Public Company Accounting Oversight Board; Order Granting Approval of Auditing Standard 2501, Auditing Accounting Estimates, Including Fair Value Measurements,, 32498-32502 [2019-14411]
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Federal Register / Vol. 84, No. 130 / Monday, July 8, 2019 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86269 File No. PCAOB–
2019–005]
Public Company Accounting Oversight
Board; Order Granting Approval of
Auditing Standard 2501, Auditing
Accounting Estimates, Including Fair
Value Measurements, and Related
Amendments to PCAOB Auditing
Standards
July 1, 2019.
I. Introduction
On March 20, 2019, 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’’), a proposal
to adopt Auditing Standard 2501,
Auditing Accounting Estimates,
Including Fair Value Measurements and
related amendments to PCAOB auditing
standards (collectively, the ‘‘Proposed
Rules’’).3 The Proposed Rules were
published for comment in the Federal
Register on April 4, 2019.4 At the time
the notice was issued, the Commission
extended to July 3, 2019 the date by
which the Commission should take
action on the Proposed Rules.5 We
received four comment letters in
response to the notice.6 This order
1 15
U.S.C. 7217(b).
U.S.C. 78s(b).
3 The PCAOB staff originally issued a staff
consultation paper on this matter in 2014. See
Auditing Accounting Estimates and Fair Value
Measurements (Aug. 19, 2014), available at https://
pcaobus.org/Standards/Documents/SCP_Auditing_
Accounting_Estimates_Fair_Value_
Measurements.pdf. In 2017, the Board issued a
proposed rule. See Proposed Auditing Standard—
Auditing Accounting Estimates, Including Fair
Value Measurements and Proposed Amendments to
PCAOB Auditing Standards, PCAOB Release No.
2017–002 (June 1, 2017) (‘‘PCAOB Proposal’’),
available at https://pcaobus.org/Rulemaking/
Docket043/2017-002-auditing-accountingestimates-proposed-rule.pdf.
4 See Release No. 34–85434 Public Company
Accounting Oversight Board; Notice of Filing of
Proposed Rules on Auditing Accounting Estimates,
Including Fair Value Measurements, and
Amendments to PCAOB Auditing Standards (Mar.
28, 2019), 84 FR 13396 (Apr. 4, 2019) available at
https://www.sec.gov/rules/pcaob/2019/3485434.pdf.
5 See id.
6 We received comment letters from Deloitte &
Touche LLP, April 10, 2019 (‘‘Deloitte Letter’’); the
Council of Institutional Investors, April 18, 2019
(‘‘CII Letter’’); PricewaterhouseCoopers LLP, April
25, 2019 (‘‘PwC Letter’’); and the Center for Capital
Markets Competitiveness, U.S. Chamber of
Commerce, April 25, 2019 (‘‘CCMC Letter’’). Copies
of the comment letters received on the Commission
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approves the Proposed Rules, which we
find to be consistent with the
requirements of the Sarbanes-Oxley Act
and the securities laws and necessary or
appropriate in the public interest or for
the protection of investors.
II. Description of the Proposed Rules
On December 20, 2018, the Board
adopted AS 2501, Auditing Accounting
Estimates, Including Fair Value
Measurements and related amendments
to PCAOB auditing standards.7 The
Proposed Rules are intended to
strengthen and enhance the
requirements for auditing accounting
estimates, including fair value
measurements, by replacing the existing
three standards 8 with a single standard
that sets forth a uniform, risk-based
approach. The requirements contained
within the Proposed Rules are discussed
further below.
A. Changes to PCAOB Standards
The Proposed Rules include a single
standard that replaces the accounting
estimates standard, the fair value
standard, and the derivatives standard.9
The Proposed Rules also include a
special topics appendix that addresses
certain matters relevant to auditing the
fair value of financial instruments. In
addition, the Proposed Rules include
amendments to several other PCAOB
auditing standards to align them with
the new standard on auditing
accounting estimates. The Proposed
Rules will make the following changes
to existing requirements:
• Provide direction to prompt
auditors to devote greater attention to
addressing potential management bias
in accounting estimates, as part of
order noticing the Proposed Rules are available on
the Commission’s website at https://www.sec.gov/
comments/pcaob-2019-02/pcaob201902.htm.
7 See Auditing Accounting Estimates, Including
Fair Value Measurements and Amendments to
PCAOB Auditing Standards, PCAOB Release No.
2018–005 (Dec. 20, 2018) (‘‘PCAOB Adopting
Release’’), available at https://pcaobus.org/
Rulemaking/Docket043/2018-005-estimates-finalrule.pdf.
8 See Auditing Standard (‘‘AS’’) 2501, Auditing
Accounting Estimates (originally issued in April
1988), which applies to auditing accounting
estimates in general (‘‘accounting estimates
standard’’); AS 2502, Auditing Fair Value
Measurements and Disclosures (originally issued
January 2003), which applies to auditing the
measurement and disclosure of assets, liabilities,
and specific components of equity presented or
disclosed at fair value in financial statements (‘‘fair
value standard’’); and AS 2503, Auditing Derivative
Instruments, Hedging Activities, and Investments in
Securities (originally issued in September 2000),
which applies to auditing financial statement
assertions for derivative instruments, hedging
activities, and investments in securities
(‘‘derivatives standard’’).
9 See id.
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applying professional skepticism. In this
regard, the Proposed Rules:
Æ Amend AS 2110, Identifying and
Assessing Risks of Material
Misstatement to require a discussion
among the key engagement team
members of how the financial
statements could be manipulated
through management bias in accounting
estimates in significant accounts and
disclosures;
Æ Emphasize certain key
requirements to focus auditors on their
obligations, when evaluating audit
results, to exercise professional
skepticism, including evaluating
whether management bias exists;
Æ Remind auditors that audit
evidence includes both information that
supports and corroborates the
company’s assertions regarding the
financial statements and information
that contradicts such assertions;
Æ Require the auditor to identify
significant assumptions used by the
company and describe matters the
auditor should take into account when
identifying those assumptions;
Æ Provide examples of significant
assumptions (important to the
recognition or measurement of the
accounting estimate), such as
assumptions that are susceptible to
manipulation or bias;
Æ Emphasize requirements for the
auditor to evaluate whether the
company has a reasonable basis for the
significant assumptions used and, when
applicable, for its selection of
assumptions from a range of potential
assumptions;
Æ Explicitly require the auditor, when
developing an independent expectation
of an accounting estimate, to have a
reasonable basis for the assumptions
and method he or she uses;
Æ Require that the auditor obtain an
understanding of management’s analysis
of critical accounting estimates and take
that understanding into account when
evaluating the reasonableness of
significant assumptions and potential
management bias;
Æ Recast certain existing
requirements using terminology that
encourages maintaining a skeptical
mindset, such as ‘‘evaluate’’ and
‘‘compare’’ instead of ‘‘corroborate;’’
Æ Strengthen requirements for
evaluating whether data was
appropriately used by a company that
build on requirements in the fair value
standard, and include a new
requirement for evaluating whether a
company’s change in the source of data
is appropriate;
Æ Clarify the auditor’s responsibilities
for evaluating data that build on the
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existing requirements in AS 1105, Audit
Evidence; and
Æ Amend AS 2401, Consideration of
Fraud in a Financial Statement Audit,
to clarify the auditor’s responsibilities
when performing a retrospective review
of accounting estimates and align them
with the requirements in the new
standard.
• Extend certain key requirements in
the fair value standard to other
accounting estimates in significant
accounts and disclosures to reflect a
more uniform approach to substantive
testing. For estimates not currently
subject to the fair value standard, this
will:
Æ Refine the three substantive
approaches common to the accounting
estimates standard to include more
specificity, similar to the fair value
standard;
Æ Describe the auditor’s
responsibilities for testing the
individual elements of the company’s
process used to develop the estimate
(i.e., methods, data, and significant
assumptions);
Æ Set forth express requirements for
the auditor to evaluate the company’s
methods for developing the estimate,
including whether the methods are:
D In conformity with the requirements
of the applicable financial reporting
framework; and
D Appropriate for the nature of the
related account or disclosure, taking
into account the auditor’s
understanding of the company and its
environment; and
Æ Require the auditor to take into
account certain factors in determining
whether significant assumptions that are
based on the company’s intent and
ability to carry out a particular course of
action are reasonable.
• Further integrate requirements with
the Board’s risk assessment standards 10
to focus auditors on estimates with
greater risk of material misstatement.
The Proposed Rules incorporate specific
requirements relating to accounting
estimates in AS 2110 and AS 2301 to
inform the necessary procedures for
auditing accounting estimates.
Specifically, the Proposed Rules will:
Æ Amend AS 2110 to include risk
factors specific to identifying significant
accounts and disclosures involving
accounting estimates;
Æ Align the scope of the Proposed
Rules with AS 2110 to apply to
10 The Board’s ‘‘risk assessment standards’’
include AS 1101, Audit Risk; AS 1105; AS 1201,
Supervision of the Audit Engagement; AS 2101,
Audit Planning; AS 2105, Consideration of
Materiality in Planning and Performing an Audit;
AS 2110; AS 2301, The Auditor’s Responses to the
Risks of Material Misstatement; and AS 2810,
Evaluating Audit Results.
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accounting estimates in significant
accounts and disclosures;
Æ Amend AS 2110 to set forth
requirements for obtaining an
understanding of the company’s process
for determining accounting estimates;
Æ Require auditors to respond to
significantly differing risks of material
misstatement in the components of
accounting estimates, consistent with
AS 2110;
Æ Remind auditors of their
responsibility to evaluate conformity
with the applicable financial reporting
framework, reasonableness, and
potential management bias and its effect
on the financial statements when
responding to the risks of material
misstatement in accounting estimates in
significant accounts and disclosures;
Æ Require the auditor, when
identifying significant assumptions, to
take into account the nature of the
accounting estimate, including related
risk factors, the applicable financial
reporting framework, and the auditor’s
understanding of the company’s process
for developing the estimate;
Æ Include matters relevant to
identifying and assessing risks of
material misstatement related to the fair
value of financial instruments;
Æ Add a note in AS 2301 to
emphasize that performing substantive
procedures for the relevant assertions of
significant accounts and disclosures
involves testing whether the significant
accounts and disclosures are in
conformity with the applicable financial
reporting framework; and
Æ Add a note to AS 2301 providing
that for certain estimates involving
complex models or processes, it might
be impossible to design effective
substantive tests that, by themselves,
would provide sufficient appropriate
evidence regarding the assertions.
• Make other updates to the
requirements for auditing accounting
estimates, including:
Æ Update the description of what
constitutes an accounting estimate to
encompass the general characteristics of
the variety of accounting estimates,
including fair value measurements, in
financial statements;
Æ Set forth specific requirements for
evaluating data and pricing information
used by the company or the auditor that
build on the existing requirements in
AS 1105;
Æ Establish more specific
requirements for developing an
independent expectation that vary
depending on the source of data,
assumptions or methods used by the
auditor and build on AS 2810 to provide
a requirement when developing an
independent expectation as a range; and
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Æ Relocate requirements in the
derivatives standard for obtaining audit
evidence when the valuation of
investments is based on investee results
as an appendix to AS 1105.
• Provide specific requirements and
direction to address auditing the fair
value of financial instruments,
including:
Æ Establish requirements to
determine whether pricing information
obtained from third parties, such as
pricing services and brokers or dealers,
provides sufficient appropriate audit
evidence, including:
D Focus auditors on the relevance and
reliability of pricing information from
third-party sources,11 regardless of
whether the pricing information was
obtained by the company or the auditor;
D Establish factors that affect
relevance and reliability of pricing
information obtained from a pricing
service;
D Require the auditor to perform
additional audit procedures to evaluate
the process used by the pricing service
when fair values are based on
transactions of similar financial
instruments;
D Require the auditor to perform
additional procedures on pricing
information obtained from a pricing
service when no recent transactions
have occurred for either the financial
instrument being valued or similar
financial instruments;
D Establish conditions under which
less information is needed about
particular methods and inputs of
individual pricing services in
circumstances where prices are obtained
from multiple pricing services; and
D Establish factors that affect the
relevance and reliability of quotes from
brokers or dealers.
Æ Require the auditor to understand,
if applicable, how unobservable inputs
were determined and evaluate the
reasonableness of unobservable inputs.
B. Applicability and Effective Date
The Proposed Rules would be
effective for audits of financial
statements for fiscal years ending on or
after December 15, 2020. The PCAOB
has proposed application of the
Proposed Rules to include audits of
emerging growth companies (‘‘EGCs’’),12
11 The requirements in this area focus primarily
on pricing information from pricing services and
brokers or dealers, but also cover pricing
information obtained from other third-party pricing
sources, such as exchanges and publishers of
exchange prices.
12 The term ‘‘emerging growth company’’ is
defined in Section 3(a)(80) of the Exchange Act (15
U.S.C. 78c(a)(80)). See also Release No. 33–10332
Inflation Adjustments and Other Technical
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as discussed in Section IV below, and
audits of brokers and dealers under
Exchange Act Rule 17a–5.
III. Comment Letters
The comment period on the Proposed
Rules ended on April 25, 2019. We
received four comment letters from
accounting firms, an investor
association, and an issuer
organization.13 Commenters generally
supported the Proposed Rules.14 Most
commenters encouraged us to support
the PCAOB’s plans to monitor
implementation, conduct postimplementation review, or monitor
advancements in technology that may
affect application of the Proposed
Rules.15 One commenter raised
concerns regarding the effective date
due to other financial reporting
activities that need to be implemented
and the potential impact on smaller
audit firms.16
The Sarbanes-Oxley Act requires us to
determine whether the Proposed Rules
are consistent with the requirements of
the Sarbanes-Oxley Act and the
securities laws or are necessary or
appropriate in the public interest or for
the protection of investors.17 In making
this determination, we have considered
the comments we received, as well as
the feedback received and modifications
made by the PCAOB throughout its
rulemaking process. The discussion
below addresses the significant points
raised in the comment letters we
received.
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A. General Support for the Proposed
Rules
Commenters generally supported the
Proposed Rules, including strengthening
the audit requirements by applying a
more uniform, risk-based approach to
the audit of accounting estimates,
Amendments Under Titles I and III of the JOBS Act
(Mar. 31, 2017), 82 FR 17545 (Apr. 12, 2017).
13 See Deloitte Letter, PwC Letter, CII Letter, and
CCMC Letter.
14 See Deloitte Letter, PwC Letter, CII Letter, and
CCMC Letter.
15 See e.g., Deloitte Letter; PwC Letter, and CCMC
Letter.
16 See CCMC Letter.
17 See Section 107(b)(3) of the Sarbanes-Oxley
Act. The Sarbanes-Oxley Act also specifies that the
provisions of Section 19(b) of the Exchange Act
shall govern the proposed rules of the Board. See
Section 107(b)(4) of the Sarbanes-Oxley Act.
Section 19 of the Exchange Act covers the
registration, responsibilities, and oversight of selfregulatory organizations. Under the procedures
prescribed by the Sarbanes-Oxley Act and Section
19(b)(2) of the Exchange Act, the Commission must
either approve or disapprove, or institute
proceedings to determine whether the proposed
rules of the Board should be disapproved; and these
procedures do not expressly permit the Commission
to amend or supplement the proposed rules of the
Board.
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including fair value measurements.18
One commenter agreed with the Board’s
view that the evolution of financial
reporting frameworks has resulted in the
expanded use of estimates and
expressed support for a single, more
uniform principles-based standard to
address the auditing of accounting
estimates, including fair value
measurements, that is aligned with the
Board’s risk assessment standards.19
Another commenter stressed the need
for the Proposed Rules because
accounting estimates, and particularly
fair value measurements and related
disclosures, provide investors with
‘‘more useful information than amounts
that would be reported under amortized
cost or other existing alternative
accounting approaches’’ and because
the PCAOB has observed numerous
deficiencies in auditing accounting
estimates.20 The commenter also
indicated that the Proposed Rules will
strengthen auditor responsibilities,
improve audit quality, and further
investor protection.21
B. Implementation Efforts
Most commenters noted their desire
for ongoing monitoring by the PCAOB if
the Proposed Rules are approved.22 Two
commenters specifically supported the
PCAOB’s plan 23 to monitor
implementation, including advances in
technology and any related effects on
the application of the proposed
amendments.24 Another commenter
recommended that the Commission, as
part of its oversight of the PCAOB,
should request that the PCAOB
periodically update the Commission on
the PCAOB’s activities for monitoring
the implementation of the Proposed
Rules along with the PCAOB’s findings
and responses to these activities,
including the PCAOB’s plans for a postimplementation review.25
In the PCAOB Adopting Release, the
Board stated it would monitor
implementation to determine whether
additional interpretive guidance is
necessary, including monitoring the
advancement of technology.26 In
addition, the PCAOB has an established
program to conduct postimplementation reviews of its rules and
18 See Deloitte Letter, CII Letter, PwC Letter, and
CCMC Letter.
19 See PwC Letter.
20 See CII Letter.
21 See id.
22 See e.g., Deloitte Letter, PwC Letter, and CCMC
Letter.
23 See PCAOB Adopting Release at 3, 21, and 46.
24 See Deloitte Letter and CCMC Letter.
25 See CCMC Letter.
26 See PCAOB Adopting Release at 3, 21, and 46.
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standards to evaluate the overall effect
of significant rulemakings.27
We acknowledge the importance of
monitoring the implementation of the
Proposed Rules. The Commission staff
works closely with the PCAOB as part
of our general oversight mandate.28 As
part of that oversight, Commission staff
will keep itself apprised of the PCAOB’s
activities for monitoring the
implementation of the Proposed Rules
and update the Commission, as
necessary.
C. The Effective Date of the Proposed
Rules
As noted above, the Proposed Rules
would be effective for audits of financial
statements for fiscal years ending on or
after December 15, 2020. One
commenter expressed concerns related
to the effective date as a result of other
financial reporting activities, including
upcoming effective dates of certain
Financial Accounting Standards Board
(‘‘FASB’’) projects, other PCAOB
standards, and a view that smaller audit
firms may be disproportionately
impacted.29 The commenter suggested a
phased implementation of the Proposed
Rules. Specifically, the commenter
recommended, as an example, that the
Commission allow triennially inspected
audit firms 30 to elect an effective date
of audits for fiscal years ending on or
after December 15, 2021, while also
permitting earlier implementation since
smaller audit firms may be
disproportionally impacted.31 The
commenter further expressed the belief
that a phased implementation may
facilitate post-implementation reviews
of the Proposed Rules.32
In the PCAOB Adopting Release, the
Board recognized the effort required for
other implementation efforts, but stated
the effective date determined by the
Board was designed to provide auditors
with a reasonable period of time to
implement the Proposed Rules, without
unduly delaying the intended benefits
of the Proposed Rules.33
27 See PCAOB website at https://pcaobus.org/
EconomicAndRiskAnalysis/pir/Pages/default.aspx.
28 See Section 107 of the Sarbanes-Oxley Act.
29 See CCMC Letter.
30 ‘‘Triennially inspected audit firms’’ are audit
firms that, in accordance with PCAOB Rule 4003(b),
are required to be inspected at least once in every
three calendar years if, during that time, the audit
firm issued an audit report for at least one issuer
but no more than 100 issuers. An audit firm is
required to be inspected on an annual basis if,
during the prior calendar year, it issued audit
reports for more than 100 issuers (‘‘annually
inspected audit firms). See PCAOB Rule 4003,
Frequency of Inspections, available at https://
pcaobus.org/Rules/Pages/Section_4.aspx.
31 See CCMC Letter.
32 See id.
33 See PCAOB Adopting Release at 58.
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We believe the Board has
appropriately balanced the amount of
time needed by audit firms to
implement the Proposed Rules with the
objectives of, and benefits obtained
from, the Proposed Rules. In this regard,
we note that, aside from the commenter
who suggested that the Commission
consider a phased implementation
approach, we received no other
comments from audit firms, including
triennially inspected audit firms,
requesting a phased implementation.
In addition, there could be practical
implications of allowing for a phased
implementation approach related to an
auditor performance standard.34 For
example, audits of multi-national
companies often involve the work of
more than one auditor conducted in
accordance with AS 1205, Part of the
Audit Performed by Other Independent
Auditors (‘‘AS 1205’’), wherein a
principal auditor may provide
instructions to the other auditors. Under
a phased implementation approach, an
annually inspected audit firm serving as
the principal auditor may instruct a
triennially inspected audit firm to
follow the Proposed Rules before the
triennially inspected audit firm has
implemented the Proposed Rules. This
approach could create challenges for the
triennially inspected audit firm as it
would be instructed to implement the
Proposed Rules on individual
engagements even though it may not
have updated its methodologies or
trained its professionals on the
Proposed Rules, which could have a
negative effect on audit quality.
Further, within the Global Networks
of accounting firms,35 many of the
affiliated accounting firms outside the
United States are triennially inspected
audit firms. Many of these affiliated
firms participate in the multi-national
audits discussed above. Our
understanding is that these
arrangements make it more practical for
the Global Network Firms to adopt the
Proposed Rules simultaneously across
their respective networks. As a result,
the Global Network Firms may not delay
implementation for the triennially
34 The CCMC Letter references differences in
considering a phased implementation approach for
an auditor performance standard as compared to an
auditor reporting standard, which is why it did not
suggest a phased implementation approach based
on issuer size similar to the auditor communicating
critical audit matters in accordance with AS 3101,
The Auditor’s Report on an Audit of Financial
Statements When the Auditor Expresses an
Unqualified Opinion.
35 See PCAOB website for a listing of ‘‘Global
Networks’’ and further discussion, available at
https://pcaobus.org/Registration/Firms/Pages/
GlobalNetworkFirms.aspx.
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inspected audit firms within their
network.
Based on these considerations, we do
not believe a phased implementation
approach for the Proposed Rules,
including providing triennially
inspected audit firms with the option to
delay implementation, is necessary or
appropriate in the public interest or for
the protection of investors.
IV. Effect on Emerging Growth
Companies
In the PCAOB Adopting Release, the
Board recommended that the
Commission determine that the
Proposed Rules apply to audits of
EGCs.36 Section 103(a)(3)(C) of the
Sarbanes-Oxley Act, as amended by
Section 104 of the Jumpstart Our
Business Startups Act of 2012, requires
that any rules of the Board ‘‘requiring
mandatory audit firm rotation or a
supplement to the auditor’s report in
which the auditor would be required to
provide additional information about
the audit and the financial statements of
the issuer (auditor discussion and
analysis)’’ shall not apply to an audit of
an EGC. The provisions of the Proposed
Rules do not fall into these categories.
Section 103(a)(3)(C) further provides
that ‘‘[a]ny additional rules’’ adopted by
the PCAOB after April 5, 2012, do not
apply to 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.’’
The Proposed Rules fall within this
category. Having considered those
statutory factors, we find that applying
the Proposed Rules to the audits of
EGCs is necessary or appropriate in the
public interest.
The PCAOB provided information
identified by the Board’s staff from
public sources, including data and
analysis of EGCs that sets forth its views
as to why it believes the Proposed Rules
should apply to audits of EGCs. To
inform consideration of the application
of auditing standards to audits of EGCs,
the PCAOB staff has also published a
white paper that provides general
information about characteristics of
EGCs (‘‘EGC White Paper’’).37 In
addition, the Board sought public input
on the application of the Proposed Rules
PCAOB Adopting Release at 56.
Characteristics of Emerging Growth
Companies as of November 15, 2017 (Oct. 11, 2018),
available at https://pcaobus.org/EconomicAnd
RiskAnalysis/Documents/White-PaperCharacteristics-Emerging-Growth-CompaniesNovember-2017.pdf.
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37 See
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to the audits of EGCs.38 Commenters
who addressed this question supported
applying the proposed requirements to
audits of EGCs, citing benefits to the
users of EGC financial statements and
the risk of confusion and inconsistency
if different methodologies were required
for EGC and non-EGC audits.39
In the PCAOB Adopting Release, the
Board expressed its belief that
accounting estimates are common in the
financial statements of many EGCs.40
The Board also noted that data from
2012–2016 reported inspection findings
for audits of EGCs indicated a relatively
high number of deficiencies (i.e., 45%60% of Part I findings on audits of
EGCs) related to the accounting
estimates standard and the fair value
standard.41 The PCAOB further
observed that ‘‘[s]ince EGCs tend to be
smaller public companies, their
accounting estimates may be less likely
to involve complex processes, although
those estimates may constitute some of
the largest accounts in EGCs’ financial
statements.’’ 42 The Board noted that the
Proposed Rules are ‘‘risk-based and
scalable for firms of all sizes,’’ and
expressed the view that ‘‘any related
cost increases are justified by expected
improvements in audit quality.’’ 43
Additionally, the PCAOB Adopting
Release noted that ‘‘any new PCAOB
standards and amendments to existing
standards determined not to apply to
the audits of EGCs would require
auditors to address the differing
requirements within their
methodologies, which would create the
potential for confusion.’’ 44 In the EGC
White Paper, the PCAOB staff stated
that ‘‘[a]pproximately 99% of EGC filers
were audited by accounting firms that
also audit issuers that are not EGC
filers.’’ 45
The PCAOB Adopting Release also
noted EGCs generally tend to have
38 See PCAOB Proposal; see also, comment letters
provided to the PCAOB related to this matter,
available at https://pcaobus.org/Rulemaking/Pages/
docket-043-comments-auditing-accountingestimates-fair-value-measurements.aspx.
39 See PCAOB Adopting Release at 53.
40 See id at 53. The five Standard Industrial
Classification (SIC) codes with the highest total
assets as a percentage of the total assets for the EGC
population are: (i) Real estate investment trusts; (ii)
state commercial banks; (iii) national commercial
banks; (iv) crude petroleum and natural gas; and (v)
pharmaceutical preparations. See EGC White Paper
at 14–15. In the PCAOB Adopting Release, the
Board noted that financial statements of companies
operating in these industries would likely have
accounting estimates that include, for example,
asset impairments and allowances for loan losses.
41 See PCAOB Adopting Release at 55–56.
42 See id at 54.
43 See id at 45.
44 See id at 53.
45 See EGC White Paper at 20.
E:\FR\FM\08JYN1.SGM
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Federal Register / Vol. 84, No. 130 / Monday, July 8, 2019 / Notices
shorter financial reporting histories and
as a result, there is less information
available to investors regarding such
companies relative to the broader
population of public companies.46 As
such, the Proposed Rules, which are
intended to enhance audit quality,
could increase the credibility of
financial statement disclosures by
EGCs.47
We agree with the Board’s analysis.
We believe the Proposed Rules will
benefit EGCs at least as much as nonEGCs, in part, because of the prevalence
of accounting estimates in financial
statements of many EGCs. Specifically,
we agree with the Board applying the
Proposed Rules to EGCs would be
consistent with the objective of the
Proposed Rules to provide a more
uniform, risk-based approach to
auditing accounting estimates but also
provide a scalable approach for firms of
all sizes. Additionally, we also agree
with the Board that Proposed Rules
could increase the credibility of the
financial statement disclosures by EGCs.
As such, after considering the
protection of investors and whether the
action will promote efficiency,
competition, and capital formation, we
believe there is a sufficient basis to
determine that applying the Proposed
Rules to the audits of EGCs is necessary
or appropriate in the public interest.
jbell on DSK3GLQ082PROD with NOTICES
V. Conclusion
The Commission has carefully
reviewed and considered the Proposed
Rules, the information submitted
therewith by the PCAOB, and the
comment letters received. 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 the audits of EGCs 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 Sarbanes-Oxley Act
and Section 19(b)(2) of the Exchange
Act, that the Proposed Rules (File No.
PCAOB–2019–005) be and hereby are
approved.
46 See
47 See
PCAOB Adopting Release at 54.
id at 54.
VerDate Sep<11>2014
19:44 Jul 05, 2019
Jkt 247001
By the Commission.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–14411 Filed 7–5–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86270; File No. PCAOB–
2019–006]
Public Company Accounting Oversight
Board; Order Granting Approval of
Amendments to Auditing Standards for
Auditor’s Use of the Work of
Specialists
July 1, 2019.
I. Introduction
On March 20, 2019, 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’’), a proposal
to adopt amendments to auditing
standards for auditor’s use of the work
of specialists (collectively, the
‘‘Proposed Rules’’).3 The Proposed
Rules were published for comment in
the Federal Register on April 4, 2019.4
At the time the notice was issued, the
Commission extended to July 3, 2019
the date by which the Commission
should take action on the Proposed
Rules.5 We received four comment
letters in response to the notice.6 This
U.S.C. 7217(b).
U.S.C. 78s(b).
3 The PCAOB staff originally issued a staff
consultation paper on this matter in 2015. See The
Auditor’s Use of the Work of Specialists, PCAOB
Staff Consultation Paper No. 2015–01 (May 28,
2015), available at https://pcaobus.org/Standards/
Documents/SCP-2015-01_The_Auditor’s_Use_of_
the_Work_of_Specialists.pdf. In 2017, the Board
issued a proposed rule. See Proposed Amendments
to Auditing Standards for Auditor’s Use of the Work
of Specialists, PCAOB Release No. 2017–003 (June
1, 2017) (‘‘PCAOB Proposal’’), available at https://
pcaobus.org/Rulemaking/Docket044/2017-003specialists-proposed-rule.pdf.
4 See Release No. 34–85435, Public Company
Accounting Oversight Board; Notice of Filing of
Proposed Rules on Amendments to Auditing
Standards for Auditor’s Use of the Work of
Specialists, (Mar. 28, 2019), 84 FR 13442 (Apr. 4,
2019).
5 See id.
6 We received comment letters from Deloitte &
Touche LLP, April 10, 2019 (‘‘Deloitte Letter’’); the
Council of Institutional Investors, April 18, 2019
(‘‘CII Letter’’); PricewaterhouseCoopers LLP, April
25, 2019 (‘‘PwC Letter’’); and the Center for Capital
Markets Competitiveness, U.S. Chamber of
Commerce, April 25, 2019 (‘‘CCMC Letter’’). Copies
of the comment letters received on the Commission
PO 00000
1 15
2 15
Frm 00102
Fmt 4703
Sfmt 4703
order approves the Proposed Rules,
which we find to be consistent with the
requirements of the Sarbanes-Oxley Act
and the securities laws and necessary or
appropriate in the public interest or for
the protection of investors.
II. Description of the Proposed Rules
On December 20, 2018, the Board
adopted amendments to auditing
standards for using the work of
specialists.7 The Proposed Rules are
intended to strengthen the requirements
that apply when auditors use the work
of specialists in an audit.8 The Proposed
Rules relate to an auditor’s evaluation of
the work of a company’s specialist,
whether employed or engaged by the
company, and apply a supervisory
approach to both auditor-employed and
auditor-engaged specialists.
A. Changes to PCAOB Standards
The Proposed Rules primarily amend
two existing PCAOB auditing standards
and retitle and replace a third auditing
standard.9 The Proposed Rules will
make the following changes to existing
requirements:
• Amend AS 1105
Æ Adds a new Appendix A that
supplements the requirements in AS
1105 for circumstances when the
auditor uses the work of the company’s
specialist as audit evidence, related to:
• Obtaining an understanding of the
work and report(s), or equivalent
communication, of the company’s
specialist(s) and related company
processes and controls;
• Obtaining an understanding of and
assessing the knowledge, skill, and
ability of a company’s specialist and the
entity that employs the specialist (if
other than the company) and the
relationship to the company of the
specialist and the entity that employs
the specialist (if other than the
company); and
order noticing the Proposed Rules are available on
the Commission’s website at https://www.sec.gov/
comments/pcaob-2019-03/pcaob201903.htm.
7 See Amendments to Auditing Standards for
Auditor’s Use of the Work of Specialists, PCAOB
Release No. 2018–006 (Dec. 20, 2018) (‘‘PCAOB
Adopting Release’’), available at https://
pcaobus.org/Rulemaking/Docket044/2018-006specialists-final-rule.pdf.
8 In the Proposed Rules, a specialist is defined
generally as a person (or firm) possessing special
skill or knowledge in a particular field other than
accounting or auditing.
9 The Proposed Rules: (1) Add an appendix to
Auditing Standard (‘‘AS’’) 1105, Audit Evidence,
with supplemental requirements for using the work
of a company’s specialist as audit evidence; (2) add
an appendix to AS 1201, Supervision of the Audit
Engagement, with supplemental requirements for
supervising an auditor-employed specialist; and (3)
replace existing AS 1210, Using the Work of a
Specialist, with an updated standard titled, Using
the Work of an Auditor-Engaged Specialist, for
using the work of an auditor-engaged specialist.
E:\FR\FM\08JYN1.SGM
08JYN1
]]>Agencies
[Federal Register Volume 84, Number 130 (Monday, July 8, 2019)]
[Notices]
[Pages 32498-32502]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-14411]
[[Page 32498]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86269 File No. PCAOB-2019-005]
Public Company Accounting Oversight Board; Order Granting
Approval of Auditing Standard 2501, Auditing Accounting Estimates,
Including Fair Value Measurements, and Related Amendments to PCAOB
Auditing Standards
July 1, 2019.
I. Introduction
On March 20, 2019, 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''), a proposal to adopt Auditing Standard 2501, Auditing Accounting
Estimates, Including Fair Value Measurements and related amendments to
PCAOB auditing standards (collectively, the ``Proposed Rules'').\3\ The
Proposed Rules were published for comment in the Federal Register on
April 4, 2019.\4\ At the time the notice was issued, the Commission
extended to July 3, 2019 the date by which the Commission should take
action on the Proposed Rules.\5\ We received four comment letters in
response to the notice.\6\ This order approves the Proposed Rules,
which we find to be consistent with the requirements of the Sarbanes-
Oxley Act and the securities laws and necessary or appropriate in the
public interest or for the protection of investors.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 7217(b).
\2\ 15 U.S.C. 78s(b).
\3\ The PCAOB staff originally issued a staff consultation paper
on this matter in 2014. See Auditing Accounting Estimates and Fair
Value Measurements (Aug. 19, 2014), available at https://pcaobus.org/Standards/Documents/SCP_Auditing_Accounting_Estimates_Fair_Value_Measurements.pdf. In
2017, the Board issued a proposed rule. See Proposed Auditing
Standard--Auditing Accounting Estimates, Including Fair Value
Measurements and Proposed Amendments to PCAOB Auditing Standards,
PCAOB Release No. 2017-002 (June 1, 2017) (``PCAOB Proposal''),
available at https://pcaobus.org/Rulemaking/Docket043/2017-002-auditing-accounting-estimates-proposed-rule.pdf.
\4\ See Release No. 34-85434 Public Company Accounting Oversight
Board; Notice of Filing of Proposed Rules on Auditing Accounting
Estimates, Including Fair Value Measurements, and Amendments to
PCAOB Auditing Standards (Mar. 28, 2019), 84 FR 13396 (Apr. 4, 2019)
available at https://www.sec.gov/rules/pcaob/2019/34-85434.pdf.
\5\ See id.
\6\ We received comment letters from Deloitte & Touche LLP,
April 10, 2019 (``Deloitte Letter''); the Council of Institutional
Investors, April 18, 2019 (``CII Letter''); PricewaterhouseCoopers
LLP, April 25, 2019 (``PwC Letter''); and the Center for Capital
Markets Competitiveness, U.S. Chamber of Commerce, April 25, 2019
(``CCMC Letter''). Copies of the comment letters received on the
Commission order noticing the Proposed Rules are available on the
Commission's website at https://www.sec.gov/comments/pcaob-2019-02/pcaob201902.htm.
---------------------------------------------------------------------------
II. Description of the Proposed Rules
On December 20, 2018, the Board adopted AS 2501, Auditing
Accounting Estimates, Including Fair Value Measurements and related
amendments to PCAOB auditing standards.\7\ The Proposed Rules are
intended to strengthen and enhance the requirements for auditing
accounting estimates, including fair value measurements, by replacing
the existing three standards \8\ with a single standard that sets forth
a uniform, risk-based approach. The requirements contained within the
Proposed Rules are discussed further below.
---------------------------------------------------------------------------
\7\ See Auditing Accounting Estimates, Including Fair Value
Measurements and Amendments to PCAOB Auditing Standards, PCAOB
Release No. 2018-005 (Dec. 20, 2018) (``PCAOB Adopting Release''),
available at https://pcaobus.org/Rulemaking/Docket043/2018-005-estimates-final-rule.pdf.
\8\ See Auditing Standard (``AS'') 2501, Auditing Accounting
Estimates (originally issued in April 1988), which applies to
auditing accounting estimates in general (``accounting estimates
standard''); AS 2502, Auditing Fair Value Measurements and
Disclosures (originally issued January 2003), which applies to
auditing the measurement and disclosure of assets, liabilities, and
specific components of equity presented or disclosed at fair value
in financial statements (``fair value standard''); and AS 2503,
Auditing Derivative Instruments, Hedging Activities, and Investments
in Securities (originally issued in September 2000), which applies
to auditing financial statement assertions for derivative
instruments, hedging activities, and investments in securities
(``derivatives standard'').
---------------------------------------------------------------------------
A. Changes to PCAOB Standards
The Proposed Rules include a single standard that replaces the
accounting estimates standard, the fair value standard, and the
derivatives standard.\9\ The Proposed Rules also include a special
topics appendix that addresses certain matters relevant to auditing the
fair value of financial instruments. In addition, the Proposed Rules
include amendments to several other PCAOB auditing standards to align
them with the new standard on auditing accounting estimates. The
Proposed Rules will make the following changes to existing
requirements:
---------------------------------------------------------------------------
\9\ See id.
---------------------------------------------------------------------------
Provide direction to prompt auditors to devote greater
attention to addressing potential management bias in accounting
estimates, as part of applying professional skepticism. In this regard,
the Proposed Rules:
[cir] Amend AS 2110, Identifying and Assessing Risks of Material
Misstatement to require a discussion among the key engagement team
members of how the financial statements could be manipulated through
management bias in accounting estimates in significant accounts and
disclosures;
[cir] Emphasize certain key requirements to focus auditors on their
obligations, when evaluating audit results, to exercise professional
skepticism, including evaluating whether management bias exists;
[cir] Remind auditors that audit evidence includes both information
that supports and corroborates the company's assertions regarding the
financial statements and information that contradicts such assertions;
[cir] Require the auditor to identify significant assumptions used
by the company and describe matters the auditor should take into
account when identifying those assumptions;
[cir] Provide examples of significant assumptions (important to the
recognition or measurement of the accounting estimate), such as
assumptions that are susceptible to manipulation or bias;
[cir] Emphasize requirements for the auditor to evaluate whether
the company has a reasonable basis for the significant assumptions used
and, when applicable, for its selection of assumptions from a range of
potential assumptions;
[cir] Explicitly require the auditor, when developing an
independent expectation of an accounting estimate, to have a reasonable
basis for the assumptions and method he or she uses;
[cir] Require that the auditor obtain an understanding of
management's analysis of critical accounting estimates and take that
understanding into account when evaluating the reasonableness of
significant assumptions and potential management bias;
[cir] Recast certain existing requirements using terminology that
encourages maintaining a skeptical mindset, such as ``evaluate'' and
``compare'' instead of ``corroborate;''
[cir] Strengthen requirements for evaluating whether data was
appropriately used by a company that build on requirements in the fair
value standard, and include a new requirement for evaluating whether a
company's change in the source of data is appropriate;
[cir] Clarify the auditor's responsibilities for evaluating data
that build on the
[[Page 32499]]
existing requirements in AS 1105, Audit Evidence; and
[cir] Amend AS 2401, Consideration of Fraud in a Financial
Statement Audit, to clarify the auditor's responsibilities when
performing a retrospective review of accounting estimates and align
them with the requirements in the new standard.
Extend certain key requirements in the fair value standard
to other accounting estimates in significant accounts and disclosures
to reflect a more uniform approach to substantive testing. For
estimates not currently subject to the fair value standard, this will:
[cir] Refine the three substantive approaches common to the
accounting estimates standard to include more specificity, similar to
the fair value standard;
[cir] Describe the auditor's responsibilities for testing the
individual elements of the company's process used to develop the
estimate (i.e., methods, data, and significant assumptions);
[cir] Set forth express requirements for the auditor to evaluate
the company's methods for developing the estimate, including whether
the methods are:
[ssquf] In conformity with the requirements of the applicable
financial reporting framework; and
[ssquf] Appropriate for the nature of the related account or
disclosure, taking into account the auditor's understanding of the
company and its environment; and
[cir] Require the auditor to take into account certain factors in
determining whether significant assumptions that are based on the
company's intent and ability to carry out a particular course of action
are reasonable.
Further integrate requirements with the Board's risk
assessment standards \10\ to focus auditors on estimates with greater
risk of material misstatement. The Proposed Rules incorporate specific
requirements relating to accounting estimates in AS 2110 and AS 2301 to
inform the necessary procedures for auditing accounting estimates.
Specifically, the Proposed Rules will:
---------------------------------------------------------------------------
\10\ The Board's ``risk assessment standards'' include AS 1101,
Audit Risk; AS 1105; AS 1201, Supervision of the Audit Engagement;
AS 2101, Audit Planning; AS 2105, Consideration of Materiality in
Planning and Performing an Audit; AS 2110; AS 2301, The Auditor's
Responses to the Risks of Material Misstatement; and AS 2810,
Evaluating Audit Results.
---------------------------------------------------------------------------
[cir] Amend AS 2110 to include risk factors specific to identifying
significant accounts and disclosures involving accounting estimates;
[cir] Align the scope of the Proposed Rules with AS 2110 to apply
to accounting estimates in significant accounts and disclosures;
[cir] Amend AS 2110 to set forth requirements for obtaining an
understanding of the company's process for determining accounting
estimates;
[cir] Require auditors to respond to significantly differing risks
of material misstatement in the components of accounting estimates,
consistent with AS 2110;
[cir] Remind auditors of their responsibility to evaluate
conformity with the applicable financial reporting framework,
reasonableness, and potential management bias and its effect on the
financial statements when responding to the risks of material
misstatement in accounting estimates in significant accounts and
disclosures;
[cir] Require the auditor, when identifying significant
assumptions, to take into account the nature of the accounting
estimate, including related risk factors, the applicable financial
reporting framework, and the auditor's understanding of the company's
process for developing the estimate;
[cir] Include matters relevant to identifying and assessing risks
of material misstatement related to the fair value of financial
instruments;
[cir] Add a note in AS 2301 to emphasize that performing
substantive procedures for the relevant assertions of significant
accounts and disclosures involves testing whether the significant
accounts and disclosures are in conformity with the applicable
financial reporting framework; and
[cir] Add a note to AS 2301 providing that for certain estimates
involving complex models or processes, it might be impossible to design
effective substantive tests that, by themselves, would provide
sufficient appropriate evidence regarding the assertions.
Make other updates to the requirements for auditing
accounting estimates, including:
[cir] Update the description of what constitutes an accounting
estimate to encompass the general characteristics of the variety of
accounting estimates, including fair value measurements, in financial
statements;
[cir] Set forth specific requirements for evaluating data and
pricing information used by the company or the auditor that build on
the existing requirements in AS 1105;
[cir] Establish more specific requirements for developing an
independent expectation that vary depending on the source of data,
assumptions or methods used by the auditor and build on AS 2810 to
provide a requirement when developing an independent expectation as a
range; and
[cir] Relocate requirements in the derivatives standard for
obtaining audit evidence when the valuation of investments is based on
investee results as an appendix to AS 1105.
Provide specific requirements and direction to address
auditing the fair value of financial instruments, including:
[cir] Establish requirements to determine whether pricing
information obtained from third parties, such as pricing services and
brokers or dealers, provides sufficient appropriate audit evidence,
including:
[ssquf] Focus auditors on the relevance and reliability of pricing
information from third-party sources,\11\ regardless of whether the
pricing information was obtained by the company or the auditor;
---------------------------------------------------------------------------
\11\ The requirements in this area focus primarily on pricing
information from pricing services and brokers or dealers, but also
cover pricing information obtained from other third-party pricing
sources, such as exchanges and publishers of exchange prices.
---------------------------------------------------------------------------
[ssquf] Establish factors that affect relevance and reliability of
pricing information obtained from a pricing service;
[ssquf] Require the auditor to perform additional audit procedures
to evaluate the process used by the pricing service when fair values
are based on transactions of similar financial instruments;
[ssquf] Require the auditor to perform additional procedures on
pricing information obtained from a pricing service when no recent
transactions have occurred for either the financial instrument being
valued or similar financial instruments;
[ssquf] Establish conditions under which less information is needed
about particular methods and inputs of individual pricing services in
circumstances where prices are obtained from multiple pricing services;
and
[ssquf] Establish factors that affect the relevance and reliability
of quotes from brokers or dealers.
[cir] Require the auditor to understand, if applicable, how
unobservable inputs were determined and evaluate the reasonableness of
unobservable inputs.
B. Applicability and Effective Date
The Proposed Rules would be effective for audits of financial
statements for fiscal years ending on or after December 15, 2020. The
PCAOB has proposed application of the Proposed Rules to include audits
of emerging growth companies (``EGCs''),\12\
[[Page 32500]]
as discussed in Section IV below, and audits of brokers and dealers
under Exchange Act Rule 17a-5.
---------------------------------------------------------------------------
\12\ The term ``emerging growth company'' is defined in Section
3(a)(80) of the Exchange Act (15 U.S.C. 78c(a)(80)). See also
Release No. 33-10332 Inflation Adjustments and Other Technical
Amendments Under Titles I and III of the JOBS Act (Mar. 31, 2017),
82 FR 17545 (Apr. 12, 2017).
---------------------------------------------------------------------------
III. Comment Letters
The comment period on the Proposed Rules ended on April 25, 2019.
We received four comment letters from accounting firms, an investor
association, and an issuer organization.\13\ Commenters generally
supported the Proposed Rules.\14\ Most commenters encouraged us to
support the PCAOB's plans to monitor implementation, conduct post-
implementation review, or monitor advancements in technology that may
affect application of the Proposed Rules.\15\ One commenter raised
concerns regarding the effective date due to other financial reporting
activities that need to be implemented and the potential impact on
smaller audit firms.\16\
---------------------------------------------------------------------------
\13\ See Deloitte Letter, PwC Letter, CII Letter, and CCMC
Letter.
\14\ See Deloitte Letter, PwC Letter, CII Letter, and CCMC
Letter.
\15\ See e.g., Deloitte Letter; PwC Letter, and CCMC Letter.
\16\ See CCMC Letter.
---------------------------------------------------------------------------
The Sarbanes-Oxley Act requires us to determine whether the
Proposed Rules are consistent with the requirements of the Sarbanes-
Oxley Act and the securities laws or are necessary or appropriate in
the public interest or for the protection of investors.\17\ In making
this determination, we have considered the comments we received, as
well as the feedback received and modifications made by the PCAOB
throughout its rulemaking process. The discussion below addresses the
significant points raised in the comment letters we received.
---------------------------------------------------------------------------
\17\ See Section 107(b)(3) of the Sarbanes-Oxley Act. The
Sarbanes-Oxley Act also specifies that the provisions of Section
19(b) of the Exchange Act shall govern the proposed rules of the
Board. See Section 107(b)(4) of the Sarbanes-Oxley Act. Section 19
of the Exchange Act covers the registration, responsibilities, and
oversight of self-regulatory organizations. Under the procedures
prescribed by the Sarbanes-Oxley Act and Section 19(b)(2) of the
Exchange Act, the Commission must either approve or disapprove, or
institute proceedings to determine whether the proposed rules of the
Board should be disapproved; and these procedures do not expressly
permit the Commission to amend or supplement the proposed rules of
the Board.
---------------------------------------------------------------------------
A. General Support for the Proposed Rules
Commenters generally supported the Proposed Rules, including
strengthening the audit requirements by applying a more uniform, risk-
based approach to the audit of accounting estimates, including fair
value measurements.\18\ One commenter agreed with the Board's view that
the evolution of financial reporting frameworks has resulted in the
expanded use of estimates and expressed support for a single, more
uniform principles-based standard to address the auditing of accounting
estimates, including fair value measurements, that is aligned with the
Board's risk assessment standards.\19\ Another commenter stressed the
need for the Proposed Rules because accounting estimates, and
particularly fair value measurements and related disclosures, provide
investors with ``more useful information than amounts that would be
reported under amortized cost or other existing alternative accounting
approaches'' and because the PCAOB has observed numerous deficiencies
in auditing accounting estimates.\20\ The commenter also indicated that
the Proposed Rules will strengthen auditor responsibilities, improve
audit quality, and further investor protection.\21\
---------------------------------------------------------------------------
\18\ See Deloitte Letter, CII Letter, PwC Letter, and CCMC
Letter.
\19\ See PwC Letter.
\20\ See CII Letter.
\21\ See id.
---------------------------------------------------------------------------
B. Implementation Efforts
Most commenters noted their desire for ongoing monitoring by the
PCAOB if the Proposed Rules are approved.\22\ Two commenters
specifically supported the PCAOB's plan \23\ to monitor implementation,
including advances in technology and any related effects on the
application of the proposed amendments.\24\ Another commenter
recommended that the Commission, as part of its oversight of the PCAOB,
should request that the PCAOB periodically update the Commission on the
PCAOB's activities for monitoring the implementation of the Proposed
Rules along with the PCAOB's findings and responses to these
activities, including the PCAOB's plans for a post-implementation
review.\25\
---------------------------------------------------------------------------
\22\ See e.g., Deloitte Letter, PwC Letter, and CCMC Letter.
\23\ See PCAOB Adopting Release at 3, 21, and 46.
\24\ See Deloitte Letter and CCMC Letter.
\25\ See CCMC Letter.
---------------------------------------------------------------------------
In the PCAOB Adopting Release, the Board stated it would monitor
implementation to determine whether additional interpretive guidance is
necessary, including monitoring the advancement of technology.\26\ In
addition, the PCAOB has an established program to conduct post-
implementation reviews of its rules and standards to evaluate the
overall effect of significant rulemakings.\27\
---------------------------------------------------------------------------
\26\ See PCAOB Adopting Release at 3, 21, and 46.
\27\ See PCAOB website at https://pcaobus.org/EconomicAndRiskAnalysis/pir/Pages/default.aspx.
---------------------------------------------------------------------------
We acknowledge the importance of monitoring the implementation of
the Proposed Rules. The Commission staff works closely with the PCAOB
as part of our general oversight mandate.\28\ As part of that
oversight, Commission staff will keep itself apprised of the PCAOB's
activities for monitoring the implementation of the Proposed Rules and
update the Commission, as necessary.
---------------------------------------------------------------------------
\28\ See Section 107 of the Sarbanes-Oxley Act.
---------------------------------------------------------------------------
C. The Effective Date of the Proposed Rules
As noted above, the Proposed Rules would be effective for audits of
financial statements for fiscal years ending on or after December 15,
2020. One commenter expressed concerns related to the effective date as
a result of other financial reporting activities, including upcoming
effective dates of certain Financial Accounting Standards Board
(``FASB'') projects, other PCAOB standards, and a view that smaller
audit firms may be disproportionately impacted.\29\ The commenter
suggested a phased implementation of the Proposed Rules. Specifically,
the commenter recommended, as an example, that the Commission allow
triennially inspected audit firms \30\ to elect an effective date of
audits for fiscal years ending on or after December 15, 2021, while
also permitting earlier implementation since smaller audit firms may be
disproportionally impacted.\31\ The commenter further expressed the
belief that a phased implementation may facilitate post-implementation
reviews of the Proposed Rules.\32\
---------------------------------------------------------------------------
\29\ See CCMC Letter.
\30\ ``Triennially inspected audit firms'' are audit firms that,
in accordance with PCAOB Rule 4003(b), are required to be inspected
at least once in every three calendar years if, during that time,
the audit firm issued an audit report for at least one issuer but no
more than 100 issuers. An audit firm is required to be inspected on
an annual basis if, during the prior calendar year, it issued audit
reports for more than 100 issuers (``annually inspected audit
firms). See PCAOB Rule 4003, Frequency of Inspections, available at
https://pcaobus.org/Rules/Pages/Section_4.aspx.
\31\ See CCMC Letter.
\32\ See id.
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In the PCAOB Adopting Release, the Board recognized the effort
required for other implementation efforts, but stated the effective
date determined by the Board was designed to provide auditors with a
reasonable period of time to implement the Proposed Rules, without
unduly delaying the intended benefits of the Proposed Rules.\33\
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\33\ See PCAOB Adopting Release at 58.
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[[Page 32501]]
We believe the Board has appropriately balanced the amount of time
needed by audit firms to implement the Proposed Rules with the
objectives of, and benefits obtained from, the Proposed Rules. In this
regard, we note that, aside from the commenter who suggested that the
Commission consider a phased implementation approach, we received no
other comments from audit firms, including triennially inspected audit
firms, requesting a phased implementation.
In addition, there could be practical implications of allowing for
a phased implementation approach related to an auditor performance
standard.\34\ For example, audits of multi-national companies often
involve the work of more than one auditor conducted in accordance with
AS 1205, Part of the Audit Performed by Other Independent Auditors
(``AS 1205''), wherein a principal auditor may provide instructions to
the other auditors. Under a phased implementation approach, an annually
inspected audit firm serving as the principal auditor may instruct a
triennially inspected audit firm to follow the Proposed Rules before
the triennially inspected audit firm has implemented the Proposed
Rules. This approach could create challenges for the triennially
inspected audit firm as it would be instructed to implement the
Proposed Rules on individual engagements even though it may not have
updated its methodologies or trained its professionals on the Proposed
Rules, which could have a negative effect on audit quality.
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\34\ The CCMC Letter references differences in considering a
phased implementation approach for an auditor performance standard
as compared to an auditor reporting standard, which is why it did
not suggest a phased implementation approach based on issuer size
similar to the auditor communicating critical audit matters in
accordance with AS 3101, The Auditor's Report on an Audit of
Financial Statements When the Auditor Expresses an Unqualified
Opinion.
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Further, within the Global Networks of accounting firms,\35\ many
of the affiliated accounting firms outside the United States are
triennially inspected audit firms. Many of these affiliated firms
participate in the multi-national audits discussed above. Our
understanding is that these arrangements make it more practical for the
Global Network Firms to adopt the Proposed Rules simultaneously across
their respective networks. As a result, the Global Network Firms may
not delay implementation for the triennially inspected audit firms
within their network.
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\35\ See PCAOB website for a listing of ``Global Networks'' and
further discussion, available at https://pcaobus.org/Registration/Firms/Pages/GlobalNetworkFirms.aspx.
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Based on these considerations, we do not believe a phased
implementation approach for the Proposed Rules, including providing
triennially inspected audit firms with the option to delay
implementation, is necessary or appropriate in the public interest or
for the protection of investors.
IV. Effect on Emerging Growth Companies
In the PCAOB Adopting Release, the Board recommended that the
Commission determine that the Proposed Rules apply to audits of
EGCs.\36\ Section 103(a)(3)(C) of the Sarbanes-Oxley Act, as amended by
Section 104 of the Jumpstart Our Business Startups Act of 2012,
requires that any rules of the Board ``requiring mandatory audit firm
rotation or a supplement to the auditor's report in which the auditor
would be required to provide additional information about the audit and
the financial statements of the issuer (auditor discussion and
analysis)'' shall not apply to an audit of an EGC. The provisions of
the Proposed Rules do not fall into these categories.
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\36\ See PCAOB Adopting Release at 56.
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Section 103(a)(3)(C) further provides that ``[a]ny additional
rules'' adopted by the PCAOB after April 5, 2012, do not apply to
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.'' The Proposed Rules fall within this category. Having
considered those statutory factors, we find that applying the Proposed
Rules to the audits of EGCs is necessary or appropriate in the public
interest.
The PCAOB provided information identified by the Board's staff from
public sources, including data and analysis of EGCs that sets forth its
views as to why it believes the Proposed Rules should apply to audits
of EGCs. To inform consideration of the application of auditing
standards to audits of EGCs, the PCAOB staff has also published a white
paper that provides general information about characteristics of EGCs
(``EGC White Paper'').\37\ In addition, the Board sought public input
on the application of the Proposed Rules to the audits of EGCs.\38\
Commenters who addressed this question supported applying the proposed
requirements to audits of EGCs, citing benefits to the users of EGC
financial statements and the risk of confusion and inconsistency if
different methodologies were required for EGC and non-EGC audits.\39\
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\37\ See Characteristics of Emerging Growth Companies as of
November 15, 2017 (Oct. 11, 2018), available at https://pcaobus.org/EconomicAndRiskAnalysis/Documents/White-Paper-Characteristics-Emerging-Growth-Companies-November-2017.pdf.
\38\ See PCAOB Proposal; see also, comment letters provided to
the PCAOB related to this matter, available at https://pcaobus.org/Rulemaking/Pages/docket-043-comments-auditing-accounting-estimates-fair-value-measurements.aspx.
\39\ See PCAOB Adopting Release at 53.
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In the PCAOB Adopting Release, the Board expressed its belief that
accounting estimates are common in the financial statements of many
EGCs.\40\ The Board also noted that data from 2012-2016 reported
inspection findings for audits of EGCs indicated a relatively high
number of deficiencies (i.e., 45%-60% of Part I findings on audits of
EGCs) related to the accounting estimates standard and the fair value
standard.\41\ The PCAOB further observed that ``[s]ince EGCs tend to be
smaller public companies, their accounting estimates may be less likely
to involve complex processes, although those estimates may constitute
some of the largest accounts in EGCs' financial statements.'' \42\ The
Board noted that the Proposed Rules are ``risk-based and scalable for
firms of all sizes,'' and expressed the view that ``any related cost
increases are justified by expected improvements in audit quality.''
\43\
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\40\ See id at 53. The five Standard Industrial Classification
(SIC) codes with the highest total assets as a percentage of the
total assets for the EGC population are: (i) Real estate investment
trusts; (ii) state commercial banks; (iii) national commercial
banks; (iv) crude petroleum and natural gas; and (v) pharmaceutical
preparations. See EGC White Paper at 14-15. In the PCAOB Adopting
Release, the Board noted that financial statements of companies
operating in these industries would likely have accounting estimates
that include, for example, asset impairments and allowances for loan
losses.
\41\ See PCAOB Adopting Release at 55-56.
\42\ See id at 54.
\43\ See id at 45.
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Additionally, the PCAOB Adopting Release noted that ``any new PCAOB
standards and amendments to existing standards determined not to apply
to the audits of EGCs would require auditors to address the differing
requirements within their methodologies, which would create the
potential for confusion.'' \44\ In the EGC White Paper, the PCAOB staff
stated that ``[a]pproximately 99% of EGC filers were audited by
accounting firms that also audit issuers that are not EGC filers.''
\45\
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\44\ See id at 53.
\45\ See EGC White Paper at 20.
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The PCAOB Adopting Release also noted EGCs generally tend to have
[[Page 32502]]
shorter financial reporting histories and as a result, there is less
information available to investors regarding such companies relative to
the broader population of public companies.\46\ As such, the Proposed
Rules, which are intended to enhance audit quality, could increase the
credibility of financial statement disclosures by EGCs.\47\
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\46\ See PCAOB Adopting Release at 54.
\47\ See id at 54.
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We agree with the Board's analysis. We believe the Proposed Rules
will benefit EGCs at least as much as non-EGCs, in part, because of the
prevalence of accounting estimates in financial statements of many
EGCs. Specifically, we agree with the Board applying the Proposed Rules
to EGCs would be consistent with the objective of the Proposed Rules to
provide a more uniform, risk-based approach to auditing accounting
estimates but also provide a scalable approach for firms of all sizes.
Additionally, we also agree with the Board that Proposed Rules could
increase the credibility of the financial statement disclosures by
EGCs.
As such, after considering the protection of investors and whether
the action will promote efficiency, competition, and capital formation,
we believe there is a sufficient basis to determine that applying the
Proposed Rules to the audits of EGCs is necessary or appropriate in the
public interest.
V. Conclusion
The Commission has carefully reviewed and considered the Proposed
Rules, the information submitted therewith by the PCAOB, and the
comment letters received. 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 the audits of EGCs 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 Sarbanes-
Oxley Act and Section 19(b)(2) of the Exchange Act, that the Proposed
Rules (File No. PCAOB-2019-005) be and hereby are approved.
By the Commission.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-14411 Filed 7-5-19; 8:45 am]
BILLING CODE 8011-01-P
