Public Company Accounting Oversight Board; Order Granting Approval of Proposed Rules on Auditing Standard No. 16, Communications With Audit Committees, and Related and Transitional Amendments to PCAOB Standards, 75689-75695 [2012-30739]
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Federal Register / Vol. 77, No. 246 / Friday, December 21, 2012 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Pursuant to Section 19(b)(3)(A)(ii) of
the Act 17 and Rule 19b–4(f)(2)
thereunder,18 the Exchange has
designated this proposal as establishing
or changing a due, fee, or other charge
applicable to the Exchange’s Members
and non-members, which renders the
proposed rule change effective upon
filing.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
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Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–BYX–2012–024 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–BYX–2012–024. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
17 15
18 17
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
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provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549–1090, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
offices of BYX. All comments received
will be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–BYX–
2012–024, and should be submitted on
or before January 11, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–30793 Filed 12–20–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68453; File No. PCAOB–
2012–01]
Public Company Accounting Oversight
Board; Order Granting Approval of
Proposed Rules on Auditing Standard
No. 16, Communications With Audit
Committees, and Related and
Transitional Amendments to PCAOB
Standards
December 17, 2012.
I. Introduction
On August 28, 2012, the Public
Company Accounting Oversight Board
(the ‘‘Board’’ or the ‘‘PCAOB’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’),
pursuant to Section 107(b) 1 of the
Sarbanes-Oxley Act of 2002 (the
‘‘Sarbanes-Oxley Act’’) and Section
19(b) 2 of the Securities Exchange Act of
1934 (the ‘‘Exchange Act’’), proposed
rules to adopt PCAOB Auditing
Standard No. 16, ‘‘Communications
with Audit Committees,’’ and related
and transitional amendments to PCAOB
standards (collectively, the ‘‘Proposed
Rules’’). The Proposed Rules were
published for comment in the Federal
Register on September 17, 2012.3 At the
time the notice was issued, the
19 17
CFR 200.30–3(a)(12).
U.S.C. 7217(b).
2 15 U.S.C. 78s(b).
3 See Release No. 34–67804 (September 10, 2012),
77 FR 57408 (September 17, 2012).
1 15
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75689
Commission designated a longer period
to act on the Proposed Rules, until
December 17, 2012.4 The Commission
received five comment letters in
response to the notice.5 On November 9,
2012, the PCAOB submitted a letter
addressing certain comments received
by the Commission.6 This order
approves the Proposed Rules.
II. Description of the Proposed Rules
Auditing Standard No. 16 will
supersede PCAOB interim auditing
standard AU section 380,
‘‘Communication with Audit
Committees’’ (‘‘AU sec. 380’’), and
interim auditing standard AU section
310, ‘‘Appointment of the Independent
Auditor’’ (‘‘AU sec. 310’’). Auditing
Standard No. 16 retains or enhances
existing audit committee
communication requirements,
incorporates SEC auditor
communication requirements set forth
in Rule 2–07 of Regulation S–X,7
provides a definition of the term ‘audit
committee’ for issuers and non-issuers,
and adds new communication
requirements that are generally linked to
performance requirements set forth in
other PCAOB auditing standards.
Auditing Standard No. 16 requires the
auditor to establish an understanding of
the terms of the audit engagement with
the audit committee. This requirement
aligns the auditing standard with the
provision of the Exchange Act, as
amended by the Sarbanes-Oxley Act,
that requires the audit committee of
listed companies to be responsible for
the appointment of the external
auditor.8 Additionally, Auditing
Standard No. 16 requires the auditor to
record the terms of the engagement in
an engagement letter and to have the
engagement letter executed by the
appropriate party or parties on behalf of
the company and determine that the
audit committee has acknowledged and
agreed to the terms.
Auditing Standard No. 16 requires the
communications with the audit
committee to occur before the issuance
4 Ibid.
5 See letters to the Commission from Howard B.
Levy, Principal and Director, Technical Services,
Piercy Bowler Taylor & Kern, dated September 28,
2012 (‘‘Piercy Letter’’); Robert L. Leclerc, Chairman,
Quest Rare Minerals Ltd., dated September 30, 2012
(‘‘Quest Letter’’); Tom Quaadman, Vice President,
Center for Capital Markets Competitiveness, U.S.
Chamber of Commerce, dated October 5, 2012
(‘‘Chamber Letter’’); Deloitte & Touche LLP, dated
October 5, 2012 (‘‘Deloitte Letter’’); and Cindy M.
Fornelli, Executive Director of the Center for Audit
Quality, dated October 9, 2012 (‘‘CAQ Letter’’).
6 See letter to the Commission from the PCAOB,
dated November 9, 2012.
7 17 CFR 210.2–07.
8 See Section 10A(m) of the Exchange Act, as
added by Section 301 of the Sarbanes-Oxley Act.
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of the audit report. The standard
requires auditors to communicate,
among other matters, the following to
audit committees:
• Certain matters regarding the
company’s accounting policies,
practices, and estimates (consistent with
Rule 2–07 of Regulation S–X);
• The auditor’s evaluation of the
quality of the company’s financial
reporting;
• Information related to significant
unusual transactions, including the
business rationale for such transactions;
• An overview of the overall audit
strategy, including timing of the audit,
significant risks the auditor identified,
and significant changes to the planned
audit strategy or identified risks;
• Information about the nature and
extent of specialized skill or knowledge
needed in the audit, the extent of the
planned use of internal auditors,
company personnel or other third
parties, and other independent public
accounting firms, or other persons not
employed by the auditor that are
involved in the audit;
• Difficult or contentious matters for
which the auditor consulted outside the
engagement team;
• The auditor’s evaluation of going
concern;
• Expected departures from the
auditor’s standard report; and
• Other matters arising from the audit
that are significant to the oversight of
the company’s financial reporting
process, including complaints or
concerns regarding accounting or
auditing matters that have come to the
auditor’s attention during the audit.
Auditing Standard No. 16 retains from
AU sec. 380 the option for auditors to
communicate to audit committees either
orally or in writing, unless otherwise
specified in the standard. The auditor is
required to document the
communications in the work papers,
regardless of whether the
communications take place orally or in
writing.
As part of the Proposed Rules, the
Board adopted conforming amendments
to several PCAOB standards, including
PCAOB interim auditing standard AU
sec. 722, ‘‘Interim Financial
Information.’’ In addition to the
conforming amendments, the Board
adopted transitional amendments to AU
sec. 380 so that audit committee
communications would continue to be
required in audits of all SEC-registered
broker-dealers in the event PCAOB
standards become applicable to brokerdealer audits prior to the effective date
of Auditing Standard No. 16.
The PCAOB has proposed application
of its Proposed Rules to audits of all
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issuers, including audits of emerging
growth companies (‘‘EGCs’’),9 and the
Proposed Rules also would apply to
audits of SEC-registered brokers and
dealers if the Commission subsequently
determines to make PCAOB standards
applicable to such audits.10 The
Proposed Rules would be effective for
audits of financial statements with fiscal
years beginning on or after December
15, 2012. The transitional amendments
to AU sec. 380 would be effective for the
periods that PCAOB standards become
applicable to audits of SEC-registered
brokers and dealers, as designated by
the Commission, if the effective date of
the application of PCAOB standards
occurs prior to the effective date of
Auditing Standard No. 16.
III. Comment Letters and the PCAOB’s
Responses
As noted above, the Commission
received five comment letters
concerning the Proposed Rules. Two
commenters expressed unqualified
support for the Proposed Rules, and
cited a link between Auditing Standard
No. 16 and investor protection.11 One of
these commenters expressed its view
that the matters Auditing Standard No.
16 requires auditors to communicate to
audit committees are commensurate
with, and supportive of, the important
role audit committees have in serving
the interests of investors through
oversight of financial reporting and the
audit process.12 The other commenter
cited its belief that adoption of Auditing
Standard No. 16 is in the public interest
and contributes to investor protection
because it establishes requirements that
enhance the relevance, timeliness, and
quality of communications between
auditors and audit committees.13
One of these commenters also
expressed unqualified support for the
application of the proposed rules to
audits of EGCs and stated its belief that
investors in public companies of all
sizes are entitled to the same level of
protection, including the protection
provided by improved communications
between auditors and audit
committees.14 This commenter also
cited the following points in support of
its view:
• Auditing Standard No. 16 will
foster improved financial reporting. The
9 The term ‘‘emerging growth company’’ is
defined in Section 3(a)(80) of the Exchange Act.
10 The Commission proposed requiring
application of PCAOB standards to audits for
brokers and dealers in Release No. 34–64676 (June
15, 2011).
11 See CAQ Letter and Deloitte Letter.
12 See Deloitte Letter.
13 See CAQ Letter.
14 See CAQ Letter.
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commenter believes improved financial
reporting reduces information
asymmetry and should increase the
efficiency of capital allocation, thereby
fostering capital formation. The
commenter also believes this may be
particularly important for EGCs, which
may need to access the capital markets
more regularly than more established
companies.
• Bifurcation of the requirements
would be confusing as to the level of
investor protection an investor is
receiving. The commenter believes that
applying Auditing Standard No. 16 to
audits of EGCs would avoid bifurcation
of the rules applied to the preparation
and audit of public company financial
statements. The commenter also
believes that having different sets of
rules for different categories of public
companies makes it more difficult for
investors to know what rules governed
the preparation and audit of a given set
of financial statements.
Three commenters raised questions
and concerns about the Proposed Rules
and their proposed application. These
matters relate to: (1) Application of the
Proposed Rules to audits of foreign
private issuers (‘‘FPIs’’); 15 (2)
application of Auditing Standard No. 16
to audits of broker-dealers; (3) the role
of management in communicating
matters to the audit committee that are
also the subject of Auditing Standard
No. 16; (4) the specificity of the
requirements in Auditing Standard No.
16; (5) potential regulatory conflicts; (6)
convergence of auditing standards; and
(7) the PCAOB’s analysis supporting its
proposal that the Proposed Rules apply
to audits of EGCs (the ‘‘PCAOB’s EGC
analysis’’).
1. Audits of FPIs
One commenter requested
clarification as to whether or not the
Proposed Rules would apply to audits of
issuers that are FPIs.16 The commenter
stated that it was not seeking relief,
solely clarity. In response to the
commenter’s request, the Commission
notes that under the Sarbanes-Oxley
Act, the PCAOB’s auditing and other
professional standards apply to audits of
15 The term ‘‘foreign private issuer’’ is defined in
Exchange Act Rule 3b–4(c) [17 CFR 240.3b–4(c)]. A
foreign private issuer means any foreign issuer
other than a foreign government except an issuer
that meets the following conditions: (1) More than
50 percent of the issuer’s outstanding voting
securities are directly or indirectly held of record
by residents of the United States; and (2) any of the
following: (i) the majority of the executive officers
or directors are United States citizens or residents;
(ii) more than 50 percent of the assets of the issuer
are located in the United States; or (iii) the business
of the issuer is administered principally in the
United States.
16 See Quest Letter.
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issuers.17 There is no exception for
issuers that are FPIs, and the PCAOB
did not propose to create an exclusion.
Accordingly, the Proposed Rules,
consistent with other auditing standards
adopted by the PCAOB, will apply to
audits of FPIs.
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2. Audits of Broker-Dealers
One commenter requested more
clarity about to whom the required
Auditing Standard No. 16 audit
committee communications should be
made in situations when a broker-dealer
does not have a board of directors or
audit committee.18 The commenter also
recommended that the PCAOB make
clear that the required communications
should not be made to a chief financial
officer or similar officer, but rather a
chief executive officer. The commenter
raised similar comments in connection
with the PCAOB’s own solicitation for
comments on the Proposed Rules. The
PCAOB revised Auditing Standard No.
16 in response to this comment, which
was also raised by other commenters.
The PCAOB revised the definition of
audit committee with respect to nonissuers such that, if a non-issuer brokerdealer did not have a board of directors
or audit committee, the required
communications would be directed to
the person(s) identified by the auditor as
responsible for overseeing the
accounting and financial reporting
processes of the company.
However, the definition was not
revised to exclude from the definition of
audit committee those persons with
oversight responsibility who also have
management responsibilities for the
preparation of the financial statements
of the company. In its adopting release,
the PCAOB stated that for non-issuers
with no existing audit committee or
board of directors (or equivalent body),
the auditor would be expected to
identify senior persons at the company
who have decision-making authority
and responsibility to oversee the
accounting and financial reporting
processes of the company and audits of
the financial statements, and to make
the required communications to those
persons.19 The PCAOB provided
examples and stated that if all persons
identified by the auditor as having
responsibility for oversight of the
company’s accounting and financial
reporting processes and audits also have
management responsibilities for the
preparation of the financial statements,
17 See Sections 101(c)(2) and 103(a)(1) of the
Sarbanes-Oxley Act.
18 See Chamber Letter.
19 See PCAOB Release No. 2012–004 (August 15,
2012), pg. A4–3.
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then the auditor could also make the
communications specified in the
standard to other individuals at the
company (e.g., the chief executive
officer or others in charge of the
company’s operations and performance,
who may benefit from the
communications). The Commission
does not find the PCAOB’s response to
be unreasonable.
The commenter also requested that
the PCAOB clarify to whom audit
committee communications should be
made when a broker-dealer is a
subsidiary of an entity that has an audit
committee.20 The PCAOB addressed
this comment in its adopting release as
well. In that release, the PCAOB
observed that some commenters
suggested that the standard should
clarify to whom the auditor should
communicate when the company is a
subsidiary of another entity. The
PCAOB stated that Auditing Standard
No. 16 does not require communication
outside the governance structure of the
audited entity because the standard
designates the appropriate party to
receive the auditor communications
within the audited entity.21 The PCAOB
also stated that if directed by the audit
client, or if the auditor otherwise deems
it appropriate, the auditor could also
communicate to a parent company audit
committee or equivalent body. The
Commission does not find the PCAOB’s
response to be unreasonable.
3. The Role of Management in
Communicating Matters to the Audit
Committee
One commenter repeated concerns
expressed in letters to the PCAOB
during the PCAOB’s proposal stages that
Auditing Standard No. 16 appears to
shift inappropriately from management
to auditors the primary responsibility to
communicate to audit committees about
matters of the selection and
identification of significant and critical
accounting policies, estimates and
significant unusual transactions.22 The
commenter acknowledged that the
PCAOB revised Auditing Standard No.
16 in response to this comment, and
observed that Auditing Standard No. 16
is not intended to change the
requirements of Rule 2–07 of Regulation
S–X. However, the commenter believes
the Commission should give
consideration to its concerns and make
‘‘appropriate revisions’’ to Rule 2–07 to
preserve what the commenter believes is
the proper balance among the
20 See
Chamber Letter.
PCAOB Release No. 202–004 (August 15,
2012), pg. A4–4.
22 See Piercy Letter.
75691
responsibilities of management, audit
committees and auditors.
The Commission has previously
considered views similar to those
expressed by the commenter. Exchange
Act Section 10A(k), as added by Section
204 of the Sarbanes-Oxley Act, directed
the Commission to issue rules requiring
timely reporting of specific information
by auditors to audit committees. In
response to this directive, in 2002, the
Commission proposed amending
Regulation S–X to require each public
accounting firm registered with the
Board that audits an issuer’s financial
statements to report, prior to the filing
of such report with the Commission, to
the issuer or registered investment
company’s audit committee: 23
(1) All critical accounting policies and
practices used by the issuer or registered
investment company;
(2) All alternative accounting
treatments of financial information
within generally accepted accounting
principles that have been discussed
with management, including the
ramifications of the use of such
alternative treatments and disclosures
and the treatment preferred by the
accounting firm; and
(3) Other material written
communications between the
accounting firm and management of the
issuer or registered investment
company.
In response to this proposal, some
commenters expressed a view that these
communications should be the
responsibility of management alone,
while others expressed a view that both
the accountant and management should
share the responsibility for informing
the audit committee about such matters.
In adopting Rule 2–07, the Commission
stated that ‘‘[w]hile we understand that
management has the primary
responsibility for the information
contained in the financial statements,
since the accounting firm is retained by
the audit committee, we share the view
reflected in Section 205 [sic] of the
Sarbanes-Oxley Act and current
auditing standards, that the accounting
firm has a responsibility to
communicate certain information to the
audit committee.’’ 24 The Commission
still holds this view and believes that
the communications required by
Auditing Standard No. 16 in this regard
are appropriate.
Further, the Commission believes that
additional changes made by the PCAOB
in response to this concern are
appropriate and balanced. In its
adopting release, the PCAOB observed
21 See
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23 See
24 See
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Release No. 33–8154 (December 2, 2002).
Release No. 33–8183 (March 27, 2003).
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that in many companies, management
might communicate matters involving
management’s preparation of the
company’s financial statements and that
in many companies, management might
communicate these matters or take the
lead on communicating these matters to
the audit committee. The PCAOB also
observed that it does not have the
authority to require management to
communicate to the audit committee,
and that certain communications are
mandated by federal securities laws and
Commission rules. Because of these
factors, Auditing Standard No. 16
clearly recognizes and acknowledges
that management might communicate to
the audit committee certain matters
related to the company’s financial
statements; and in such circumstances,
the auditor does not need to
communicate those matters at the same
level of detail as management, as long
as certain conditions are met, as
specified in the standard.
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4. Level of Specificity of Requirements
in Auditing Standard No. 16
One commenter observed that
Auditing Standard No. 16 is
‘‘prescriptive’’ in that it contains
specific mandatory communication
requirements.25
The PCAOB addressed this comment
in its letter to the Commission. In that
letter, the PCAOB stated that its
standards, including Auditing Standard
No. 16, reflect the fact that a company’s
size and complexity can affect the risks
of material misstatement and that the
Proposed Rules are designed to allow
auditors to tailor the required
communications to the size and level of
complexity of a company’s operations,
accounting practices, and audit issues.
The Commission addressed a similar
comment in 2010 in connection with its
consideration of rules proposed by the
PCAOB to establish new risk assessment
standards.26 The Commission
recognizes that there should be an
appropriate balance in auditing
standards between providing necessary
minimum requirements and allowing
auditors to apply judgment in
determining the nature and extent of
audit procedures given the particular
circumstances of an individual
engagement. The Commission believes
that all PCAOB standards should reflect
an appropriate balance of requirements
and judgments that enables auditors to
perform high quality and effective
audits and believes the PCAOB’s
approach in Auditing Standard No. 16
25 See
26 See
Chamber Letter.
Release No. 34–63606 (December 23, 2010).
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reflects a reasonable balance in this
respect.
5. Potential Regulatory Conflicts
One commenter voiced concerns that
the Proposed Rules may go outside of
the scope of the PCAOB’s jurisdiction
over the audit and infringe upon the
corporate governance responsibilities of
the Commission or under applicable
state law in overseeing the audit
committee.27 This commenter asked
that the Commission review the
Proposed Rules ‘‘with an eye towards
eliminating any potential regulatory
conflict.’’ In considering the Proposed
Rules, the Commission does not believe
the Proposed Rules create any potential
regulatory conflicts. In its adopting
release, the PCAOB recognized the
scope and limits of its jurisdiction. In
one place, the PCAOB states that its
definition of audit committee is not
intended to conflict with or affect any
requirements, or the application of any
requirements, under federal law, state
law, foreign law, or an entity’s
governing documents regarding the
establishment, approval, or ratification
of board of directors or audit
committees, or the delegation of
responsibilities of such a committee or
board; 28 and in another place, the Board
recognized that it does not have the
authority to require management to
communicate to the audit committee.29
6. Convergence of Auditing Standards
One commenter expressed support for
the notion of working to achieve one set
of global high quality auditing standards
through the convergence of PCAOB
auditing standards with those of the
International Auditing and Assurance
Standards Board (‘‘IAASB’’) and the
Auditing Standards Board of the
American Institute of Certified Public
Accountants (‘‘ASB’’) and observed that
the Proposed Rules do not adequately
identify and explain the rationale for
differences between the Proposed Rules
and the relevant standards of the IAASB
and ASB.30
The PCAOB has received similar
comments in the past, and has observed
that:
[B]ecause the Board’s standards must be
consistent with the Board’s statutory
mandate, differences will continue to exist
between the Board’s standards and the
standards of the IAASB and ASB, e.g., when
the Board decides to retain an existing
requirement in PCAOB standards that is not
27 See
Chamber Letter.
28 See PCAOB Release No. 202–004 (August 15,
2012), pg. A4–2.
29 See PCAOB Release No. 202–004 (August 15,
2012), pg. 4.
30 See Chamber Letter.
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included in IAASB or ASB standards. Also,
certain differences are often necessary for the
Board’s standards to be consistent with
relevant provisions of the federal securities
laws or other existing standards or rules of
the Board.31
The Commission also addressed a
similar comment in connection with its
consideration of the rules proposed by
the PCAOB to establish new risk
assessment standards.32 As noted then,
the Commission encourages the Board’s
efforts to consider standards issued by
the IAASB and the ASB, and
appreciates the reasons why it is
reasonable to expect that the Board’s
standards may appropriately differ from
such standards. In this regard, we take
note of the efforts the PCAOB has taken
in developing the Proposed Rules to
consider the work of other standard
setters.
7. The PCAOB’s EGC Request and the
Commission’s EGC Determination
Section 103(a)(3)(C) of the SarbanesOxley Act provides that any additional
rules adopted by the PCAOB subsequent
to April 5, 2012 do not apply to the
audits of EGCs, unless the Commission
determines that the application of such
additional requirements is necessary or
appropriate in the public interest, after
considering the protection of investors
and whether the action will promote
efficiency, competition, and capital
formation.33 Having considered those
factors, and as explained further below,
the Commission finds that applying the
Proposed Rules to audits of EGCs is
necessary or appropriate in the public
interest.
The PCAOB adopted Auditing
Standard No. 16 on August 15, 2012 for
application to audits of all issuers,
including EGCs; and the PCAOB
requested that the Commission make the
determination required by Section
103(a)(3)(C) such that Auditing
Standard No. 16 would apply to audits
of EGCs. To assist the Commission in
making its determination, the PCAOB
prepared and submitted to the
Commission its own EGC analysis. The
PCAOB’s EGC analysis includes
discussions of: (1) The background of
and reasons for the new standard; (2)
the PCAOB’s approach to developing
the new standard, including
consideration of alternatives; (3) key
changes and improvements from
existing audit committee
31 See PCAOB Release No. 2010–004, August 5,
2010, pp. A10–91—A10–92 (internal footnotes
omitted).
32 See supra note 26.
33 Section 103(a)(3)(C) of the Sarbanes-Oxley Act,
as amended by Section 104 of the Jumpstart Our
Business Startups Act (the ‘‘JOBS Act’’).
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Federal Register / Vol. 77, No. 246 / Friday, December 21, 2012 / Notices
communication requirements; and (4)
characteristics of EGCs and economic
considerations.
In developing its analysis, the PCAOB
compiled data available from entities
voluntarily identifying themselves as
EGCs in SEC filings. Based on data
available to the PCAOB, the Board
observed that one key difference
between EGCs and other entities
appears to be the length of time an EGC
has been subject to the reporting
requirements under the Exchange Act.34
The Board also observed that the
enhanced audit committee
communication requirements of
Auditing Standard No. 16 may be of
particular benefit to EGCs given that: (1)
Some EGCs are companies that are
relatively new to the SEC reporting
process, and may have new audit
committee members that may be less
familiar with SEC reporting
requirements and have relatively more
questions regarding how to present their
financial statements for SEC reporting
purposes; and (2) some EGCs may also
be considering, for the first time, initial
choices in their accounting policies and
practices that could have implications
for their financial reporting.35
The PCAOB’s EGC analysis was
included in the Commission’s public
notice soliciting comment on the
Proposed Rules. Based on the analysis
submitted, the comments received, and
the PCAOB’s response, we believe the
information in the record is sufficient
for us to make the EGC determination in
relation to this standard. Specifically,
the PCAOB’s EGC analysis discussed its
approach to developing the new
standard and its consideration of
alternatives, as well as the
characteristics of EGCs and economic
considerations. The Commission also
takes note, in particular, of the PCAOB’s
overall approach to Auditing Standard
No. 16, which was designed to: (1) Scale
the required communications to the size
and complexity of the company being
audited; (2) maintain flexibility (e.g.,
with respect to auditors communicating
orally or in writing); (3) minimize
duplicative or redundant
communications to the audit committee
from the auditor and management; (4)
focus the communications on the
accounting matters that are significant
to the auditor and the audit committee;
and (5) reduce auditors’ search costs
(i.e., the costs associated with
researching the federal securities laws’
and auditing standards’ various
communication requirements) by
providing a list of other PCAOB
34 See
35 See
77 FR 57448.
77 FR. 57447.
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standards and rules that contain audit
committee communication requirements
in one place. Moreover, the auditor’s
requirements under the new standard
are focused on communicating the
results of audit procedures that the
auditor is already required to perform.
One commenter raised concerns about
the PCAOB’s EGC analysis.36 This
commenter did not assert that any
specific aspect of Auditing Standard No.
16 should not apply to audits of EGCs.
Rather, the commenter raised several
concerns about the substance and form
of the PCAOB’s EGC analysis and
whether it was sufficient to form a basis
for the Commission’s EGC
determination. We discuss each of this
commenter’s main points, and set forth
our responses, separately below.
• First, the commenter states that because
the JOBS Act provides an automatic
exemption for EGC audits from any future
PCAOB rules, there is a special burden on the
Commission to determine that benefits
outweigh costs in order to reverse a clear
Congressional directive in favor of an
exemption.
As noted above, Section 103(a)(3)(C)
of the Sarbanes-Oxley Act contains very
specific provisions concerning the
application of PCAOB rules to audits of
EGCs. The statutory text of Section
103(a)(3)(C) demonstrates that where
Congress intended to provide EGCs with
an absolute exemption from future
PCAOB rules, it did so explicitly (e.g.,
that any future PCAOB rules on
mandatory audit firm rotation or an
auditor discussion and analysis shall
not apply to EGCs audits). By contrast,
with respect to other future PCAOB
rules, Congress indicated that new
requirements may apply to EGCs, but
that for them to apply, the Commission
needs to make a determination that such
application is ‘‘necessary or appropriate
in the public interest, after considering
the protection of investors, and whether
the action will promote efficiency,
competition, and capital formation.’’
This determination is separate from the
existing finding needed to approve a
PCAOB proposed rule change under
Section 107 of the Sarbanes-Oxley Act
that the proposed rule is consistent with
the requirements of the Sarbanes-Oxley
Act and the securities laws, or is
necessary or appropriate in the public
interest or for the protection of
investors.37
Just as the Section 107 finding does
not require the Commission to overcome
36 See
Chamber Letter.
Section 107(b)(3) of the Sarbanes-Oxley
Act. As discussed below, the Commission makes
both findings. The Commission makes each finding
on its own merits and does not consider either one
dependent on the other.
37 See
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75693
a ‘‘presumption’’ that a proposed
PCAOB rule should be disapproved, the
Section 103 EGC determination does not
require the Commission to overcome a
‘‘presumption’’ that a PCAOB proposed
rule should not apply to audits of EGCs.
Rather, in both instances, the statute
sets forth a predicate finding that the
Commission must make, after
considering specified factors, in order
for the rule to be approved (section
107(b)(2)) or for it to apply to EGC
audits (Section 103(a)(3)(C)).
The statutory text of Section
103(a)(3)(C) requires the Commission to
consider the protection of investors and
whether the action will promote
efficiency, competition, and capital
formation as part of its affirmative
determination that the application of
such additional requirements is
necessary or appropriate in the public
interest. Plainly this involves
considering the economic effects of the
Proposed Rules as they relate to
efficiency, competition and capital
formation.
• Second, the commenter believes the
PCAOB’s EGC analysis is ‘‘devoid of any
semblance of an analysis of the cost of
compliance with the rule for all issuers or for
EGCs,’’ and asserts that the PCAOB, in its
EGC analysis, cited a belief that Auditing
Standard No. 16 would be less costly for
EGCs.
The PCAOB did provide information
regarding potential costs of the
proposed rules to issuers, including
EGCs. The PCAOB’s analysis included
qualitative factors that would affect
such costs (e.g., nature or complexity of
the issuer). As noted above, the PCAOB
also provided an analysis of the
characteristics of EGCs, including data
on the number of issuers that have
voluntarily disclosed their EGC status
after enactment of the JOBS Act. In its
analysis, the PCAOB noted that EGCs
vary widely in size, and noted that one
key difference between EGCs and other
entities appears to be the length of time
an EGC has been subject to the reporting
requirements under the Exchange Act.
In this regard, the PCAOB further
described how this difference may in
fact relate to the ability of the Proposed
Rules to promote efficiency and capital
formation for EGCs over other issuers.
Notwithstanding the commenter’s
assertion that the PCAOB believes the
application of Auditing Standard No. 16
would be less costly for EGCs, no such
statement is expressed in the PCAOB’s
EGC analysis. Rather, the PCAOB’s EGC
analysis reflects the Board’s view that a
company’s size and complexity can
affect the risks of material misstatement,
and therefore, auditing challenges and
audit strategies (matters that impact the
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amount of time and effort put into an
audit). This point was reiterated in the
PCAOB’s letter to the Commission. In
that letter, the PCAOB also provided
examples of how communications
required by Auditing Standard No. 16
could be tailored to the audit of a less
complex company, which could have an
impact on the overall cost of the audit
and could help to avoid unnecessary
costs.
Section 103(a)(3)(C) does not require
the Commission to conclude that a
proposed PCAOB rule would be ‘‘less
costly’’ for EGC audits than for other
issuer audits in order to find that
applying the rule to EGC audits would
be necessary or appropriate in the
public interest. The relative impact on
EGCs vis a vis other issuers could be a
factor to consider in whether the
application of the proposed rules to EGC
audits is necessary or appropriate in the
public interest, after considering the
protection of investors and whether the
action will promote efficiency,
competition, and capital formation.
However, nothing in the statutory text
indicates that the Commission’s public
interest finding hinges on whether, on a
categorical basis, the requirements of a
given PCAOB rule would be less costly
for EGCs.
• Third, the commenter disputes the
relevance of existing audit committee
communication requirements under PCAOB
interim auditing standard AU sec. 380 to a
discussion of the application of Auditing
Standard No. 16 to audits of EGCs.
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The Commission does not view the
PCAOB’s discussion of the Proposed
Rules in relation to the existing
standards as inconsistent with the
proper analysis of an EGC
determination. Rather, establishing a
baseline for conducting an analysis of
economic effects of a proposed
regulatory action is an appropriate
regulatory practice. Also, it is important
to consider that currently, all issuers,
including EGCs, are subject to the
existing audit committee
communication requirements of AU
secs. 310 and 380 and Rule 2–07 of
Regulation S–X. If the Commission
determined that the Proposed Rules
should not apply to audits of EGCs, AU
secs. 310 and 380 and Rule 2–07 of
Regulation S–X would still apply to the
audits of EGCs.38
38 Also, the Commission does not view the
PCAOB’s highlighting the existing baseline as the
sole justification to carry forward existing
requirements. Rather, throughout the PCAOB’s
submission describing the individual requirements
of the standard, while the PCAOB notes whether
the particular requirement is new or carried
forward, the PCAOB also explains why it chose to
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The Commission believes the
PCAOB’s EGC analysis appropriately
describes the consequences of the
Proposed Rules relative to the baseline.
As the PCAOB notes in its submission,
the impact of the Proposed Rules is
largely incremental to existing
requirements regarding communications
between auditors and audit committees.
Accordingly, this discussion of existing
requirements is highly relevant to
considering the impacts on efficiency,
competition and capital formation that
would be caused by applying the new
standard to audits of EGCs. The
Commission does not believe the
Proposed Rules can be categorized as a
major or profound change to the way
auditors communicate with audit
committees. In fact, the PCAOB received
comments to this effect during its own
due process. For example, one
commenter observed that ‘‘many of the
requirements [of the proposed rules] are
already reflected in the best practices of
audit firms and public companies.’’ 39
Another commenter to the PCAOB
stated its ‘‘belie[f] that auditors, in most
cases, are already providing meaningful
communications on the financial
statement and audit areas that meet the
spirit of the requirements of the
Proposed Standard and go beyond what
is currently required by the extant
standards.’’ 40
• Fourth, the commenter raised a concern
that the public was never afforded an
opportunity to comment upon the impact of
the proposed rules on the audits of EGCs.
Section 103(a)(3)(C) requires the
Commission to make the specified
determination. The PCAOB submitted
an EGC analysis that assisted the
Commission in its own determination.
The PCAOB’s analysis was included in
the Commission’s notice of the
Proposed Rules which provided an
opportunity for the public, including
the commenter, to submit comments on
the analysis.41 The PCAOB also
include them irrespective of whether they already
are included in the existing standards.
39 See letter from The Society of Corporate
Secretaries and Governance Professionals to the
PCAOB (June 1, 2010). This letter may be viewed
at: https://pcaobus.org/Rules/Rulemaking/
Docket030/032_SCSGP.pdf.
40 See letter from Deloitte & Touche to the PCAOB
(May 28, 2010). This letter may be viewed at:
https://pcaobus.org/Rules/Rulemaking/Docket030/
020_DT.pdf.
41 In addition, the commenter acknowledged that
the JOBS Act was signed into law after the PCAOB’s
second comment period closed. The PCAOB did not
re-expose the Proposed Rules again as part of its
standard-setting process to seek public input on
whether application of the Proposed Rules to EGC
audits would be necessary or appropriate in the
public interest, after considering the protection of
investors, and whether the action will promote
efficiency, competition, and capital formation.
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supplemented the record with
additional information after comments
were received. As noted above, based on
the analysis submitted, the comments
received, and the PCAOB’s response, we
believe the information in the record is
sufficient for us to make the EGC
determination.
• Fifth, the commenter believes that the
inspection findings cited in the PCAOB’s
EGC analysis do not provide any indication
whether any of the audit committee
communication failures involved the audits
of EGCs. The commenter also criticizes the
relevance of the PCAOB’s citation to four
year old research that indicated that audit
committee oversight was having a positive
impact on the overall quality of audits.
In its EGC analysis, the PCAOB cited
its inspection findings as one input into
its decision to bring together in one
place audit committee communication
requirements; 42 and in its letter to the
Commission, the PCAOB reiterated this
point. The Commission believes it was
appropriate for the PCAOB to consider
its inspection findings in developing the
Proposed Rules.
As to the PCAOB’s reference in its
EGC analysis to research, the
Commission believes it was wholly
appropriate for the PCAOB to highlight
the relationship between audit
committee communications and overall
audit quality and improved financial
reporting, given the relevance of the
quality of financial reporting to
considerations of efficiency and capital
formation. It does not appear that the
PCAOB was referencing the research
identified by the commenter to justify
the Proposed Rules themselves or was
attempting to use research
inconsistently or opportunistically to
support its views. Rather, the PCAOB
noted, citing to other research, that
improved financial reporting quality
promotes efficiency and capital
formation. The PCAOB explained that
the results of one of the studies cited in
its EGC analysis supported its view that
audit committee oversight of the auditor
improves audit quality and financial
reporting quality. The PCAOB then
went on to discuss additional findings
from its outreach and research that
improved interaction between, and
information shared, between the auditor
and the audit committee enhances audit
committee oversight and auditor
performance.
IV. Conclusion
The Commission has carefully
reviewed and considered the Proposed
Rules and the information submitted
therewith by the PCAOB, including the
42 See
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PCAOB’s EGC analysis, the comment
letters received, and the PCAOB’s
response. In connection with the
PCAOB’s filing and the Commission’s
review,
A. The Commission finds that the
Proposed Rules are consistent with the
requirements of the Sarbanes-Oxley Act
and the securities laws and are
necessary or appropriate in the public
interest or for the protection of
investors; and
B. Separately, the Commission finds
that the application of the Proposed
Rules to EGC audits is necessary or
appropriate in the public interest, after
considering the protection of investors
and whether the action will promote
efficiency, competition, and capital
formation.
It is therefore ordered, pursuant to
Section 107 of the Act and Section
19(b)(2) of the Exchange Act, that the
Proposed Rules (File No. PCAOB–2012–
01) be and hereby are approved.
By the Commission.
Elizabeth M. Murphy.
Secretary.
[FR Doc. 2012–30739 Filed 12–20–12; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF STATE
[Public Notice 8130]
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Overseas Schools Advisory Council;
Notice of Meeting
The Overseas Schools Advisory
Council, Department of State, will hold
its Executive Committee Meeting on
Thursday, January 24, 2013, at 9:30 a.m.
in Conference Room 1107, Department
of State Building, 2201 C Street NW.,
Washington, DC The meeting is open to
the public and will last until
approximately 12:00 p.m.
The Overseas Schools Advisory
Council works closely with the U.S.
business community in improving those
American-sponsored schools overseas
that are assisted by the Department of
State and attended by dependents of
U.S. Government families and children
of employees of U.S. corporations and
foundations abroad.
This meeting will deal with issues
related to the work and the support
provided by the Overseas Schools
Advisory Council to the Americansponsored overseas schools. In addition
there will be a report and discussion
about the status of the Councilsponsored project to expand the World
Virtual School.
Members of the public may attend the
meeting and join in the discussion,
subject to the instructions of the Chair.
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Admittance of public members will be
limited to the seating available. Access
to the State Department is controlled,
and individual building passes are
required for all attendees. Persons who
plan to attend should advise the office
of Dr. Keith D. Miller, Department of
State,
Office of Overseas Schools, telephone
202–261–8200, prior to January 14,
2013. Each visitor will be asked to
provide his/her date of birth and either
driver’s license or passport number at
the time of registration and attendance,
and must carry a valid photo ID to the
meeting.
Personal data is requested pursuant to
Public Law 99–399 (Omnibus
Diplomatic Security and Antiterrorism
Act of 1986), as amended; Public Law
107–56 (USA PATRIOT Act); and
Executive Order 13356. The purpose of
the collection is to validate the identity
of individuals who enter Department
facilities. The data will be entered into
the Visitor Access Control System
(VACS–D) database. Please see the
Security Records System of Records
Notice (State-36) at https://
www.state.gov/documents/organization/
103419.pdf for additional information.
Any requests for reasonable
accommodation should be made at the
time of registration. All such requests
will be considered, however, requests
made after January 10th might not be
possible to fill. All attendees must use
the C Street entrance to the building.
Dated: December 17, 2012.
Keith D. Miller,
Executive Secretary, Overseas Schools
Advisory Council.
[FR Doc. 2012–30863 Filed 12–20–12; 8:45 am]
BILLING CODE 4710–24–P
DEPARTMENT OF STATE
[Public Notice 8132]
U.S. Department of State Advisory
Committee on Private International
Law (ACPIL): Notice of Public Meeting
of the Study Group on the Hague
Judgments Project
The Office of the Assistant Legal
Adviser for Private International Law,
Department of State, hereby gives notice
of a public meeting of the Study Group
on the Judgments Project in the Hague
Conference on Private International
Law.
Last April, the General Affairs and
Policy Council of the Hague Conference
decided to proceed with the Judgments
Project as follows:
(1) A Working Group was established
to draft proposals for inclusion in an
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instrument on the recognition and
enforcement of judgments; and
(2) An Experts’ Group will convene
separately to give further consideration
to whether it would be desirable and
feasible to include in this or another
instrument provisions on jurisdiction.
The Permanent Bureau of the Hague
Conference has announced that two
meetings will be held in The Hague
during the latter part of February
(precise dates to be determined): The
Working Group on recognition and
enforcement of judgments will meet,
followed by a meeting of the Experts’
Group on jurisdiction and related
issues.
The purpose of the meeting of the
Study Group is to obtain the views of
concerned stakeholders on these
matters; specifically, reactions to the
issue papers that are being prepared by
the Permanent Bureau for the Hague
meetings. Those issue papers will be
circulated, as soon as they become
available, to those individuals who
advise that they intend to participate in
the public meeting. This is not a
meeting of the full Advisory Committee.
Time and Place: The meeting will
take place on Wednesday, January 23,
2013 from 9:00 a.m. until 2:00 p.m., EST
in Room 240, South Building, State
Department Annex 4. Participants
should arrive at the Navy Hill gate at the
corner of 23rd Street NW. and D Street
NW. before 8:30 a.m. for visitor
screening. Persons arriving later will
need to make arrangements for entry
using the contact information provided
below. If you are unable to attend the
public meeting and would like to
participate from a remote location,
teleconferencing will be available.
Public Participation: This meeting is
open to the public, subject to the
capacity of the meeting room.
Access to Navy Hill is strictly
controlled. For pre-clearance purposes,
those planning to attend in person are
requested to email or phone Tricia
Smeltzer (smeltzertk@state.gov, 202–
776–8423) or Niesha Toms
(tomsnn@state.gov, 202–776–8420) and
provide your full name, address, date of
birth, citizenship, driver’s license or
passport number, affiliation, and email
address. This will greatly facilitate
entry.
Participants will be met at the Navy
Hill gate at 23rd and D Streets NW., and
will be escorted to the South Building.
A member of the public needing
reasonable accommodation should
advise Ms. Smeltzer or Ms. Toms not
later than January 16, 2013. Requests
made after that date will be considered,
but might not be able to be fulfilled. If
you would like to participate by
E:\FR\FM\21DEN1.SGM
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]]>Agencies
[Federal Register Volume 77, Number 246 (Friday, December 21, 2012)]
[Notices]
[Pages 75689-75695]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30739]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68453; File No. PCAOB-2012-01]
Public Company Accounting Oversight Board; Order Granting
Approval of Proposed Rules on Auditing Standard No. 16, Communications
With Audit Committees, and Related and Transitional Amendments to PCAOB
Standards
December 17, 2012.
I. Introduction
On August 28, 2012, the Public Company Accounting Oversight Board
(the ``Board'' or the ``PCAOB'') filed with the Securities and Exchange
Commission (the ``Commission''), pursuant to Section 107(b) \1\ of the
Sarbanes-Oxley Act of 2002 (the ``Sarbanes-Oxley Act'') and Section
19(b) \2\ of the Securities Exchange Act of 1934 (the ``Exchange
Act''), proposed rules to adopt PCAOB Auditing Standard No. 16,
``Communications with Audit Committees,'' and related and transitional
amendments to PCAOB standards (collectively, the ``Proposed Rules'').
The Proposed Rules were published for comment in the Federal Register
on September 17, 2012.\3\ At the time the notice was issued, the
Commission designated a longer period to act on the Proposed Rules,
until December 17, 2012.\4\ The Commission received five comment
letters in response to the notice.\5\ On November 9, 2012, the PCAOB
submitted a letter addressing certain comments received by the
Commission.\6\ This order approves the Proposed Rules.
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\1\ 15 U.S.C. 7217(b).
\2\ 15 U.S.C. 78s(b).
\3\ See Release No. 34-67804 (September 10, 2012), 77 FR 57408
(September 17, 2012).
\4\ Ibid.
\5\ See letters to the Commission from Howard B. Levy, Principal
and Director, Technical Services, Piercy Bowler Taylor & Kern, dated
September 28, 2012 (``Piercy Letter''); Robert L. Leclerc, Chairman,
Quest Rare Minerals Ltd., dated September 30, 2012 (``Quest
Letter''); Tom Quaadman, Vice President, Center for Capital Markets
Competitiveness, U.S. Chamber of Commerce, dated October 5, 2012
(``Chamber Letter''); Deloitte & Touche LLP, dated October 5, 2012
(``Deloitte Letter''); and Cindy M. Fornelli, Executive Director of
the Center for Audit Quality, dated October 9, 2012 (``CAQ
Letter'').
\6\ See letter to the Commission from the PCAOB, dated November
9, 2012.
---------------------------------------------------------------------------
II. Description of the Proposed Rules
Auditing Standard No. 16 will supersede PCAOB interim auditing
standard AU section 380, ``Communication with Audit Committees'' (``AU
sec. 380''), and interim auditing standard AU section 310,
``Appointment of the Independent Auditor'' (``AU sec. 310''). Auditing
Standard No. 16 retains or enhances existing audit committee
communication requirements, incorporates SEC auditor communication
requirements set forth in Rule 2-07 of Regulation S-X,\7\ provides a
definition of the term `audit committee' for issuers and non-issuers,
and adds new communication requirements that are generally linked to
performance requirements set forth in other PCAOB auditing standards.
---------------------------------------------------------------------------
\7\ 17 CFR 210.2-07.
---------------------------------------------------------------------------
Auditing Standard No. 16 requires the auditor to establish an
understanding of the terms of the audit engagement with the audit
committee. This requirement aligns the auditing standard with the
provision of the Exchange Act, as amended by the Sarbanes-Oxley Act,
that requires the audit committee of listed companies to be responsible
for the appointment of the external auditor.\8\ Additionally, Auditing
Standard No. 16 requires the auditor to record the terms of the
engagement in an engagement letter and to have the engagement letter
executed by the appropriate party or parties on behalf of the company
and determine that the audit committee has acknowledged and agreed to
the terms.
---------------------------------------------------------------------------
\8\ See Section 10A(m) of the Exchange Act, as added by Section
301 of the Sarbanes-Oxley Act.
---------------------------------------------------------------------------
Auditing Standard No. 16 requires the communications with the audit
committee to occur before the issuance
[[Page 75690]]
of the audit report. The standard requires auditors to communicate,
among other matters, the following to audit committees:
Certain matters regarding the company's accounting
policies, practices, and estimates (consistent with Rule 2-07 of
Regulation S-X);
The auditor's evaluation of the quality of the company's
financial reporting;
Information related to significant unusual transactions,
including the business rationale for such transactions;
An overview of the overall audit strategy, including
timing of the audit, significant risks the auditor identified, and
significant changes to the planned audit strategy or identified risks;
Information about the nature and extent of specialized
skill or knowledge needed in the audit, the extent of the planned use
of internal auditors, company personnel or other third parties, and
other independent public accounting firms, or other persons not
employed by the auditor that are involved in the audit;
Difficult or contentious matters for which the auditor
consulted outside the engagement team;
The auditor's evaluation of going concern;
Expected departures from the auditor's standard report;
and
Other matters arising from the audit that are significant
to the oversight of the company's financial reporting process,
including complaints or concerns regarding accounting or auditing
matters that have come to the auditor's attention during the audit.
Auditing Standard No. 16 retains from AU sec. 380 the option for
auditors to communicate to audit committees either orally or in
writing, unless otherwise specified in the standard. The auditor is
required to document the communications in the work papers, regardless
of whether the communications take place orally or in writing.
As part of the Proposed Rules, the Board adopted conforming
amendments to several PCAOB standards, including PCAOB interim auditing
standard AU sec. 722, ``Interim Financial Information.'' In addition to
the conforming amendments, the Board adopted transitional amendments to
AU sec. 380 so that audit committee communications would continue to be
required in audits of all SEC-registered broker-dealers in the event
PCAOB standards become applicable to broker-dealer audits prior to the
effective date of Auditing Standard No. 16.
The PCAOB has proposed application of its Proposed Rules to audits
of all issuers, including audits of emerging growth companies
(``EGCs''),\9\ and the Proposed Rules also would apply to audits of
SEC-registered brokers and dealers if the Commission subsequently
determines to make PCAOB standards applicable to such audits.\10\ The
Proposed Rules would be effective for audits of financial statements
with fiscal years beginning on or after December 15, 2012. The
transitional amendments to AU sec. 380 would be effective for the
periods that PCAOB standards become applicable to audits of SEC-
registered brokers and dealers, as designated by the Commission, if the
effective date of the application of PCAOB standards occurs prior to
the effective date of Auditing Standard No. 16.
---------------------------------------------------------------------------
\9\ The term ``emerging growth company'' is defined in Section
3(a)(80) of the Exchange Act.
\10\ The Commission proposed requiring application of PCAOB
standards to audits for brokers and dealers in Release No. 34-64676
(June 15, 2011).
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III. Comment Letters and the PCAOB's Responses
As noted above, the Commission received five comment letters
concerning the Proposed Rules. Two commenters expressed unqualified
support for the Proposed Rules, and cited a link between Auditing
Standard No. 16 and investor protection.\11\ One of these commenters
expressed its view that the matters Auditing Standard No. 16 requires
auditors to communicate to audit committees are commensurate with, and
supportive of, the important role audit committees have in serving the
interests of investors through oversight of financial reporting and the
audit process.\12\ The other commenter cited its belief that adoption
of Auditing Standard No. 16 is in the public interest and contributes
to investor protection because it establishes requirements that enhance
the relevance, timeliness, and quality of communications between
auditors and audit committees.\13\
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\11\ See CAQ Letter and Deloitte Letter.
\12\ See Deloitte Letter.
\13\ See CAQ Letter.
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One of these commenters also expressed unqualified support for the
application of the proposed rules to audits of EGCs and stated its
belief that investors in public companies of all sizes are entitled to
the same level of protection, including the protection provided by
improved communications between auditors and audit committees.\14\ This
commenter also cited the following points in support of its view:
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\14\ See CAQ Letter.
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Auditing Standard No. 16 will foster improved financial
reporting. The commenter believes improved financial reporting reduces
information asymmetry and should increase the efficiency of capital
allocation, thereby fostering capital formation. The commenter also
believes this may be particularly important for EGCs, which may need to
access the capital markets more regularly than more established
companies.
Bifurcation of the requirements would be confusing as to
the level of investor protection an investor is receiving. The
commenter believes that applying Auditing Standard No. 16 to audits of
EGCs would avoid bifurcation of the rules applied to the preparation
and audit of public company financial statements. The commenter also
believes that having different sets of rules for different categories
of public companies makes it more difficult for investors to know what
rules governed the preparation and audit of a given set of financial
statements.
Three commenters raised questions and concerns about the Proposed
Rules and their proposed application. These matters relate to: (1)
Application of the Proposed Rules to audits of foreign private issuers
(``FPIs''); \15\ (2) application of Auditing Standard No. 16 to audits
of broker-dealers; (3) the role of management in communicating matters
to the audit committee that are also the subject of Auditing Standard
No. 16; (4) the specificity of the requirements in Auditing Standard
No. 16; (5) potential regulatory conflicts; (6) convergence of auditing
standards; and (7) the PCAOB's analysis supporting its proposal that
the Proposed Rules apply to audits of EGCs (the ``PCAOB's EGC
analysis'').
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\15\ The term ``foreign private issuer'' is defined in Exchange
Act Rule 3b-4(c) [17 CFR 240.3b-4(c)]. A foreign private issuer
means any foreign issuer other than a foreign government except an
issuer that meets the following conditions: (1) More than 50 percent
of the issuer's outstanding voting securities are directly or
indirectly held of record by residents of the United States; and (2)
any of the following: (i) the majority of the executive officers or
directors are United States citizens or residents; (ii) more than 50
percent of the assets of the issuer are located in the United
States; or (iii) the business of the issuer is administered
principally in the United States.
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1. Audits of FPIs
One commenter requested clarification as to whether or not the
Proposed Rules would apply to audits of issuers that are FPIs.\16\ The
commenter stated that it was not seeking relief, solely clarity. In
response to the commenter's request, the Commission notes that under
the Sarbanes-Oxley Act, the PCAOB's auditing and other professional
standards apply to audits of
[[Page 75691]]
issuers.\17\ There is no exception for issuers that are FPIs, and the
PCAOB did not propose to create an exclusion. Accordingly, the Proposed
Rules, consistent with other auditing standards adopted by the PCAOB,
will apply to audits of FPIs.
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\16\ See Quest Letter.
\17\ See Sections 101(c)(2) and 103(a)(1) of the Sarbanes-Oxley
Act.
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2. Audits of Broker-Dealers
One commenter requested more clarity about to whom the required
Auditing Standard No. 16 audit committee communications should be made
in situations when a broker-dealer does not have a board of directors
or audit committee.\18\ The commenter also recommended that the PCAOB
make clear that the required communications should not be made to a
chief financial officer or similar officer, but rather a chief
executive officer. The commenter raised similar comments in connection
with the PCAOB's own solicitation for comments on the Proposed Rules.
The PCAOB revised Auditing Standard No. 16 in response to this comment,
which was also raised by other commenters. The PCAOB revised the
definition of audit committee with respect to non-issuers such that, if
a non-issuer broker-dealer did not have a board of directors or audit
committee, the required communications would be directed to the
person(s) identified by the auditor as responsible for overseeing the
accounting and financial reporting processes of the company.
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\18\ See Chamber Letter.
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However, the definition was not revised to exclude from the
definition of audit committee those persons with oversight
responsibility who also have management responsibilities for the
preparation of the financial statements of the company. In its adopting
release, the PCAOB stated that for non-issuers with no existing audit
committee or board of directors (or equivalent body), the auditor would
be expected to identify senior persons at the company who have
decision-making authority and responsibility to oversee the accounting
and financial reporting processes of the company and audits of the
financial statements, and to make the required communications to those
persons.\19\ The PCAOB provided examples and stated that if all persons
identified by the auditor as having responsibility for oversight of the
company's accounting and financial reporting processes and audits also
have management responsibilities for the preparation of the financial
statements, then the auditor could also make the communications
specified in the standard to other individuals at the company (e.g.,
the chief executive officer or others in charge of the company's
operations and performance, who may benefit from the communications).
The Commission does not find the PCAOB's response to be unreasonable.
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\19\ See PCAOB Release No. 2012-004 (August 15, 2012), pg. A4-3.
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The commenter also requested that the PCAOB clarify to whom audit
committee communications should be made when a broker-dealer is a
subsidiary of an entity that has an audit committee.\20\ The PCAOB
addressed this comment in its adopting release as well. In that
release, the PCAOB observed that some commenters suggested that the
standard should clarify to whom the auditor should communicate when the
company is a subsidiary of another entity. The PCAOB stated that
Auditing Standard No. 16 does not require communication outside the
governance structure of the audited entity because the standard
designates the appropriate party to receive the auditor communications
within the audited entity.\21\ The PCAOB also stated that if directed
by the audit client, or if the auditor otherwise deems it appropriate,
the auditor could also communicate to a parent company audit committee
or equivalent body. The Commission does not find the PCAOB's response
to be unreasonable.
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\20\ See Chamber Letter.
\21\ See PCAOB Release No. 202-004 (August 15, 2012), pg. A4-4.
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3. The Role of Management in Communicating Matters to the Audit
Committee
One commenter repeated concerns expressed in letters to the PCAOB
during the PCAOB's proposal stages that Auditing Standard No. 16
appears to shift inappropriately from management to auditors the
primary responsibility to communicate to audit committees about matters
of the selection and identification of significant and critical
accounting policies, estimates and significant unusual
transactions.\22\ The commenter acknowledged that the PCAOB revised
Auditing Standard No. 16 in response to this comment, and observed that
Auditing Standard No. 16 is not intended to change the requirements of
Rule 2-07 of Regulation S-X. However, the commenter believes the
Commission should give consideration to its concerns and make
``appropriate revisions'' to Rule 2-07 to preserve what the commenter
believes is the proper balance among the responsibilities of
management, audit committees and auditors.
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\22\ See Piercy Letter.
---------------------------------------------------------------------------
The Commission has previously considered views similar to those
expressed by the commenter. Exchange Act Section 10A(k), as added by
Section 204 of the Sarbanes-Oxley Act, directed the Commission to issue
rules requiring timely reporting of specific information by auditors to
audit committees. In response to this directive, in 2002, the
Commission proposed amending Regulation S-X to require each public
accounting firm registered with the Board that audits an issuer's
financial statements to report, prior to the filing of such report with
the Commission, to the issuer or registered investment company's audit
committee: \23\
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\23\ See Release No. 33-8154 (December 2, 2002).
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(1) All critical accounting policies and practices used by the
issuer or registered investment company;
(2) All alternative accounting treatments of financial information
within generally accepted accounting principles that have been
discussed with management, including the ramifications of the use of
such alternative treatments and disclosures and the treatment preferred
by the accounting firm; and
(3) Other material written communications between the accounting
firm and management of the issuer or registered investment company.
In response to this proposal, some commenters expressed a view that
these communications should be the responsibility of management alone,
while others expressed a view that both the accountant and management
should share the responsibility for informing the audit committee about
such matters. In adopting Rule 2-07, the Commission stated that
``[w]hile we understand that management has the primary responsibility
for the information contained in the financial statements, since the
accounting firm is retained by the audit committee, we share the view
reflected in Section 205 [sic] of the Sarbanes-Oxley Act and current
auditing standards, that the accounting firm has a responsibility to
communicate certain information to the audit committee.'' \24\ The
Commission still holds this view and believes that the communications
required by Auditing Standard No. 16 in this regard are appropriate.
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\24\ See Release No. 33-8183 (March 27, 2003).
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Further, the Commission believes that additional changes made by
the PCAOB in response to this concern are appropriate and balanced. In
its adopting release, the PCAOB observed
[[Page 75692]]
that in many companies, management might communicate matters involving
management's preparation of the company's financial statements and that
in many companies, management might communicate these matters or take
the lead on communicating these matters to the audit committee. The
PCAOB also observed that it does not have the authority to require
management to communicate to the audit committee, and that certain
communications are mandated by federal securities laws and Commission
rules. Because of these factors, Auditing Standard No. 16 clearly
recognizes and acknowledges that management might communicate to the
audit committee certain matters related to the company's financial
statements; and in such circumstances, the auditor does not need to
communicate those matters at the same level of detail as management, as
long as certain conditions are met, as specified in the standard.
4. Level of Specificity of Requirements in Auditing Standard No. 16
One commenter observed that Auditing Standard No. 16 is
``prescriptive'' in that it contains specific mandatory communication
requirements.\25\
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\25\ See Chamber Letter.
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The PCAOB addressed this comment in its letter to the Commission.
In that letter, the PCAOB stated that its standards, including Auditing
Standard No. 16, reflect the fact that a company's size and complexity
can affect the risks of material misstatement and that the Proposed
Rules are designed to allow auditors to tailor the required
communications to the size and level of complexity of a company's
operations, accounting practices, and audit issues.
The Commission addressed a similar comment in 2010 in connection
with its consideration of rules proposed by the PCAOB to establish new
risk assessment standards.\26\ The Commission recognizes that there
should be an appropriate balance in auditing standards between
providing necessary minimum requirements and allowing auditors to apply
judgment in determining the nature and extent of audit procedures given
the particular circumstances of an individual engagement. The
Commission believes that all PCAOB standards should reflect an
appropriate balance of requirements and judgments that enables auditors
to perform high quality and effective audits and believes the PCAOB's
approach in Auditing Standard No. 16 reflects a reasonable balance in
this respect.
---------------------------------------------------------------------------
\26\ See Release No. 34-63606 (December 23, 2010).
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5. Potential Regulatory Conflicts
One commenter voiced concerns that the Proposed Rules may go
outside of the scope of the PCAOB's jurisdiction over the audit and
infringe upon the corporate governance responsibilities of the
Commission or under applicable state law in overseeing the audit
committee.\27\ This commenter asked that the Commission review the
Proposed Rules ``with an eye towards eliminating any potential
regulatory conflict.'' In considering the Proposed Rules, the
Commission does not believe the Proposed Rules create any potential
regulatory conflicts. In its adopting release, the PCAOB recognized the
scope and limits of its jurisdiction. In one place, the PCAOB states
that its definition of audit committee is not intended to conflict with
or affect any requirements, or the application of any requirements,
under federal law, state law, foreign law, or an entity's governing
documents regarding the establishment, approval, or ratification of
board of directors or audit committees, or the delegation of
responsibilities of such a committee or board; \28\ and in another
place, the Board recognized that it does not have the authority to
require management to communicate to the audit committee.\29\
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\27\ See Chamber Letter.
\28\ See PCAOB Release No. 202-004 (August 15, 2012), pg. A4-2.
\29\ See PCAOB Release No. 202-004 (August 15, 2012), pg. 4.
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6. Convergence of Auditing Standards
One commenter expressed support for the notion of working to
achieve one set of global high quality auditing standards through the
convergence of PCAOB auditing standards with those of the International
Auditing and Assurance Standards Board (``IAASB'') and the Auditing
Standards Board of the American Institute of Certified Public
Accountants (``ASB'') and observed that the Proposed Rules do not
adequately identify and explain the rationale for differences between
the Proposed Rules and the relevant standards of the IAASB and ASB.\30\
---------------------------------------------------------------------------
\30\ See Chamber Letter.
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The PCAOB has received similar comments in the past, and has
observed that:
[B]ecause the Board's standards must be consistent with the
Board's statutory mandate, differences will continue to exist
between the Board's standards and the standards of the IAASB and
ASB, e.g., when the Board decides to retain an existing requirement
in PCAOB standards that is not included in IAASB or ASB standards.
Also, certain differences are often necessary for the Board's
standards to be consistent with relevant provisions of the federal
securities laws or other existing standards or rules of the
Board.\31\
---------------------------------------------------------------------------
\31\ See PCAOB Release No. 2010-004, August 5, 2010, pp. A10-
91--A10-92 (internal footnotes omitted).
The Commission also addressed a similar comment in connection with
its consideration of the rules proposed by the PCAOB to establish new
risk assessment standards.\32\ As noted then, the Commission encourages
the Board's efforts to consider standards issued by the IAASB and the
ASB, and appreciates the reasons why it is reasonable to expect that
the Board's standards may appropriately differ from such standards. In
this regard, we take note of the efforts the PCAOB has taken in
developing the Proposed Rules to consider the work of other standard
setters.
---------------------------------------------------------------------------
\32\ See supra note 26.
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7. The PCAOB's EGC Request and the Commission's EGC Determination
Section 103(a)(3)(C) of the Sarbanes-Oxley Act provides that any
additional rules adopted by the PCAOB subsequent to April 5, 2012 do
not apply to the audits of EGCs, unless the Commission determines that
the application of such additional requirements is necessary or
appropriate in the public interest, after considering the protection of
investors and whether the action will promote efficiency, competition,
and capital formation.\33\ Having considered those factors, and as
explained further below, the Commission finds that applying the
Proposed Rules to audits of EGCs is necessary or appropriate in the
public interest.
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\33\ Section 103(a)(3)(C) of the Sarbanes-Oxley Act, as amended
by Section 104 of the Jumpstart Our Business Startups Act (the
``JOBS Act'').
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The PCAOB adopted Auditing Standard No. 16 on August 15, 2012 for
application to audits of all issuers, including EGCs; and the PCAOB
requested that the Commission make the determination required by
Section 103(a)(3)(C) such that Auditing Standard No. 16 would apply to
audits of EGCs. To assist the Commission in making its determination,
the PCAOB prepared and submitted to the Commission its own EGC
analysis. The PCAOB's EGC analysis includes discussions of: (1) The
background of and reasons for the new standard; (2) the PCAOB's
approach to developing the new standard, including consideration of
alternatives; (3) key changes and improvements from existing audit
committee
[[Page 75693]]
communication requirements; and (4) characteristics of EGCs and
economic considerations.
In developing its analysis, the PCAOB compiled data available from
entities voluntarily identifying themselves as EGCs in SEC filings.
Based on data available to the PCAOB, the Board observed that one key
difference between EGCs and other entities appears to be the length of
time an EGC has been subject to the reporting requirements under the
Exchange Act.\34\ The Board also observed that the enhanced audit
committee communication requirements of Auditing Standard No. 16 may be
of particular benefit to EGCs given that: (1) Some EGCs are companies
that are relatively new to the SEC reporting process, and may have new
audit committee members that may be less familiar with SEC reporting
requirements and have relatively more questions regarding how to
present their financial statements for SEC reporting purposes; and (2)
some EGCs may also be considering, for the first time, initial choices
in their accounting policies and practices that could have implications
for their financial reporting.\35\
---------------------------------------------------------------------------
\34\ See 77 FR 57448.
\35\ See 77 FR. 57447.
---------------------------------------------------------------------------
The PCAOB's EGC analysis was included in the Commission's public
notice soliciting comment on the Proposed Rules. Based on the analysis
submitted, the comments received, and the PCAOB's response, we believe
the information in the record is sufficient for us to make the EGC
determination in relation to this standard. Specifically, the PCAOB's
EGC analysis discussed its approach to developing the new standard and
its consideration of alternatives, as well as the characteristics of
EGCs and economic considerations. The Commission also takes note, in
particular, of the PCAOB's overall approach to Auditing Standard No.
16, which was designed to: (1) Scale the required communications to the
size and complexity of the company being audited; (2) maintain
flexibility (e.g., with respect to auditors communicating orally or in
writing); (3) minimize duplicative or redundant communications to the
audit committee from the auditor and management; (4) focus the
communications on the accounting matters that are significant to the
auditor and the audit committee; and (5) reduce auditors' search costs
(i.e., the costs associated with researching the federal securities
laws' and auditing standards' various communication requirements) by
providing a list of other PCAOB standards and rules that contain audit
committee communication requirements in one place. Moreover, the
auditor's requirements under the new standard are focused on
communicating the results of audit procedures that the auditor is
already required to perform.
One commenter raised concerns about the PCAOB's EGC analysis.\36\
This commenter did not assert that any specific aspect of Auditing
Standard No. 16 should not apply to audits of EGCs. Rather, the
commenter raised several concerns about the substance and form of the
PCAOB's EGC analysis and whether it was sufficient to form a basis for
the Commission's EGC determination. We discuss each of this commenter's
main points, and set forth our responses, separately below.
---------------------------------------------------------------------------
\36\ See Chamber Letter.
First, the commenter states that because the JOBS Act
provides an automatic exemption for EGC audits from any future PCAOB
rules, there is a special burden on the Commission to determine that
benefits outweigh costs in order to reverse a clear Congressional
---------------------------------------------------------------------------
directive in favor of an exemption.
As noted above, Section 103(a)(3)(C) of the Sarbanes-Oxley Act
contains very specific provisions concerning the application of PCAOB
rules to audits of EGCs. The statutory text of Section 103(a)(3)(C)
demonstrates that where Congress intended to provide EGCs with an
absolute exemption from future PCAOB rules, it did so explicitly (e.g.,
that any future PCAOB rules on mandatory audit firm rotation or an
auditor discussion and analysis shall not apply to EGCs audits). By
contrast, with respect to other future PCAOB rules, Congress indicated
that new requirements may apply to EGCs, but that for them to apply,
the Commission needs to make a determination that such application is
``necessary or appropriate in the public interest, after considering
the protection of investors, and whether the action will promote
efficiency, competition, and capital formation.'' This determination is
separate from the existing finding needed to approve a PCAOB proposed
rule change under Section 107 of the Sarbanes-Oxley Act that the
proposed rule is consistent with the requirements of the Sarbanes-Oxley
Act and the securities laws, or is necessary or appropriate in the
public interest or for the protection of investors.\37\
---------------------------------------------------------------------------
\37\ See Section 107(b)(3) of the Sarbanes-Oxley Act. As
discussed below, the Commission makes both findings. The Commission
makes each finding on its own merits and does not consider either
one dependent on the other.
---------------------------------------------------------------------------
Just as the Section 107 finding does not require the Commission to
overcome a ``presumption'' that a proposed PCAOB rule should be
disapproved, the Section 103 EGC determination does not require the
Commission to overcome a ``presumption'' that a PCAOB proposed rule
should not apply to audits of EGCs. Rather, in both instances, the
statute sets forth a predicate finding that the Commission must make,
after considering specified factors, in order for the rule to be
approved (section 107(b)(2)) or for it to apply to EGC audits (Section
103(a)(3)(C)).
The statutory text of Section 103(a)(3)(C) requires the Commission
to consider the protection of investors and whether the action will
promote efficiency, competition, and capital formation as part of its
affirmative determination that the application of such additional
requirements is necessary or appropriate in the public interest.
Plainly this involves considering the economic effects of the Proposed
Rules as they relate to efficiency, competition and capital formation.
Second, the commenter believes the PCAOB's EGC analysis
is ``devoid of any semblance of an analysis of the cost of
compliance with the rule for all issuers or for EGCs,'' and asserts
that the PCAOB, in its EGC analysis, cited a belief that Auditing
Standard No. 16 would be less costly for EGCs.
The PCAOB did provide information regarding potential costs of the
proposed rules to issuers, including EGCs. The PCAOB's analysis
included qualitative factors that would affect such costs (e.g., nature
or complexity of the issuer). As noted above, the PCAOB also provided
an analysis of the characteristics of EGCs, including data on the
number of issuers that have voluntarily disclosed their EGC status
after enactment of the JOBS Act. In its analysis, the PCAOB noted that
EGCs vary widely in size, and noted that one key difference between
EGCs and other entities appears to be the length of time an EGC has
been subject to the reporting requirements under the Exchange Act. In
this regard, the PCAOB further described how this difference may in
fact relate to the ability of the Proposed Rules to promote efficiency
and capital formation for EGCs over other issuers.
Notwithstanding the commenter's assertion that the PCAOB believes
the application of Auditing Standard No. 16 would be less costly for
EGCs, no such statement is expressed in the PCAOB's EGC analysis.
Rather, the PCAOB's EGC analysis reflects the Board's view that a
company's size and complexity can affect the risks of material
misstatement, and therefore, auditing challenges and audit strategies
(matters that impact the
[[Page 75694]]
amount of time and effort put into an audit). This point was reiterated
in the PCAOB's letter to the Commission. In that letter, the PCAOB also
provided examples of how communications required by Auditing Standard
No. 16 could be tailored to the audit of a less complex company, which
could have an impact on the overall cost of the audit and could help to
avoid unnecessary costs.
Section 103(a)(3)(C) does not require the Commission to conclude
that a proposed PCAOB rule would be ``less costly'' for EGC audits than
for other issuer audits in order to find that applying the rule to EGC
audits would be necessary or appropriate in the public interest. The
relative impact on EGCs vis a vis other issuers could be a factor to
consider in whether the application of the proposed rules to EGC audits
is necessary or appropriate in the public interest, after considering
the protection of investors and whether the action will promote
efficiency, competition, and capital formation. However, nothing in the
statutory text indicates that the Commission's public interest finding
hinges on whether, on a categorical basis, the requirements of a given
PCAOB rule would be less costly for EGCs.
Third, the commenter disputes the relevance of existing
audit committee communication requirements under PCAOB interim
auditing standard AU sec. 380 to a discussion of the application of
Auditing Standard No. 16 to audits of EGCs.
The Commission does not view the PCAOB's discussion of the Proposed
Rules in relation to the existing standards as inconsistent with the
proper analysis of an EGC determination. Rather, establishing a
baseline for conducting an analysis of economic effects of a proposed
regulatory action is an appropriate regulatory practice. Also, it is
important to consider that currently, all issuers, including EGCs, are
subject to the existing audit committee communication requirements of
AU secs. 310 and 380 and Rule 2-07 of Regulation S-X. If the Commission
determined that the Proposed Rules should not apply to audits of EGCs,
AU secs. 310 and 380 and Rule 2-07 of Regulation S-X would still apply
to the audits of EGCs.\38\
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\38\ Also, the Commission does not view the PCAOB's highlighting
the existing baseline as the sole justification to carry forward
existing requirements. Rather, throughout the PCAOB's submission
describing the individual requirements of the standard, while the
PCAOB notes whether the particular requirement is new or carried
forward, the PCAOB also explains why it chose to include them
irrespective of whether they already are included in the existing
standards.
---------------------------------------------------------------------------
The Commission believes the PCAOB's EGC analysis appropriately
describes the consequences of the Proposed Rules relative to the
baseline. As the PCAOB notes in its submission, the impact of the
Proposed Rules is largely incremental to existing requirements
regarding communications between auditors and audit committees.
Accordingly, this discussion of existing requirements is highly
relevant to considering the impacts on efficiency, competition and
capital formation that would be caused by applying the new standard to
audits of EGCs. The Commission does not believe the Proposed Rules can
be categorized as a major or profound change to the way auditors
communicate with audit committees. In fact, the PCAOB received comments
to this effect during its own due process. For example, one commenter
observed that ``many of the requirements [of the proposed rules] are
already reflected in the best practices of audit firms and public
companies.'' \39\ Another commenter to the PCAOB stated its ``belie[f]
that auditors, in most cases, are already providing meaningful
communications on the financial statement and audit areas that meet the
spirit of the requirements of the Proposed Standard and go beyond what
is currently required by the extant standards.'' \40\
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\39\ See letter from The Society of Corporate Secretaries and
Governance Professionals to the PCAOB (June 1, 2010). This letter
may be viewed at: https://pcaobus.org/Rules/Rulemaking/Docket030/032_SCSGP.pdf.
\40\ See letter from Deloitte & Touche to the PCAOB (May 28,
2010). This letter may be viewed at: https://pcaobus.org/Rules/Rulemaking/Docket030/020_DT.pdf.
Fourth, the commenter raised a concern that the public
was never afforded an opportunity to comment upon the impact of the
---------------------------------------------------------------------------
proposed rules on the audits of EGCs.
Section 103(a)(3)(C) requires the Commission to make the specified
determination. The PCAOB submitted an EGC analysis that assisted the
Commission in its own determination. The PCAOB's analysis was included
in the Commission's notice of the Proposed Rules which provided an
opportunity for the public, including the commenter, to submit comments
on the analysis.\41\ The PCAOB also supplemented the record with
additional information after comments were received. As noted above,
based on the analysis submitted, the comments received, and the PCAOB's
response, we believe the information in the record is sufficient for us
to make the EGC determination.
---------------------------------------------------------------------------
\41\ In addition, the commenter acknowledged that the JOBS Act
was signed into law after the PCAOB's second comment period closed.
The PCAOB did not re-expose the Proposed Rules again as part of its
standard-setting process to seek public input on whether application
of the Proposed Rules to EGC audits would be necessary or
appropriate in the public interest, after considering the protection
of investors, and whether the action will promote efficiency,
competition, and capital formation.
Fifth, the commenter believes that the inspection
findings cited in the PCAOB's EGC analysis do not provide any
indication whether any of the audit committee communication failures
involved the audits of EGCs. The commenter also criticizes the
relevance of the PCAOB's citation to four year old research that
indicated that audit committee oversight was having a positive
---------------------------------------------------------------------------
impact on the overall quality of audits.
In its EGC analysis, the PCAOB cited its inspection findings as one
input into its decision to bring together in one place audit committee
communication requirements; \42\ and in its letter to the Commission,
the PCAOB reiterated this point. The Commission believes it was
appropriate for the PCAOB to consider its inspection findings in
developing the Proposed Rules.
---------------------------------------------------------------------------
\42\ See 77 FR 57441.
---------------------------------------------------------------------------
As to the PCAOB's reference in its EGC analysis to research, the
Commission believes it was wholly appropriate for the PCAOB to
highlight the relationship between audit committee communications and
overall audit quality and improved financial reporting, given the
relevance of the quality of financial reporting to considerations of
efficiency and capital formation. It does not appear that the PCAOB was
referencing the research identified by the commenter to justify the
Proposed Rules themselves or was attempting to use research
inconsistently or opportunistically to support its views. Rather, the
PCAOB noted, citing to other research, that improved financial
reporting quality promotes efficiency and capital formation. The PCAOB
explained that the results of one of the studies cited in its EGC
analysis supported its view that audit committee oversight of the
auditor improves audit quality and financial reporting quality. The
PCAOB then went on to discuss additional findings from its outreach and
research that improved interaction between, and information shared,
between the auditor and the audit committee enhances audit committee
oversight and auditor performance.
IV. Conclusion
The Commission has carefully reviewed and considered the Proposed
Rules and the information submitted therewith by the PCAOB, including
the
[[Page 75695]]
PCAOB's EGC analysis, the comment letters received, and the PCAOB's
response. In connection with the PCAOB's filing and the Commission's
review,
A. The Commission finds that the Proposed Rules are consistent with
the requirements of the Sarbanes-Oxley Act and the securities laws and
are necessary or appropriate in the public interest or for the
protection of investors; and
B. Separately, the Commission finds that the application of the
Proposed Rules to EGC audits is necessary or appropriate in the public
interest, after considering the protection of investors and whether the
action will promote efficiency, competition, and capital formation.
It is therefore ordered, pursuant to Section 107 of the Act and
Section 19(b)(2) of the Exchange Act, that the Proposed Rules (File No.
PCAOB-2012-01) be and hereby are approved.
By the Commission.
Elizabeth M. Murphy.
Secretary.
[FR Doc. 2012-30739 Filed 12-20-12; 8:45 am]
BILLING CODE 8011-01-P
