor’s report, not much altered since the
1930s,1 identifies the financial statements
audited, the scope and nature of the audit,
the general responsibilities of the auditor and
management, and the auditor’s opinion.2 In
addition, for companies subject to the
Sarbanes-Oxley Act’s internal control
requirements, the auditor’s report includes
an attestation as to internal control over
financial reporting.3 The auditor’s opinion on
the financial statements states whether these
statements present fairly, in all material
respects, a company’s financial position,
results of operations, and cash flows in
conformity with generally accepted
accounting principles.4
Many consider the auditor’s reporting
model a pass/fail model because the auditor
opines whether the statements are fairly
presented (pass) or not (fail).5 Some believe
this pass/fail model with its standardized
wording does not adequately reflect the
amount of auditor work and judgment.
Over thirty years ago, the Commission on
Auditors’ Responsibilities (Cohen
Commission) made a simple observation:
‘‘For the largest corporations in the country,
an audit may involve scores of auditors and
tens of thousands of hours of work for which
the client may pay millions of dollars.
Nevertheless, the auditor’s standard report
compresses that considerable expenditure of
skilled effort into a relatively few words and
paragraphs.’’ 6 The Cohen Commission then
called for an expansion of the auditor’s report
to include a report not merely on the
financial statements, but covering the entire
audit function.7 The Cohen Commission
reasoned that this new more comprehensive
information would benefit users, but also
clarify the role and, consequently, the legal
standing of the auditor in relation to the
audit.8
In 1987, the National Commission on
Fraudulent Financial Reporting (Treadway
Commission) recommended that the standard
auditor’s report more clearly identify the
auditor’s responsibilities, the degree to which
users can rely on the audit, and the
limitations on the audit process.9 The
Treadway Commission aimed to reaffirm that
management has ‘‘primary responsibility for
financial statements’’ and to caution users of
financial statements from placing more than
‘‘reasonable’’ assurance on the audit process.
More recently, the American Assembly
called for differing attestation standards for
different parts of the financial statements,
depending on the amount of uncertainty and
judgment required in making certain
determinations.10 In addition, a February
2008 CFA Institute survey indicated that
80% of its member respondents believe that
the auditor’s report should provide specific
information about how the auditor reached
its opinion.11 A majority of survey
respondents thought it was very important to
have the auditors identify key risk areas,
significant changes in risk exposures, and
amounts either involving a high degree of
uncertainty in measurement and significant
assumptions or requiring a higher level of
professional judgment.12
In 2005, the PCAOB’s Standing Advisory
Group (SAG), which advises the PCAOB on
the establishment of auditing and related
professional practice standards, considered
whether the auditor’s report should include
more information relating to the auditor’s
judgments regarding financial reporting
quality.13 The SAG also considered whether
required auditor communications to audit
committees, such as the auditor’s judgments
about accounting principles 14 and critical
accounting policies and practices,15 should
be incorporated into the auditor’s report.16
The PCAOB has not yet taken up a standardsetting initiative regarding the auditor’s
report.
Foreign jurisdictions are also currently
considering changes to their auditor’s
reports. For instance, the European
Commission under the Eighth Directive is
authorized to develop its own ‘‘European
1 For a historical analysis of the evolution of the
auditor’s report, see George Cochrane, The
Auditor’s Report: Its Evolution in the U.S.A., in
Perspectives in Auditing 16 (D.R. Carmichael and
John J. Willingham 2d. ed. 1975).
2 Reports on Audited Financial Statements,
Interim Auditing Standard AU Section 508.08 (Pub.
Company Accounting Oversight Bd. 2002).
3 An Audit of Internal Control over Financial
Reporting That Is Integrated with an Audit of
Financial Statements, Auditing Standard No. 5,
para. 85 (Pub. Company Accounting Oversight Bd.
2007).
4 Reports on Audited Financial Statements,
Interim Auditing Standard AU Section 508.07–.08
(Pub. Company Accounting Oversight Bd. 2002).
5 Public Company Accounting Oversight Board,
Standing Advisory Group Meeting Briefing Paper:
Auditor’s Reporting Model 3 (Feb. 16, 2005).
6 Commission on Auditors’ Responsibilities,
Report, Conclusions, and Recommendations 71
(1978).
7 Commission on Auditors’ Responsibilities,
Report, Conclusions, and Recommendations 75
(1978).
8 Commission on Auditors’ Responsibilities,
Report, Conclusions, and Recommendations 75–76
(1978).
9 National Commission on Fraudulent Financial
Report, Report of the National Commission on
Fraudulent Financial Reporting (Oct. 1987).
10 American Assembly, The Future of the
Accounting Profession 12–13 (Nov. 13–15, 2003);
American Assembly, The Future of the Accounting
Profession: Auditor Concentration 21 (May 23,
2005).
11 CFA Institute, February 2008 Monthly
Question Results (Feb. 2008), available at https://
www.cfainstitute.org/memresources/
monthlyquestion/2008/february.html.
12 CFA Institute, February 2008 Monthly
Question Results (Feb. 2008), available at https://
www.cfainstitute.org/memresources/monthly
question/2008/february.html.
13 Public Company Accounting Oversight Board,
Standing Advisory Group Meeting: Auditor’s
Reporting Model (Feb. 16, 2005).
14 For this requirement, see Communications with
Audit Committees, Interim Auditing Standard AU
Section 380.11 (Public Company Accounting
Oversight Bd. 2002).
15 For this requirement, see Sarbanes-Oxley Act,
15 U.S.C. § 78j–1 (2002).
16 Public Company Accounting Oversight Board,
Standing Advisory Group Meeting: Auditor’s
Reporting Model 4–5 (Feb. 16, 2005).
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Audit Report’’ or adopt the International
Federation of Accountants’ International
Auditing and Assurance Standards Board’s
recently revised auditor’s report standard.17
In December 2007, the Audit Practices Board,
a part of the United Kingdom’s Financial
Reporting Council, issued a Discussion Paper
seeking comment on potentially altering the
auditor’s report.18 Currently in Germany,
public companies are generally required to
issue a long-form auditor’s report, discussing
matters such as the company’s economic
position and trend of business operations and
the nature and scope of the auditor’s
procedures. The Committee is cognizant that
this debate over such disclosures is unfolding
in a litigation environment different from
that in the United States.
This Committee has also heard testimony
regarding expanding the auditor’s report.19
One witness noted that some institutional
investors believe an expanded auditor’s
report would enhance investor confidence in
financial reporting and recommended
exploring a more ‘‘narrative’’ report in areas,
such as ‘‘estimates, judgments, sufficiency of
evidence and uncertainties.’’ 20
The Committee notes that the increasing
complexity of global business operations are
compelling a growing use of judgments and
estimates, including those related to fair
value measurements, and also contributing to
greater complexity in financial reporting. The
Committee believes this complexity supports
improving the content of the auditor’s report
beyond the current pass/fail model to include
a more relevant discussion about the audit of
the financial statements. While there is not
yet agreement as to precisely what additional
information is sought by and would be useful
to investors and other users of financial
statements, the Committee concludes that an
improved auditor’s report would likely lead
to more relevant information for users of
financial statements and, in line with
17 Directive 2006/43/EC of the European
Parliament and of the Council Art. 28 (May 17,
2006); Auditing Practices Board, Discussion
Paper—The Auditor’s Report: A Time for Change?
6 (Dec. 2007).
18 Auditing Practices Board, Discussion Paper—
The Auditor’s Report: A Time for Change? (Dec.
2007).
19 19 See, e.g., Record of Proceedings (Dec. 3,
2007) (Written Submission of Dennis M. Nally,
Chairman and Senior Partner,
PricewaterhouseCoopers LLP, 7), available at https://
www.treas.gov/offices/domestic-finance/acap/
submissions/12032007/Nally120307.pdf
(supporting the Committee’s considering whether to
change the auditor’s report’s content given single
financial reporting standards, more cohesive global
auditing standards, and trends, like fair value
measurement); Record of Proceedings (Dec. 3, 2007)
(Oral Remarks of Ashwinpaul C. Sondhi, President,
A. C. Sondhi & Associates, LLC, 255–57), available
at https://www.treas.gov/offices/domestic-finance/
acap/agendas/minutes-12-3-07.pdf; Record of
Proceedings (Dec. 3, 2007) (Oral Remarks of James
S. Turley, Chairman and Chief Executive Officer,
Ernst & Young LLP, 253–54), available at https://
www.treas.gov/offices/domestic-finance/acap/
agendas/minutes-12-3-07.pdf.
20 Record of Proceedings (Feb. 4, 2008) (Written
Submission of Richard Fleck, Global Relationship
Partner, Herbert Smith LLP, 17, 21), available at
https://www.treas.gov/offices/domestic-finance/
acap/submissions/02042008/Fleck02042008.pdf.
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Recommendation 1(b) in Chapter VI of this
Report, would clarify the role of the auditor
in the financial statement audit.
The Committee therefore recommends that
the PCAOB address these issues, both longdebated and increasingly important given the
use of judgments and estimates, by
undertaking a standard-setting initiative to
consider improvements to the auditor’s
reporting model. With regards to this
initiative, the PCAOB should consult with
investors, other financial statement users,
auditing firms, public companies, academics,
other market participants, and other state,
federal, and foreign regulators. In view of the
desirability of improving the quality of
financial reporting and auditing on a global
basis, the PCAOB should also consider the
developments in foreign jurisdictions that
improve the quality and content of the
auditor’s report and should consult with
international regulatory bodies as
appropriate. The PCAOB should also take
cognizance of the proposal’s potential legal
ramifications, if any, to auditors.
Engagement Partner Signature
SEC regulations require that the auditor’s
report be signed.21 Under current
requirements, the auditor’s report signature
block shows the auditing firm’s name, not the
engagement partner’s. In 2005, the PCAOB’s
SAG considered whether the audit partner
and a concurring partner should sign the
auditor’s report in their own names.22
Advocates believe that such signatures will
foster greater accountability of the
individuals signing the auditor’s report,
although they note there is no intention to
increase or decrease the liability or
responsibilities of the engagement partner.
These supporters analogize the signatures to
the chief executive officer and chief financial
officer certifications under Section 302 of the
Sarbanes-Oxley Act and directors’ signatures
on public company annual reports. The
signature will also enhance the status of the
engagement partner, putting the partner on
the same level as the chief executive officer
and chief financial officer. Opponents of
such signatures argue that the auditing firm
operates as a team and takes responsibility
for the audit, but not individual partners.
The Committee notes that engagement
partner signatures are required in other
jurisdictions. The European Commission’s
Eighth Directive requires that the engagement
partner sign the auditor’s report.23 Even prior
to the Eighth Directive, several European
countries, including France, Germany, and
Luxembourg, required engagement partner
signatures for a number of years.24
21 SEC
Regulation S–X, Rule 2–02a.
Company Accounting Oversight Board,
Standing Advisory Group Meeting: Auditor’s
Reporting Model 7–8 (Feb. 16, 2005).
23 Directive 2006/43/EC of the European
Parliament and of the Council Art. 28 (May 17,
2006).
24 The Institute of Chartered Accountants in
England and Wales, Shareholder Involvement—
Identifying the Audit Partner (2005) (noting that
Germany, France, and Luxembourg currently
require audit partner signatures and European
Member states must adopt such a requirement
under Article 28 of the Directive 2006/43/EC of the
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The Committee has heard testimony
regarding the benefits of engagement partner
signatures 25 and has discussed and debated
the merits of the senior engagement partner
signing the auditor’s report.26 The Committee
notes that in Chapter VII of this Report, the
Committee is recommending disclosure of
the name(s) of the senior audit partner(s)
staffed on the engagement in the proxy
statement to increase transparency and affirm
the accountability of the auditor.
The Committee is considering
recommending that the PCAOB revise its
auditor’s report standard to mandate the
engagement partner’s signature on the
auditor’s report. The Committee notes the
signing partner should face no additional
liability than that under the current liability
regime. The Committee is seeking
commentary on this potential
recommendation, and in jurisdictions where
signatures are currently required, their
impact on audit quality.
Transparency
The Committee considered testimony and
commentary regarding the transparency of
auditing firms.27 The Committee has
reviewed and considered a range of
transparency reporting options, including the
PCAOB’s May 2006 proposal, not yet
finalized, requiring annual and periodic
reporting pursuant to the mandate under
Sarbanes-Oxley’s Section 102(d).28 This
proposal would require annual reporting by
auditing firms on such items as a public
company audit client list and the percentage
of the firm’s total fees attributable to public
company audit clients for each of the
following categories of services: Audit
services, other accounting services, tax
services, and non-audit services. The PCAOB
proposal would also require firms to file a
‘‘special’’ report, triggered by such events as
European Parliament and of the Council of 17 May
2006 on statutory audits of annual accounts and
consolidated accounts).
25 Record of Proceedings (Feb. 4, 2008) (Written
Submission of Paul G. Haaga, Jr., Vice Chairman,
Capital Research and Management Company, 2),
available at https://www.treas.gov/offices/domesticfinance/acap/submissions/02042008/
Haaga020408.pdf (stating that signatures could
improve audit quality and enhance accountability).
26 See, e.g., Record of Proceedings (Mar. 13, 2008)
(Oral Remarks of Donald T. Nicolaisen, Board
Member, Morgan Stanley, 228–230) (stating his
belief that the engagement partner should sign the
auditor’s report); Record of Proceedings (Mar. 13,
2008) (Oral Remarks of Mary Bush, Board Member,
Discover Financial Services, 231) (endorsing the
engagement partner signature on the auditor’s
report).
27 See e.g., Record of Proceedings (Dec. 3, 2007)
(Written Submission of James S. Turley, Chairman
and Chief Executive Officer, Ernst & Young LLP,
10), available at https://www.treas.gov/offices/
domestic-finance/acap/submissions/12032007/
Turley120307.pdf; Record of Proceedings (Feb. 4,
2008) (Written Submission of Dennis Johnson,
Senior Portfolio Manager, Corporate Governance,
California Public Employees’ Retirement System, 5),
available at https://www.treas.gov/offices/domesticfinance/acap/submissions/02042008/
Johnson020408.pdf.
28 See PCAOB, Proposed Rules on Periodic
Reporting by Registered Public Accounting Firms,
available at https://www.pcaobus.org/rules/
docket_019/2006-05–23-release_no.__2006_004.pdf.
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the initiation of certain criminal or civil
governmental proceedings against the firm or
its personnel; a new relationship with a
previously disciplined person or entity; or
the firm becoming subject to bankruptcy or
similar proceedings.
The Committee has also considered the
European Union’s Eighth Directive, Article
40 Transparency Report,29 which requires
that public company auditors post on their
Web sites annual reports including the
following information: Legal and network
structure and ownership description;
governance description; most recent quality
assurance review; public company audit
client list; independence practices and
confirmation of independence compliance
review; continuing education policy;
financial information, including audit fees,
tax advisory fees, consulting fees; and partner
remuneration policies. The Article 40
Transparency Report also requires a
description of the auditing firm’s quality
control system and a statement by firm
management on its effectiveness. Auditing
firms and investors have expressed support
for requiring U.S. auditing firms to publish
reports similar to the Article 40 Transparency
Report.30
The Committee notes that
Recommendation 3 in Chapter VII of this
Report recommends that, if feasible, the
PCAOB develop audit quality indicators and
auditing firms publish these indicators. The
Committee believes this information could
improve audit quality by enhancing the
transparency of auditing firms and notes that
some foreign affiliates of U.S. auditing firms
provide such indicators in public reports
issued in other jurisdictions.31
29 Directive 2006/43/EC of the European
Parliament and of the Council Art. 40 (May 17,
2006), available at https://eur-lex.europa.eu/
LexUriServ/LexUri
Serv.do?uri=OJ:L:2006:157:0087:0107:EN:PDF.
30 See, e.g., Record of Proceedings (Feb. 4, 2008)
(Written Submission of Paul G. Haaga, Jr., Vice
Chairman, Capital Research and Management
Company, 2), available at https://www.treas.gov/
offices/domestic-finance/acap/submissions/
02042008/Haaga020408.pdf (recommending
auditing firm disclosure of quality control policies
and procedures); Record of Proceedings (Feb. 4,
2008) (Written Submission of Edward E. Nusbaum,
Chief Executive Officer, Grant Thornton LLP, 6),
available at https://www.treas.gov/offices/domesticfinance/acap/submissions/02042008/
Nusbaum020408.pdf (supporting an annual
transparency report for U.S. auditing firms); Record
of Proceedings (Written Submission of James S.
Turley, Chairman and Chief Executive Officer, Ernst
& Young LLP, 10), available at https://
www.treas.gov/offices/domestic-finance/acap/
submissions/12032007/Turley120307.pdf
(suggesting the PCAOB require auditing firms to
publish transparency reports like the European
Union’s Article 40 Transparency Report).
31 See, e.g., Record of Proceedings (Feb. 4, 2008)
(Written Submission of Dennis Johnson, Senior
Portfolio Manager, Corporate Governance,
California Public Employees’ Retirement System, 5),
available at https://www.treas.gov/offices/domesticfinance/acap/submissions/02042008/
Johnson020408.pdf (recommending auditing firm
disclosure of key performance indicators, such as
‘‘percent of training dollars spent on staff compared
to the fees received for the audit, average
experience of staff, partner time allocated to each
audit’’).
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Furthermore, for several years auditing
firms in the United Kingdom have published
annual reports containing audited financial
statements pursuant to limited liability
partnership disclosure requirements as well
as a discussion of those statements, a
statement on corporate governance,
performance metrics, and other useful
information. In the United States, auditing
firms typically do not prepare audited
financial statements. Some witnesses have
called for disclosure of audited financial
statements,32 whereas one auditing firm
representative questioned the usefulness of
disclosing financial statements of the smaller
auditing firms.33
The Committee recommends that the
PCAOB require that, beginning in 2010,
larger auditing firms (those with 100 or more
public company audit clients that the PCAOB
inspects annually) produce a public annual
report incorporating (a) information required
by the Article 40 Transparency Report
deemed appropriate by the PCAOB in
consultation with investors, other financial
statement users, auditing firms, public
companies, academics, and other market
participants, and (b) such key indicators of
audit quality and effectiveness as determined
by the PCAOB in accordance with
Recommendation 3 in Chapter VII of this
Report. These disclosure requirements
should supplement any rules adopted as a
result of the PCAOB’s 2006 reporting
proposal.
The Committee also recommends that the
PCAOB determine which of the requirements
included above should be imposed on
smaller auditing firms (those with less than
100 public company audit clients), taking
into account these firms’ size and resources.
The Committee is also considering
recommending one of the following two
approaches to audited financial statements:
The PCAOB should require that, beginning in
2011, the larger auditing firms file with the
PCAOB on a confidential basis audited
financial statements prepared in accordance
with generally accepted accounting
principles or international financial reporting
standards and the PCAOB will then either:
‘‘Alternative 1: Determine, based on broad
consultation, whether these audited financial
32 See, e.g., Record of Proceedings (Feb. 4, 2008)
(Written Submission of Paul G. Haaga, Jr., Vice
Chairman, Capital Research and Management
Company, 2), available at https://www.treas.gov/
offices/domestic-finance/acap/submissions/
02042008/Haaga020408.pdf (calling for auditing
firm disclosure of audited financial statements).
33 Record of Proceedings (Feb. 4, 2008) (Questions
for the Record of Neal Spencer, Managing Partner,
BKD LLP, 38–39), available at https://
www.treas.gov/offices/domestic-finance/acap/
agendas/QFRs-2-4-08.pdf (analogizing the auditing
firm to a vendor and noting that the profitability or
financial strength of vendors ‘‘has little, if any,
relevance other than perhaps related to concerns
about their ability to financially support their
continued existence’’ and noting that the
profitability or financial condition of an auditing
firm is not directly related to audit quality; and
noting that the ‘‘most relevant financial information
for users’’ of smaller auditing firms is insurancerelated information and noting that larger auditing
firms with limited commercial insurance coverage
may need to disclose different financial
information).
VerDate Aug<31>2005
21:47 Jun 11, 2008
Jkt 214001
statements should be made public in
consideration of their utility to audit
committee members and investors in
assessing audit quality, impact on firm
sustainability, firm comparability, and other
considerations relevant to the public interest,
or
Alternative 2: Make these audited financial
statements publicly available.’’
The Committee is seeking commentary on
these potential alternatives.
standard fairly and adequately representing
investors’ interests.
The Committee is seeking commentary on
(1) Whether it is appropriate to have
exclusive federal jurisdiction for some
categories of claims and a uniform standard
of care; and, if so, (2) what types of claims
should be subject to federal jurisdiction; and
(3) what should be the uniform standard of
care.
Litigation
The Committee also has considered
liability issues impacting the profession. The
Committee received and considered
testimony and commentary suggesting
certain measures aimed at liability reform.34
The Committee also has received testimony
and commentary opposing liability reform.35
The Committee takes note that the
Sarbanes-Oxley Act established a new level
of federal regulation over the public company
auditing profession. In that context, some
believe it would be appropriate to transfer to
federal court jurisdiction some categories of
claims against auditors, which presently may
be brought in state courts. Others are
unconvinced by this argument, expressing
concerns that this approach might weaken
plaintiffs’ rights and remedies.
The Committee is considering whether it
should recommend that Congress provide
federal courts with exclusive jurisdiction
over some categories of claims, which
presently may be brought in state courts
against auditors, when such claims are
related to audits of public company financial
statements. Should Congress take up this
recommendation, it should develop a
uniform standard of care with the
appropriate and necessary levels of investor
protection. While there are various
differences among state and federal standards
of care, the Committee contemplates a
BILLING CODE 4810–25–P
34 See, e.g., Record of Proceedings (Feb. 4, 2008)
(Written Submission of Edward E. Nusbaum, Chief
Executive Officer, Grant Thornton LLP, 7–8),
available at https://www.treas.gov/offices/domesticfinance/acap/submissions/02042008/
Nusbaum020408.pdf (suggesting general securities
litigation reform); Record of Proceedings (Dec. 3,
2007) (Written Submission of James S. Turley,
Chairman and Chief Executive Officer, Ernst &
Young LLP, 16), available at https://www.treas.gov/
offices/domestic-finance/acap/submissions/
12032007/Turley120307.pdf (suggesting the ability
to appeal motions to dismiss in securities class
actions).
35 See, e.g., Record of Proceedings (Feb. 4, 2008)
(Questions for the Record of John P. Coffey, Partner,
Bernstein Litowitz Berger & Grossmann LLP, 1–7
(Mar. 31, 2008)), available at https://www.treas.gov/
offices/domestic-finance/acap/agendas/QFRs-2-408.pdf (weighing against reforming the calculation
of damages in securities fraud class actions and
auditor liability protections, including a
professional judgment framework and safe harbor,
but supporting scheme liability); Record of
Proceedings (Feb. 4, 2008) (Questions for the
Record of Paul G. Haaga, Jr., Vice Chairman, Capital
Research and Management Company, 1–3),
available at https://www.treas.gov/offices/domesticfinance/acap/agendas/QFRs-2-4-08.pdf (opposing
liability limits and safe harbors for auditing firms
and viewing liability exposure as a ‘‘very effective
incentive for the firms to conduct high quality
audits’’).
PO 00000
Frm 00104
Fmt 4703
Sfmt 4703
[FR Doc. E8–13274 Filed 6–11–08; 8:45 am]
DEPARTMENT OF THE TREASURY
Office of the Assistant Secretary for
International Affairs; Survey of Foreign
Ownership of U.S. Securities
Departmental Offices,
Department of the Treasury.
ACTION: Notice of reporting
requirements.
AGENCY:
SUMMARY: By this Notice, the
Department of the Treasury is informing
the public that it is conducting a
mandatory survey of foreign ownership
of U.S. securities as of June 30, 2008.
This Notice constitutes legal notification
to all United States persons (defined
below) who meet the reporting
requirements set forth in this Notice that
they must respond to, and comply with,
this survey. Additional copies of the
reporting forms SHLA (2008) and
instructions may be printed from the
Internet at: https://www.treas.gov/tic/
forms-sh.html.
Definition: A U.S. person is any
individual, branch, partnership,
associated group, association, estate,
trust, corporation, or other organization
(whether or not organized under the
laws of any State), and any government
(including a foreign government, the
United States Government, a state,
provincial, or local government, and any
agency, corporation, financial
institution, or other entity or
instrumentality thereof, including a
government-sponsored agency), who
resides in the United States or is subject
to the jurisdiction of the United States.
Who Must Report: The panel for this
survey is based upon the level of foreign
holdings of U.S. securities reported on
the June 2004 benchmark survey of
foreign holdings of U.S. securities, and
will consist mostly of the largest
reporters on that survey. Entities
required to report will be contacted
individually by the Federal Reserve
Bank of New York. Entities not
contacted by the Federal Reserve Bank
of New York have no reporting
responsibilities.
What to Report: This report will
collect information on foreign resident
E:\FR\FM\12JNN1.SGM
12JNN1
]]>Agencies
[Federal Register Volume 73, Number 114 (Thursday, June 12, 2008)]
[Notices]
[Pages 33487-33490]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-13274]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Draft Report Addendum of the Advisory Committee on the Auditing
Profession
AGENCY: Office of the Undersecretary for Domestic Finance, Treasury.
ACTION: Notice; request for comments.
-----------------------------------------------------------------------
SUMMARY: The Advisory Committee on the Auditing Profession is
publishing a Draft Report Addendum and soliciting public comment.
DATES: Comments should be received on or before July 9, 2008.
ADDRESSES: Comments may be submitted to the Advisory Committee by any
of the following methods:
Electronic Comments
Use the Department's Internet submission form (https://
www.treas.gov/offices/domestic-finance/acap/comments); or
Paper Comments
Send paper comments in triplicate to Advisory Committee on
the Auditing Profession, Office of Financial Institutions Policy, Room
1418, Department of the Treasury, 1500 Pennsylvania Avenue, NW.,
Washington, DC 20220.
In general, the Department will post all comments on its Web site
(https://www.treas.gov/offices/domestic-finance/acap/comments) without
change, including any business or personal information provided such as
names, addresses, e-mail addresses, or telephone numbers. The
Department will also make such comments available for public inspection
and copying in the Department's Library, Room 1428, Main Department
Building, 1500 Pennsylvania Avenue, NW., Washington, DC 20220, on
official business days between the hours of 10 a.m. and 5 p.m. Eastern
Time. You can make an appointment to inspect comments by telephoning
(202) 622-0990. All comments, including attachments and other
supporting materials, received are part of the public record and
subject to public disclosure. You should submit only information that
you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Kristen E. Jaconi, Senior Policy
Advisor to the Under Secretary for Domestic Finance, Department of the
Treasury, Main Department Building, 1500 Pennsylvania Avenue, NW.,
Washington, DC 20220, at (202) 927-6618.
SUPPLEMENTARY INFORMATION: At the request of the two Co-Chairs of the
Department of the Treasury's Advisory Committee on the Auditing
Profession, the Department is publishing this notice soliciting public
comment on the Advisory Committee's Draft Report Addendum. The text of
this Draft Report Addendum is found in the appendix to this notice and
may be found on the Web page of the Advisory Committee at https://
www.treas.gov/offices/domestic-finance/acap/index.shtml. The Draft
Report Addendum seeks comments on a variety of issues impacting the
sustainability of a strong and vibrant public company auditing
profession. All interested parties are invited to submit their comments
in the manner described above.
Dated: June 6, 2008.
Taiya Smith,
Executive Secretary.
Appendix: Advisory Committee on the Auditing Profession
Draft Report Addendum--June 3, 2008
The Department of the Treasury
Addendum to VI. Firm Structure and Finances
Auditor's Report
Recommendation: Urge the PCAOB to undertake a standard-setting
initiative to consider improvements to the auditor's reporting
model.
[[Page 33488]]
The auditor's report is the primary means by which the auditor
communicates to the users of financial statements regarding its
audit of financial statements. The standard auditor's report, not
much altered since the 1930s,\1\ identifies the financial statements
audited, the scope and nature of the audit, the general
responsibilities of the auditor and management, and the auditor's
opinion.\2\ In addition, for companies subject to the Sarbanes-Oxley
Act's internal control requirements, the auditor's report includes
an attestation as to internal control over financial reporting.\3\
The auditor's opinion on the financial statements states whether
these statements present fairly, in all material respects, a
company's financial position, results of operations, and cash flows
in conformity with generally accepted accounting principles.\4\
---------------------------------------------------------------------------
\1\ For a historical analysis of the evolution of the auditor's
report, see George Cochrane, The Auditor's Report: Its Evolution in
the U.S.A., in Perspectives in Auditing 16 (D.R. Carmichael and John
J. Willingham 2d. ed. 1975).
\2\ Reports on Audited Financial Statements, Interim Auditing
Standard AU Section 508.08 (Pub. Company Accounting Oversight Bd.
2002).
\3\ An Audit of Internal Control over Financial Reporting That
Is Integrated with an Audit of Financial Statements, Auditing
Standard No. 5, para. 85 (Pub. Company Accounting Oversight Bd.
2007).
\4\ Reports on Audited Financial Statements, Interim Auditing
Standard AU Section 508.07-.08 (Pub. Company Accounting Oversight
Bd. 2002).
---------------------------------------------------------------------------
Many consider the auditor's reporting model a pass/fail model
because the auditor opines whether the statements are fairly
presented (pass) or not (fail).\5\ Some believe this pass/fail model
with its standardized wording does not adequately reflect the amount
of auditor work and judgment.
---------------------------------------------------------------------------
\5\ Public Company Accounting Oversight Board, Standing Advisory
Group Meeting Briefing Paper: Auditor's Reporting Model 3 (Feb. 16,
2005).
---------------------------------------------------------------------------
Over thirty years ago, the Commission on Auditors'
Responsibilities (Cohen Commission) made a simple observation: ``For
the largest corporations in the country, an audit may involve scores
of auditors and tens of thousands of hours of work for which the
client may pay millions of dollars. Nevertheless, the auditor's
standard report compresses that considerable expenditure of skilled
effort into a relatively few words and paragraphs.'' \6\ The Cohen
Commission then called for an expansion of the auditor's report to
include a report not merely on the financial statements, but
covering the entire audit function.\7\ The Cohen Commission reasoned
that this new more comprehensive information would benefit users,
but also clarify the role and, consequently, the legal standing of
the auditor in relation to the audit.\8\
---------------------------------------------------------------------------
\6\ Commission on Auditors' Responsibilities, Report,
Conclusions, and Recommendations 71 (1978).
\7\ Commission on Auditors' Responsibilities, Report,
Conclusions, and Recommendations 75 (1978).
\8\ Commission on Auditors' Responsibilities, Report,
Conclusions, and Recommendations 75-76 (1978).
---------------------------------------------------------------------------
In 1987, the National Commission on Fraudulent Financial
Reporting (Treadway Commission) recommended that the standard
auditor's report more clearly identify the auditor's
responsibilities, the degree to which users can rely on the audit,
and the limitations on the audit process.\9\ The Treadway Commission
aimed to reaffirm that management has ``primary responsibility for
financial statements'' and to caution users of financial statements
from placing more than ``reasonable'' assurance on the audit
process.
---------------------------------------------------------------------------
\9\ National Commission on Fraudulent Financial Report, Report
of the National Commission on Fraudulent Financial Reporting (Oct.
1987).
---------------------------------------------------------------------------
More recently, the American Assembly called for differing
attestation standards for different parts of the financial
statements, depending on the amount of uncertainty and judgment
required in making certain determinations.\10\ In addition, a
February 2008 CFA Institute survey indicated that 80% of its member
respondents believe that the auditor's report should provide
specific information about how the auditor reached its opinion.\11\
A majority of survey respondents thought it was very important to
have the auditors identify key risk areas, significant changes in
risk exposures, and amounts either involving a high degree of
uncertainty in measurement and significant assumptions or requiring
a higher level of professional judgment.\12\
---------------------------------------------------------------------------
\10\ American Assembly, The Future of the Accounting Profession
12-13 (Nov. 13-15, 2003); American Assembly, The Future of the
Accounting Profession: Auditor Concentration 21 (May 23, 2005).
\11\ CFA Institute, February 2008 Monthly Question Results (Feb.
2008), available at https://www.cfainstitute.org/memresources/
monthlyquestion/2008/february.html.
\12\ CFA Institute, February 2008 Monthly Question Results (Feb.
2008), available at https://www.cfainstitute.org/memresources/
monthlyquestion/2008/february.html.
---------------------------------------------------------------------------
In 2005, the PCAOB's Standing Advisory Group (SAG), which
advises the PCAOB on the establishment of auditing and related
professional practice standards, considered whether the auditor's
report should include more information relating to the auditor's
judgments regarding financial reporting quality.\13\ The SAG also
considered whether required auditor communications to audit
committees, such as the auditor's judgments about accounting
principles \14\ and critical accounting policies and practices,\15\
should be incorporated into the auditor's report.\16\ The PCAOB has
not yet taken up a standard-setting initiative regarding the
auditor's report.
---------------------------------------------------------------------------
\13\ Public Company Accounting Oversight Board, Standing
Advisory Group Meeting: Auditor's Reporting Model (Feb. 16, 2005).
\14\ For this requirement, see Communications with Audit
Committees, Interim Auditing Standard AU Section 380.11 (Public
Company Accounting Oversight Bd. 2002).
\15\ For this requirement, see Sarbanes-Oxley Act, 15 U.S.C.
Sec. 78j-1 (2002).
\16\ Public Company Accounting Oversight Board, Standing
Advisory Group Meeting: Auditor's Reporting Model 4-5 (Feb. 16,
2005).
---------------------------------------------------------------------------
Foreign jurisdictions are also currently considering changes to
their auditor's reports. For instance, the European Commission under
the Eighth Directive is authorized to develop its own ``European
Audit Report'' or adopt the International Federation of Accountants'
International Auditing and Assurance Standards Board's recently
revised auditor's report standard.\17\ In December 2007, the Audit
Practices Board, a part of the United Kingdom's Financial Reporting
Council, issued a Discussion Paper seeking comment on potentially
altering the auditor's report.\18\ Currently in Germany, public
companies are generally required to issue a long-form auditor's
report, discussing matters such as the company's economic position
and trend of business operations and the nature and scope of the
auditor's procedures. The Committee is cognizant that this debate
over such disclosures is unfolding in a litigation environment
different from that in the United States.
---------------------------------------------------------------------------
\17\ Directive 2006/43/EC of the European Parliament and of the
Council Art. 28 (May 17, 2006); Auditing Practices Board, Discussion
Paper--The Auditor's Report: A Time for Change? 6 (Dec. 2007).
\18\ Auditing Practices Board, Discussion Paper--The Auditor's
Report: A Time for Change? (Dec. 2007).
---------------------------------------------------------------------------
This Committee has also heard testimony regarding expanding the
auditor's report.\19\ One witness noted that some institutional
investors believe an expanded auditor's report would enhance
investor confidence in financial reporting and recommended exploring
a more ``narrative'' report in areas, such as ``estimates,
judgments, sufficiency of evidence and uncertainties.'' \20\
---------------------------------------------------------------------------
\19\ 19 See, e.g., Record of Proceedings (Dec. 3, 2007) (Written
Submission of Dennis M. Nally, Chairman and Senior Partner,
PricewaterhouseCoopers LLP, 7), available at https://www.treas.gov/
offices/domestic-finance/acap/submissions/12032007/Nally120307.pdf
(supporting the Committee's considering whether to change the
auditor's report's content given single financial reporting
standards, more cohesive global auditing standards, and trends, like
fair value measurement); Record of Proceedings (Dec. 3, 2007) (Oral
Remarks of Ashwinpaul C. Sondhi, President, A. C. Sondhi &
Associates, LLC, 255-57), available at https://www.treas.gov/offices/
domestic-finance/acap/agendas/minutes-12-3-07.pdf; Record of
Proceedings (Dec. 3, 2007) (Oral Remarks of James S. Turley,
Chairman and Chief Executive Officer, Ernst & Young LLP, 253-54),
available at https://www.treas.gov/offices/domestic-finance/acap/
agendas/minutes-12-3-07.pdf.
\20\ Record of Proceedings (Feb. 4, 2008) (Written Submission of
Richard Fleck, Global Relationship Partner, Herbert Smith LLP, 17,
21), available at https://www.treas.gov/offices/domestic-finance/
acap/submissions/02042008/Fleck02042008.pdf.
---------------------------------------------------------------------------
The Committee notes that the increasing complexity of global
business operations are compelling a growing use of judgments and
estimates, including those related to fair value measurements, and
also contributing to greater complexity in financial reporting. The
Committee believes this complexity supports improving the content of
the auditor's report beyond the current pass/fail model to include a
more relevant discussion about the audit of the financial
statements. While there is not yet agreement as to precisely what
additional information is sought by and would be useful to investors
and other users of financial statements, the Committee concludes
that an improved auditor's report would likely lead to more relevant
information for users of financial statements and, in line with
[[Page 33489]]
Recommendation 1(b) in Chapter VI of this Report, would clarify the
role of the auditor in the financial statement audit.
The Committee therefore recommends that the PCAOB address these
issues, both long-debated and increasingly important given the use
of judgments and estimates, by undertaking a standard-setting
initiative to consider improvements to the auditor's reporting
model. With regards to this initiative, the PCAOB should consult
with investors, other financial statement users, auditing firms,
public companies, academics, other market participants, and other
state, federal, and foreign regulators. In view of the desirability
of improving the quality of financial reporting and auditing on a
global basis, the PCAOB should also consider the developments in
foreign jurisdictions that improve the quality and content of the
auditor's report and should consult with international regulatory
bodies as appropriate. The PCAOB should also take cognizance of the
proposal's potential legal ramifications, if any, to auditors.
Engagement Partner Signature
SEC regulations require that the auditor's report be signed.\21\
Under current requirements, the auditor's report signature block
shows the auditing firm's name, not the engagement partner's. In
2005, the PCAOB's SAG considered whether the audit partner and a
concurring partner should sign the auditor's report in their own
names.\22\ Advocates believe that such signatures will foster
greater accountability of the individuals signing the auditor's
report, although they note there is no intention to increase or
decrease the liability or responsibilities of the engagement
partner. These supporters analogize the signatures to the chief
executive officer and chief financial officer certifications under
Section 302 of the Sarbanes-Oxley Act and directors' signatures on
public company annual reports. The signature will also enhance the
status of the engagement partner, putting the partner on the same
level as the chief executive officer and chief financial officer.
Opponents of such signatures argue that the auditing firm operates
as a team and takes responsibility for the audit, but not individual
partners.
---------------------------------------------------------------------------
\21\ SEC Regulation S-X, Rule 2-02a.
\22\ Public Company Accounting Oversight Board, Standing
Advisory Group Meeting: Auditor's Reporting Model 7-8 (Feb. 16,
2005).
---------------------------------------------------------------------------
The Committee notes that engagement partner signatures are
required in other jurisdictions. The European Commission's Eighth
Directive requires that the engagement partner sign the auditor's
report.\23\ Even prior to the Eighth Directive, several European
countries, including France, Germany, and Luxembourg, required
engagement partner signatures for a number of years.\24\
---------------------------------------------------------------------------
\23\ Directive 2006/43/EC of the European Parliament and of the
Council Art. 28 (May 17, 2006).
\24\ The Institute of Chartered Accountants in England and
Wales, Shareholder Involvement--Identifying the Audit Partner (2005)
(noting that Germany, France, and Luxembourg currently require audit
partner signatures and European Member states must adopt such a
requirement under Article 28 of the Directive 2006/43/EC of the
European Parliament and of the Council of 17 May 2006 on statutory
audits of annual accounts and consolidated accounts).
---------------------------------------------------------------------------
The Committee has heard testimony regarding the benefits of
engagement partner signatures \25\ and has discussed and debated the
merits of the senior engagement partner signing the auditor's
report.\26\ The Committee notes that in Chapter VII of this Report,
the Committee is recommending disclosure of the name(s) of the
senior audit partner(s) staffed on the engagement in the proxy
statement to increase transparency and affirm the accountability of
the auditor.
---------------------------------------------------------------------------
\25\ Record of Proceedings (Feb. 4, 2008) (Written Submission of
Paul G. Haaga, Jr., Vice Chairman, Capital Research and Management
Company, 2), available at https://www.treas.gov/offices/domestic-
finance/acap/submissions/02042008/Haaga020408.pdf (stating that
signatures could improve audit quality and enhance accountability).
\26\ See, e.g., Record of Proceedings (Mar. 13, 2008) (Oral
Remarks of Donald T. Nicolaisen, Board Member, Morgan Stanley, 228-
230) (stating his belief that the engagement partner should sign the
auditor's report); Record of Proceedings (Mar. 13, 2008) (Oral
Remarks of Mary Bush, Board Member, Discover Financial Services,
231) (endorsing the engagement partner signature on the auditor's
report).
---------------------------------------------------------------------------
The Committee is considering recommending that the PCAOB revise
its auditor's report standard to mandate the engagement partner's
signature on the auditor's report. The Committee notes the signing
partner should face no additional liability than that under the
current liability regime. The Committee is seeking commentary on
this potential recommendation, and in jurisdictions where signatures
are currently required, their impact on audit quality.
Transparency
The Committee considered testimony and commentary regarding the
transparency of auditing firms.\27\ The Committee has reviewed and
considered a range of transparency reporting options, including the
PCAOB's May 2006 proposal, not yet finalized, requiring annual and
periodic reporting pursuant to the mandate under Sarbanes-Oxley's
Section 102(d).\28\ This proposal would require annual reporting by
auditing firms on such items as a public company audit client list
and the percentage of the firm's total fees attributable to public
company audit clients for each of the following categories of
services: Audit services, other accounting services, tax services,
and non-audit services. The PCAOB proposal would also require firms
to file a ``special'' report, triggered by such events as the
initiation of certain criminal or civil governmental proceedings
against the firm or its personnel; a new relationship with a
previously disciplined person or entity; or the firm becoming
subject to bankruptcy or similar proceedings.
---------------------------------------------------------------------------
\27\ See e.g., Record of Proceedings (Dec. 3, 2007) (Written
Submission of James S. Turley, Chairman and Chief Executive Officer,
Ernst & Young LLP, 10), available at https://www.treas.gov/offices/
domestic-finance/acap/submissions/12032007/Turley120307.pdf; Record
of Proceedings (Feb. 4, 2008) (Written Submission of Dennis Johnson,
Senior Portfolio Manager, Corporate Governance, California Public
Employees' Retirement System, 5), available at https://www.treas.gov/
offices/domestic-finance/acap/submissions/02042008/
Johnson020408.pdf.
\28\ See PCAOB, Proposed Rules on Periodic Reporting by
Registered Public Accounting Firms, available at https://
www.pcaobus.org/rules/docket_019/2006-05-23-release_no.__2006_
004.pdf.
---------------------------------------------------------------------------
The Committee has also considered the European Union's Eighth
Directive, Article 40 Transparency Report,\29\ which requires that
public company auditors post on their Web sites annual reports
including the following information: Legal and network structure and
ownership description; governance description; most recent quality
assurance review; public company audit client list; independence
practices and confirmation of independence compliance review;
continuing education policy; financial information, including audit
fees, tax advisory fees, consulting fees; and partner remuneration
policies. The Article 40 Transparency Report also requires a
description of the auditing firm's quality control system and a
statement by firm management on its effectiveness. Auditing firms
and investors have expressed support for requiring U.S. auditing
firms to publish reports similar to the Article 40 Transparency
Report.\30\
---------------------------------------------------------------------------
\29\ Directive 2006/43/EC of the European Parliament and of the
Council Art. 40 (May 17, 2006), available at https://eur-
lex.europa.eu/LexUriServ/
LexUriServ.do?uri=OJ:L:2006:157:0087:0107:EN:PDF.
\30\ See, e.g., Record of Proceedings (Feb. 4, 2008) (Written
Submission of Paul G. Haaga, Jr., Vice Chairman, Capital Research
and Management Company, 2), available at https://www.treas.gov/
offices/domestic-finance/acap/submissions/02042008/Haaga020408.pdf
(recommending auditing firm disclosure of quality control policies
and procedures); Record of Proceedings (Feb. 4, 2008) (Written
Submission of Edward E. Nusbaum, Chief Executive Officer, Grant
Thornton LLP, 6), available at https://www.treas.gov/offices/
domestic-finance/acap/submissions/02042008/Nusbaum020408.pdf
(supporting an annual transparency report for U.S. auditing firms);
Record of Proceedings (Written Submission of James S. Turley,
Chairman and Chief Executive Officer, Ernst & Young LLP, 10),
available at https://www.treas.gov/offices/domestic-finance/acap/
submissions/12032007/Turley120307.pdf (suggesting the PCAOB require
auditing firms to publish transparency reports like the European
Union's Article 40 Transparency Report).
---------------------------------------------------------------------------
The Committee notes that Recommendation 3 in Chapter VII of this
Report recommends that, if feasible, the PCAOB develop audit quality
indicators and auditing firms publish these indicators. The
Committee believes this information could improve audit quality by
enhancing the transparency of auditing firms and notes that some
foreign affiliates of U.S. auditing firms provide such indicators in
public reports issued in other jurisdictions.\31\
---------------------------------------------------------------------------
\31\ See, e.g., Record of Proceedings (Feb. 4, 2008) (Written
Submission of Dennis Johnson, Senior Portfolio Manager, Corporate
Governance, California Public Employees' Retirement System, 5),
available at https://www.treas.gov/offices/domestic-finance/acap/
submissions/02042008/Johnson020408.pdf (recommending auditing firm
disclosure of key performance indicators, such as ``percent of
training dollars spent on staff compared to the fees received for
the audit, average experience of staff, partner time allocated to
each audit'').
---------------------------------------------------------------------------
[[Page 33490]]
Furthermore, for several years auditing firms in the United
Kingdom have published annual reports containing audited financial
statements pursuant to limited liability partnership disclosure
requirements as well as a discussion of those statements, a
statement on corporate governance, performance metrics, and other
useful information. In the United States, auditing firms typically
do not prepare audited financial statements. Some witnesses have
called for disclosure of audited financial statements,\32\ whereas
one auditing firm representative questioned the usefulness of
disclosing financial statements of the smaller auditing firms.\33\
---------------------------------------------------------------------------
\32\ See, e.g., Record of Proceedings (Feb. 4, 2008) (Written
Submission of Paul G. Haaga, Jr., Vice Chairman, Capital Research
and Management Company, 2), available at https://www.treas.gov/
offices/domestic-finance/acap/submissions/02042008/Haaga020408.pdf
(calling for auditing firm disclosure of audited financial
statements).
\33\ Record of Proceedings (Feb. 4, 2008) (Questions for the
Record of Neal Spencer, Managing Partner, BKD LLP, 38-39), available
at https://www.treas.gov/offices/domestic-finance/acap/agendas/QFRs-
2-4-08.pdf (analogizing the auditing firm to a vendor and noting
that the profitability or financial strength of vendors ``has
little, if any, relevance other than perhaps related to concerns
about their ability to financially support their continued
existence'' and noting that the profitability or financial condition
of an auditing firm is not directly related to audit quality; and
noting that the ``most relevant financial information for users'' of
smaller auditing firms is insurance-related information and noting
that larger auditing firms with limited commercial insurance
coverage may need to disclose different financial information).
---------------------------------------------------------------------------
The Committee recommends that the PCAOB require that, beginning
in 2010, larger auditing firms (those with 100 or more public
company audit clients that the PCAOB inspects annually) produce a
public annual report incorporating (a) information required by the
Article 40 Transparency Report deemed appropriate by the PCAOB in
consultation with investors, other financial statement users,
auditing firms, public companies, academics, and other market
participants, and (b) such key indicators of audit quality and
effectiveness as determined by the PCAOB in accordance with
Recommendation 3 in Chapter VII of this Report. These disclosure
requirements should supplement any rules adopted as a result of the
PCAOB's 2006 reporting proposal.
The Committee also recommends that the PCAOB determine which of
the requirements included above should be imposed on smaller
auditing firms (those with less than 100 public company audit
clients), taking into account these firms' size and resources.
The Committee is also considering recommending one of the
following two approaches to audited financial statements: The PCAOB
should require that, beginning in 2011, the larger auditing firms
file with the PCAOB on a confidential basis audited financial
statements prepared in accordance with generally accepted accounting
principles or international financial reporting standards and the
PCAOB will then either:
``Alternative 1: Determine, based on broad consultation, whether
these audited financial statements should be made public in
consideration of their utility to audit committee members and
investors in assessing audit quality, impact on firm sustainability,
firm comparability, and other considerations relevant to the public
interest, or
Alternative 2: Make these audited financial statements publicly
available.''
The Committee is seeking commentary on these potential
alternatives.
Litigation
The Committee also has considered liability issues impacting the
profession. The Committee received and considered testimony and
commentary suggesting certain measures aimed at liability
reform.\34\ The Committee also has received testimony and commentary
opposing liability reform.\35\
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\34\ See, e.g., Record of Proceedings (Feb. 4, 2008) (Written
Submission of Edward E. Nusbaum, Chief Executive Officer, Grant
Thornton LLP, 7-8), available at https://www.treas.gov/offices/
domestic-finance/acap/submissions/02042008/Nusbaum020408.pdf
(suggesting general securities litigation reform); Record of
Proceedings (Dec. 3, 2007) (Written Submission of James S. Turley,
Chairman and Chief Executive Officer, Ernst & Young LLP, 16),
available at https://www.treas.gov/offices/domestic-finance/acap/
submissions/12032007/Turley120307.pdf (suggesting the ability to
appeal motions to dismiss in securities class actions).
\35\ See, e.g., Record of Proceedings (Feb. 4, 2008) (Questions
for the Record of John P. Coffey, Partner, Bernstein Litowitz Berger
& Grossmann LLP, 1-7 (Mar. 31, 2008)), available at https://
www.treas.gov/offices/domestic-finance/acap/agendas/QFRs-2-4-08.pdf
(weighing against reforming the calculation of damages in securities
fraud class actions and auditor liability protections, including a
professional judgment framework and safe harbor, but supporting
scheme liability); Record of Proceedings (Feb. 4, 2008) (Questions
for the Record of Paul G. Haaga, Jr., Vice Chairman, Capital
Research and Management Company, 1-3), available at https://
www.treas.gov/offices/domestic-finance/acap/agendas/QFRs-2-4-08.pdf
(opposing liability limits and safe harbors for auditing firms and
viewing liability exposure as a ``very effective incentive for the
firms to conduct high quality audits'').
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The Committee takes note that the Sarbanes-Oxley Act established
a new level of federal regulation over the public company auditing
profession. In that context, some believe it would be appropriate to
transfer to federal court jurisdiction some categories of claims
against auditors, which presently may be brought in state courts.
Others are unconvinced by this argument, expressing concerns that
this approach might weaken plaintiffs' rights and remedies.
The Committee is considering whether it should recommend that
Congress provide federal courts with exclusive jurisdiction over
some categories of claims, which presently may be brought in state
courts against auditors, when such claims are related to audits of
public company financial statements. Should Congress take up this
recommendation, it should develop a uniform standard of care with
the appropriate and necessary levels of investor protection. While
there are various differences among state and federal standards of
care, the Committee contemplates a standard fairly and adequately
representing investors' interests.
The Committee is seeking commentary on (1) Whether it is
appropriate to have exclusive federal jurisdiction for some
categories of claims and a uniform standard of care; and, if so, (2)
what types of claims should be subject to federal jurisdiction; and
(3) what should be the uniform standard of care.
[FR Doc. E8-13274 Filed 6-11-08; 8:45 am]
BILLING CODE 4810-25-P
