Public Company Accounting Oversight Board; Order Granting Approval of Amendments Related to Aspects of Designing and Performing Audit Procedures That Involve Technology-Assisted Analysis of Information in Electronic Form, 68219-68223 [2024-18986]
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Amendments to the audits of EGCs is
necessary or appropriate in the public
interest, after considering the protection
of investors and whether the
Amendments will promote efficiency,
competition, and capital formation.
Overall, the Amendments are expected
to enhance audit quality and contribute
to an increase in the credibility of
financial reporting for all issuers,
including EGCs, whose financial
statements are audited by a registered
public accounting firm. We also note the
secondary benefits that flow from higher
audit quality, including improved
efficiency of capital allocation and
lower cost of capital and enhanced
capital formation with respect to EGCs
and other issuers.
The PCAOB explained how associated
costs may be relatively higher for EGC
audits in large part due to the
amendment accelerating the
documentation completion date.36 We
acknowledge the potential for higher
costs, but agree with the PCAOB’s
assessment that these costs may be
mitigated based on certain
characteristics of EGCs. For example, as
the PCAOB observed in its analysis, to
the extent EGCs are smaller than nonEGCs, EGC audits may be less complex,
which potentially facilitates a more
expeditious assembly of the final
workpapers.37 Additionally, to the
extent that EGCs are audited by firms
that issued audit reports with respect to
100 or fewer issuers during the calendar
year ending December 31, 2024, the
extended effective date of the
amendment to accelerate the
documentation completion date will
allow those firms more time to
implement systems, processes, and
procedures to meet the accelerated
documentation completion date.38
We also concur with the PCAOB’s
conclusion that while the costs to
update references within firm
methodologies and related guidance for
the amendments made to the general
principles and responsibilities of the
auditor could also be relatively higher
for firms which are more likely to serve
as EGC auditors, in general, the
alternative of not applying the same
standard and related amendments to
audits of EGCs and non-EGCs creates
the potential for confusion, or even
potential additional costs and
inefficiencies to maintain separate
methodologies.39
As the PCAOB explained in its
analysis, the amendment to accelerate
36 See
Adopting Release, supra note 6 at 94.
37 Id.
38 Id.
39 Id.
at 95.
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the documentation completion date
could improve efficiency and capital
formation for EGCs to the extent that the
amendment reduces uncertainty about
the reliability of an EGC’s financial
statements via enhanced audit quality.40
Investors who are uncertain about the
reliability of an EGC’s financial
statements may require a larger risk
premium that reduces the efficient
allocation of capital or increases the cost
of capital. Additionally, while the
Amendments could impact the ability of
EGCs to compete if the indirect costs to
audited companies disproportionately
impact EGCs relative to their
competitors, as the costs associated with
the Amendments are expected to be
relatively modest, any impact on
competition is likely to be relatively
small.
Accordingly, 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
Amendments to the audits of EGCs is
necessary or appropriate in the public
interest.
V. Conclusion
The Commission has reviewed and
considered the Amendments, the
information submitted therewith by the
PCAOB, and the comment letters
received, and the recommendation of
the Commission’s staff. The
Commission concludes that the
determinations made by the PCAOB as
described in the Adopting Release are
reasonable. The Amendments will
reaffirm and modernize the
foundational audit standards, clarify
engagement partner responsibilities, and
accelerate the documentation
completion date, which should improve
audit quality. In particular, the
Amendments make the following
important changes, among others, to the
existing standards, which will advance
the Board’s investor protection mandate
under SOX: reaffirm the auditor’s
fundamental obligation to protect
investors; 41 extend the requirement of
due professional care to other areas of
audit practice, such as public reporting
and documentation, which will help to
ensure that auditors fulfill their
40 Id.
41 AS 1000 is consistent with United States v.
Arthur Young & Co., 465 U.S. 805, 818 (1984)
(‘‘[t]he independent public accountant performing
this special function [auditing] owes ultimate
allegiance to the corporation’s creditors and
stockholders, as well as to investment public. This
‘public watchdog’ function demands that the
accountant maintain total independence from the
client at all times and requires complete fidelity to
the public trust.’’).
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professional responsibilities with
appropriate rigor and diligence; clarify
an auditor’s responsibilities by focusing
on affirmative responsibilities rather
than discussing the limitations of an
audit and the limits of an auditor’s
responsibility; and ensure consistency
of the PCAOB standards with the
requirements of Regulation S–X Rule 4–
01(a),42 which states that compliance
with the applicable financial reporting
framework is ‘‘a minimum requirement
to which shall be added such further
material information as is necessary to
make the required statements, in the
light of the circumstances under which
they are made, not misleading.’’
Therefore, in connection with the
PCAOB’s filing and the Commission’s
review,
A. The Commission finds that the
Amendments are consistent with the
requirements of Title I of SOX and the
rules and regulations thereunder 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 Amendments
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 SOX and Section 19(b)(2)
of the Exchange Act, that the
Amendments (File No. PCAOB–2024–
01) be and hereby are approved.
By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024–18985 Filed 8–22–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–100774; File No. PCAOB–
2024–03]
Public Company Accounting Oversight
Board; Order Granting Approval of
Amendments Related to Aspects of
Designing and Performing Audit
Procedures That Involve TechnologyAssisted Analysis of Information in
Electronic Form
August 20, 2024.
I. Introduction
On June 20, 2024, the Public
Company Accounting Oversight Board
(the ‘‘Board’’ or the ‘‘PCAOB’’) filed
42 See Rule 4–01 under Regulation S–X, 17 CFR
210.4–01(a).
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Federal Register / Vol. 89, No. 164 / Friday, August 23, 2024 / Notices
with the Securities and Exchange
Commission (the ‘‘Commission’’),
pursuant to section 107(b) 1 of the
Sarbanes-Oxley Act of 2002 (‘‘SOX’’)
and section 19(b) 2 of the Securities
Exchange Act of 1934 (the ‘‘Exchange
Act’’), a proposal to adopt amendments
to auditing standard (‘‘AS’’) 1105, Audit
Evidence, and AS 2301, The Auditor’s
Responses to the Risks of Material
Misstatement, and conforming
amendments to AS 2501, Auditing
Accounting Estimates, Including Fair
Value Measurements (collectively, the
‘‘Amendments’’). The Amendments
were published for comment in the
Federal Register on July 2, 2024.3 We
received six (6) comment letters in
response to the Notice of Filing of
Proposed Rules.4 This order approves
the Amendments, which we find to be
consistent with the requirements of
Title I of SOX and the rules and
regulations issued thereunder and
necessary or appropriate in the public
interest or for the protection of
investors.
II. Description of the Amendments
On June 12, 2024, the Board
unanimously adopted the
Amendments.5 The Amendments are
intended to more specifically address
certain aspects of designing and
performing audit procedures that
involve analyzing information in
electronic form with technology-based
tools (i.e., technology-assisted analysis).
The Amendments should promote
investor protection by enhancing the
quality of audits. The requirements
1 15
U.S.C. 7217(b).
U.S.C. 78s(b).
3 See Public Company Accounting Oversight
Board; Notice of Filing of Proposed Rules on
Amendments Related to Aspects of Designing and
Performing Audit Procedures that Involve
Technology-Assisted Analysis of Information in
Electronic Form, Release No. 34–100430 (June 26,
2024) [89 FR 54922 (July 2, 2024)] (‘‘Notice of Filing
of Proposed Rules’’), available at https://
www.sec.gov/files/rules/pcaob/2024/34-100276.pdf.
4 The Commission received comment letters from
Deloitte & Touche LLP (July 18, 2024) (‘‘Deloitte’’);
KPMG LLP (July 23, 2024) (‘‘KPMG’’);
PricewaterhouseCoopers LLP (July 23, 2024)
(‘‘PWC’’); RSM US LLP (July 23, 2024) (‘‘RSM’’);
Center for Audit Quality (July 23, 2024) (‘‘CAQ’’);
and Ernst & Young LLP (Aug. 12, 2024) (‘‘EY’’).
Comment letters received by the Commission on the
Amendments are available on the Commission’s
website at https://www.sec.gov/comments/pcaob2024-003/pcaob2024003.htm.
5 See Amendments Related to Aspects of
Designing and Performing Audit Procedures that
Involve Technology-Assisted Analysis of
Information in Electronic Form, PCAOB Release No.
2024–007 (June 12, 2024) (‘‘Adopting Release’’),
available at https://assets.pcaobus.org/pcaob-dev/
docs/default-source/rulemaking/docket-052/2024007-adoptingrelease.pdf?sfvrsn=28f44e9e_2.
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contained within the Amendments are
discussed further below.
A. Changes to PCAOB Standards
The Amendments are principlesbased in how they further specify and
clarify certain existing auditor
responsibilities and are therefore
intended to be adaptable to the evolving
nature of the use of technology in the
audit. In particular, the Amendments:
• Clarify the description of what
constitutes a test of details; 6
• Specify auditor responsibilities
when identifying items that require
further investigation when performing
tests of details; 7
• Specify that if the auditor uses an
audit procedure for more than one
purpose (e.g., risk assessment, test of
controls, or substantive procedure), the
auditor should achieve each objective of
the procedure; 8
• Specify auditor responsibilities for
evaluating the reliability of external
information provided by the company
under audit; 9
• Emphasize the importance of
controls over information technology; 10
• Emphasize the importance of
appropriate disaggregation or detail of
information to the relevance of audit
evidence; 11 and
• Make conforming changes to AS
2501.12
B. Applicability and Effective Date
The Amendments will be effective for
audits of financial statements for fiscal
years beginning on or after December
15, 2025. The PCAOB has proposed
application of the Amendments to
include audits of emerging growth
companies (‘‘EGCs’’),13 as discussed in
section IV below.
III. Comment Letters
As noted above, to date the
Commission has received six (6)
comment letters in response to the
Notice of Filing of Proposed Rules.14
Commenters generally supported the
Board’s efforts to modernize the
requirements related to certain aspects
6 See
AS 2301.48.
AS 2301.10, .49 and .50.
8 See AS 1105.14.
9 See AS 1105.10A.
10 See AS 1105.08, .10, and .15.
11 See AS 1105.07.
12 See AS 2501.12 and footnote 14 to paragraph
.13.
13 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 Inflation Adjustments
under Titles I and III of the JOBS Act, Release No.
33–11098 (Sept. 9, 2022) [87 FR 57394 (Sept. 20,
2022)], available at https://www.sec.gov/files/rules/
final/2022/33-11098.pdf.
14 See supra note 4.
7 See
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of designing and performing audit
procedures that involve technologyassisted analysis to support the
objective of improving audit quality. A
number of commenters, while generally
supportive of the Amendments, sought
clarification of specific issues raised,
which are detailed below.15
A number of commenters identified
the requirements in new paragraph
.10A(b) of AS 1105 as requiring further
clarity or modification.16 Commenters
stated their view that the requirements
could be read as not allowing the
auditor to apply a risk-based approach,
but instead requiring the auditor, in all
circumstances, to either test each piece
of external information obtained from
the company to determine if it was
modified before it was provided to the
auditor, or test controls over receiving,
maintaining, and, if applicable,
processing the information.17
Commenters stated that this reading of
the requirements appeared to be in
conflict with language included in the
Adopting Release that indicated that a
risk-based approach could be taken 18 as
well as with AS 1105.09, which states
that the auditor is not expected to be an
expert in documentation
authentication.19 Commenters also
stated that if the requirements were not
risk-based, they would likely result in
significant additional costs, without a
commensurate benefit, that have not
been accounted for in the Board’s
economic analysis.20 Commenters also
stated that, in some cases, an entity may
not have identified the risk of
modification as one that represents a
reasonable possibility of a material
misstatement, and thus such controls
would not likely be currently part of the
entity’s internal control over financial
reporting.21 Some of these commenters
stated that, in such circumstances, they
15 See letters from KPMG; PWC; RSM; CAQ; and
EY. PWC expressed support for the overall goal of
the rulemaking but indicated that it could not
support the Amendments ‘‘without further
amendment or contemporaneous interpretive
guidance’’ to address its concerns.
16 See letters from KPMG; PWC; RSM; CAQ; and
EY.
17 See, e.g., letter from PWC.
18 See letters from PWC; RSM; and CAQ.
19 See letters from KPMG; PWC; CAQ; and EY
(Expressing its concerns in the context of the
interaction between AS 1105.10A(b) and the
PCAOB’s proposed paragraph AS 2301.40A, which
is part of the Substantive Analytical Procedures
Proposal. Infra note 25. We believe EY’s concern
with respect to the Amendments is addressed by
the risk-based considerations discussed herein, and,
with respect to concerns about the Substantive
Analytical Procedures Proposal currently under
consideration by the Board, we intend to encourage
the Board to consider the comments in that
proposal.).
20 See letters from PWC and EY.
21 See letters from KPMG; PWC; CAQ; and EY.
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believe the Amendments may require
the company to establish controls solely
to satisfy the requirements of its
auditors.22 Commenters raised concerns
about auditors’ ability to compare
electronic information to source records
as many companies do not have
physical copies or original paper
records because the information is
obtained and maintained only in
electronic form.23 According to these
commenters, this potential limitation on
the ability to compare electronic
information to source records would
result in the auditor being required to
test management’s controls over
receiving, maintaining, and processing
the electronic information, which would
not be possible if the controls do not
exist or were not operating effectively.24
All commenters stated that either
interpretive or other implementation
guidance was warranted to facilitate
implementation of the Amendments.
One commenter recommended the
Commission delay the effective date of
the Amendments to align with the
effective date of the recently proposed
amendments to AS 2305.25
As discussed above, a number of
commenters were of the view that new
paragraph AS1105.10A(b) requires the
auditor, in all circumstances, to test
whether each piece of information
provided to the auditor by the company,
which the company received from
external sources, has been modified by
the company. Although we understand
the concerns raised by such
commenters, we believe these concerns
may be misplaced, particularly in light
of the guidance provided by the Board
in the Adopting Release. For example,
in the Adopting Release, the Board
stated that ‘‘[it was] not prescribing the
nature, timing, or extent of the auditor’s
procedures to evaluate the reliability of
the external information.’’ 26 Instead, as
the Board explained, ‘‘[a]n auditor
would design the procedures
considering the wide variety of types of
external information received by
companies and differences in the
processes for receiving, maintaining
and, where applicable, processing such
22 See
23 See
letters from KPMG; PWC; and CAQ.
letters from KPMG; PWC; RSM; CAQ; and
EY.
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24 Id.
25 See letter from KPMG. See Proposed Auditing
Standard—Designing and Performing Substantive
Analytical Procedures and Amendments to Other
PCAOB Standards, PCAOB Release No. 2024–005
(June 12, 2024) (‘‘Substantive Analytical Procedures
Proposal’’), available at https://assets.pcaobus.org/
pcaob-dev/docs/default-source/rulemaking/docket056/2024-006-as-2305proposal.pdf?sfvrsn=d174cacf_2.
26 Adopting Release, supra note 5 at 26–32.
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information.’’ 27 Therefore, our
understanding of the Amendments,
when read in the overall context of the
PCAOB auditing standards, is that they
do not preclude a risk-based approach
to testing external information.
Nevertheless, given the concerns raised
by commenters, we encourage the
PCAOB to provide further
implementation guidance on this point.
Given our understanding of the riskbased nature of the standards, we
believe the commenters’ concern that
the costs of this requirement were not
appropriately considered in the Board’s
economic analysis reflects a
misunderstanding of the nature of the
requirement and that the Board
adequately considered the costs related
to the Amendments.28
Regarding commenter concerns about
the availability of source records, we do
not believe that having source records
only available in electronic form would
inhibit procedures to compare
information to source records. Source
records are not defined in the PCAOB’s
auditing standards and may exist in
many forms, including in electronic
form. We note that, when considering
the reliability of such a record, AS
1105.10A and AS 1105.09 require the
auditor to consider, among other things,
the means by which it was obtained,
including any processing by the
company and whether there are
indications that it may not be authentic.
We also do not believe that the
Amendments would require
management to establish new controls
solely for purposes of satisfying the
requirements of the auditor as raised by
commenters. The PCAOB addressed this
concern in the Adopting Release by
explicitly stating that the Amendments
do not require testing of controls to
establish reliability.29
One commenter stated that aspects of
revised AS 2301.48 ‘‘impact auditors’
ability to consistently determine
whether a particular audit procedure
qualifies as a test of details.’’ 30 This
comment appears to be based on a
misunderstanding of the amendment.
AS 2301.48 provides examples of items
in an account or disclosure for which
audit procedures are performed, but
does not specify at what level audit
procedures should be applied. In the
Adopting Release, the Board was
explicit that the Amendments are not
intended to define ‘‘items included in
27 Id. See also AS 2110 Identifying and Assessing
Risks of Material Misstatement; AS 1105.08; AS
1105.09; and new AS 1105.10A(a).
28 See letters from PWC and EY.
29 See Adopting Release, supra note 5 at 30.
30 See letter from KPMG.
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an account or disclosure’’ because a
definition is impractical, and the Board
explained that the auditor will
determine the level of disaggregation or
detail based on the facts and
circumstances of the individual audit
engagement.31 We believe the approach
to allow the auditor to determine what
level of disaggregation is most
appropriate in light of the specific
circumstances of the engagement is
appropriate.
Regarding the comment
recommending the Commission delay
the effective date to align with the
Substantive Analytical Procedures
Proposal, the effective date was
addressed by the Board in the Adopting
Release, and the Board specifically
highlighted that they considered ‘‘the
effective dates for other Board
rulemaking projects.’’ 32 We agree with
the Board’s assessment and support the
conclusion reached.
We acknowledge commenters’
concerns about the need for
implementation guidance and we note
that the Board has a historical practice
of performing a post-implementation
review 33 as well as issuing appropriate
implementation guidance for new
standards and rule amendments when
needed.34 We encourage the Board to do
the same with respect to the
Amendments. We also acknowledge the
importance of monitoring the
implementation of the Amendments and
the Commission staff works closely with
the PCAOB as part of our general
oversight mandate.35 As part of that
oversight, Commission staff will keep
itself apprised of the PCAOB’s activities
for monitoring the implementation of
the Amendments and update the
Commission, as necessary.
IV. Effect on Emerging Growth
Companies
In the Notice of Filing of Proposed
Rules, the Board recommended that the
Commission determine that the
Amendments apply to audits of EGCs.36
31 See
Adopting Release, supra note 5 at 18.
Adopting Release, supra note 5 at 61.
33 See, e.g., Interim Analysis Report—Evidence of
the Initial Impact of New Requirements for Auditing
Accounting Estimates and the Auditor’s Use of the
Work of Specialists, Release No. 2022–008 (Dec. 8,
2022), available at https://assets.pcaobus.org/
pcaob-dev/docs/default-source/
economicandriskanalysis/pir/documents/estimatesspecialists-interim-analysisreport.pdf?sfvrsn=e1b0eb15_4.
34 See, e.g., Staff Guidance—Auditing Accounting
Estimates (Aug. 22, 2019), available at https://
assets.pcaobus.org/pcaob-dev/docs/default-source/
standards/documents/staff-guidance-auditingaccounting-estimates.pdf?sfvrsn=80016a49_0.
35 See section 107 of SOX.
36 See Notice of Filing of Proposed Rules.
32 See
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Section 103(a)(3)(C) of SOX 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
Amendments do not fall into these
categories.
Section 103(a)(3)(C) further provides
that ‘‘[a]ny additional rules’’ adopted by
the PCAOB 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 Amendments fall
within this category. Having considered
those statutory factors, we find that
applying the Amendments to the audits
of EGCs is necessary or appropriate in
the public interest.
With respect to the Commission’s
determination of whether the
Amendments will apply to audits of
EGCs, the PCAOB provided information,
including data and analysis of EGCs that
sets forth its views as to why it believes
the Amendments should apply to audits
of EGCs.37 In addition, the Board sought
public input on the application of the
Amendments to the audits of EGCs.
Commenters who responded to the
Board agreed the Amendments should
apply to the audits of EGCs.38
The Board indicated in its assessment
that for all audits performed pursuant to
PCAOB standards, including audits of
EGCs, the Amendments may lead to
higher audit quality, more efficient
audits, lower audit fees, or some
combination of the three.39 These
benefits may apply both to audit
engagements where auditors currently
incorporate technology-assisted analysis
into their audit approach and
engagements where auditors have been
previously reluctant to use technologyassisted analysis because of the risk of
noncompliance.40 As the Board noted in
its assessment, the use of technologyassisted analysis appears to be less
prevalent among U.S. non-affiliated
firms (‘‘NAFs’’) than U.S. global
network firms (‘‘GNFs’’).41 Therefore,
37 See
Adopting Release, supra note 5 at 58–61.
38 Id.
39 Id.
at 45.
at 46–47.
41 See Adopting Release, supra note 5 at 36. The
U.S. GNFs are BDO USA P.C., Deloitte & Touche
LLP, Ernst & Young LLP, Grant Thornton LLP,
KPMG LLP, and PricewaterhouseCoopers LLP. The
40 Id.
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since EGCs are more likely than nonEGCs to be audited by NAFs,42 and to
the extent NAFs are not more likely
than other firms to newly implement
technology-assisted analysis in response
to the Amendments, the impacts of the
Amendments on EGC audits may be less
than on non-EGC audits.43 Nevertheless,
the Board stated that it expects the
Amendments to enhance the efficiency
and quality of EGC audits that
implement technology-assisted analysis
and contribute to an increase in the
credibility of financial reporting by
those EGCs.44 An improvement in EGCs’
financial reporting quality, may also
improve the efficiency of capital
allocation and enhance capital
formation.45
The Board noted that the
Amendments could impact the ability of
EGCs to compete if the costs of the
Amendments to audited companies (as
a result of any increase in costs to their
auditors) disproportionately impact
EGCs relative to their competitors.46
However, as the direct costs associated
with the Amendments are expected to
be relatively modest, the Board
concluded that the impact of the
Amendments on competition, if any, is
likewise expected to be limited.47
We agree with the Board’s findings
and further emphasize the benefits of
the Amendments for EGCs. The
Amendments may promote higher audit
quality for EGC audits employing
technology-assisted analysis, and thus a
higher reliability of financial reporting
for the affected EGCs. An increased
reliability of financial reporting may
enhance investor protection and lead to
an improved efficiency of capital
allocation and enhanced capital
formation with respect to EGCs. These
benefits may be moderated relative to
the effects on other issuers, because, for
example, the auditors of EGCs are
currently less likely to employ
technology-assisted analysis. However,
any potential costs passed down to
EGCs may be similarly moderated.
We note that the Amendments could
also impact competition for capital or in
product markets in which EGCs
U.S. NAF firms include registered public
accounting firms that are not members of global
network firms.
42 See Adopting Release, supra note 5 at 60.
PCAOB staff analysis indicates that, compared to
exchange-listed non-EGCs, exchange-listed EGCs
are approximately 2.6 times more likely to be
audited by an NAF and approximately 1.3 times
more likely to be audited by a triennially inspected
firm.
43 See Adopting Release, supra note 5 at 60.
44 Id.
45 Id.
46 Id. at 54.
47 Id. at 60.
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compete. For example, if non-EGCs are
more likely to be the subject of audits
using technology-assisted analysis,
these issuers may experience greater
improvements in the reliability of their
financial reporting and thereby attract
more capital than EGCs. Alternatively, if
any incremental costs or savings passed
down to audited companies by auditors
as a result of the Amendments are
disproportionately directed to either
EGCs or their competitors, competition
may be affected. However, given that the
direct benefits and costs of the rule
(including effects on audit quality and
audit fees) are expected to be relatively
modest, any resulting impact on
competition is likely to be relatively
limited. While there may be additional
effects if the Amendments result in a
larger number of auditors newly
incorporating or expanding the use of
technology-assisted analysis in their
audits, and it is difficult to predict
which auditors and which engagements
would most likely be the subject of such
changes, it is not clear that such effects
would disproportionately favor the
competitors of EGCs. Further, many of
the potential effects on competition are
unlikely to be mitigated by applying the
Amendments only to audits of nonEGCs.
Accordingly, 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
Amendments to the audits of EGCs is
necessary or appropriate in the public
interest.
V. Conclusion
The Commission has reviewed and
considered the Amendments, the
information submitted therewith by the
PCAOB, the comment letters received,
and the recommendation of the
Commission’s staff. The Commission
concludes that the determinations made
by the PCAOB as described in the
Adopting Release are reasonable. In
particular, the Amendments address
challenges with the rapidly evolving use
of technology-based analytical tools that
may not be sufficiently addressed under
current professional audit standards.
Addressing these challenges will
advance the Board’s investor protection
mandate under SOX given that (1) the
use of technology-based analytical tools
is substantially increasing and is
expected to continue to do so; (2)
technology-based analytical tools have
the potential to enhance the
effectiveness of audit procedures by, for
example, increasing the amount of data
an auditor is able to analyze or
E:\FR\FM\23AUN1.SGM
23AUN1
Federal Register / Vol. 89, No. 164 / Friday, August 23, 2024 / Notices
otherwise validate, allowing the auditor
to perform more robust analysis or
analyze more complex relationships, or
by allowing the auditor to focus their
procedures on the transactions with the
most risk; and (3) PCAOB research
indicates that some auditors may be
reluctant to implement new
technologies due to perceived regulatory
uncertainty, which can be addressed
through the clarity provided in the
Amendments.48 Therefore, in
connection with the PCAOB’s filing and
the Commission’s review,
A. The Commission finds that the
Amendments are consistent with the
requirements of Title I of SOX and the
rules and regulations thereunder 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 Amendments
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 SOX and section 19(b)(2)
of the Exchange Act, that the
Amendments (File No. PCAOB–2024–
03) be and hereby are approved.
By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024–18986 Filed 8–22–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–100772; File No. PCAOB–
2024–04]
Public Company Accounting Oversight
Board; Order Granting Approval of
Amendment to PCAOB Rule 3502
Governing Contributory Liability
August 20, 2024.
khammond on DSKJM1Z7X2PROD with NOTICES
I. Introduction
On June 20, 2024, the Public
Company Accounting Oversight Board
(the ‘‘Board’’ or the ‘‘PCAOB’’) filed
with the Securities and Exchange
48 See Adopting Release, supra note 5 at 12. (‘‘The
[Data and Technology] research [project] further
suggests that clarifications to PCAOB standards
could more specifically address certain aspects of
designing and performing audit procedures that
involve technology-assisted analysis. The Board’s
Investor Advisory Group has also noted that
auditors’ use of technology-assisted analysis is an
area of concern due to auditors’ potential
overreliance on company-produced information,
and that addressing the use of such analysis in the
standards could be beneficial.’’).
VerDate Sep<11>2014
17:23 Aug 22, 2024
Jkt 262001
Commission (the ‘‘Commission’’),
pursuant to section 107(b) 1 of the
Sarbanes-Oxley Act of 2002 (‘‘SOX’’)
and section 19(b) 2 of the Securities
Exchange Act of 1934 (the ‘‘Exchange
Act’’), a proposal to adopt an
amendment to PCAOB Rule 3502,
Responsibility Not to Knowingly or
Recklessly Contribute to Violations, the
Board’s ethics rule governing the
liability of associated persons who
directly and substantially contribute to
a registered public accounting firm’s
primary violation (the ‘‘Amendment’’).
The Amendment was published for
comment in the Federal Register on July
2, 2024.3 The Commission received one
comment letter in response to the Notice
of Filing of Proposed Rules.4 This order
approves the Amendment, which we
find to be consistent with the
requirements of Title I of SOX and the
rules and regulations thereunder and is
necessary or appropriate in the public
interest or for the protection of
investors.
II. Description of the Amendment
Existing PCAOB Rule 3502 codifies
associated persons’ ethical obligation
not to contribute to a registered firm’s
violations of the laws, rules, and
standards that the Board is charged with
enforcing.5 The rule provides grounds
for secondary liability when an
associated person of a registered firm
acts at least recklessly to directly and
substantially contribute to such a
violation. On June 12, 2024, the Board
unanimously adopted the Amendment,6
which changes from recklessness to
negligence the liability standard for
actionable contributory conduct by
associated persons under Rule 3502.
Whereas negligence is ‘‘the failure to
1 15
U.S.C. 7217(b).
U.S.C. 78s(b).
3 See Public Company Accounting Oversight
Board; Notice of Filing of Proposed Rules on
Amendment to PCAOB Rule 3502 Governing
Contributory Liability, Release No. 34–100429 (June
26, 2024 [89 FR 54895 (July 2, 2024)] (‘‘Notice of
Filing of Proposed Rules’’), available at https://
www.sec.gov/files/rules/pcaob/2024/34-100429.pdf.
4 The Commission received a comment letter from
the Pennsylvania Institute of Certified Public
Accountants (July 22, 2024). This comment letter is
available on the Commission’s website at https://
www.sec.gov/comments/pcaob-2024-04/pcaob
202404.htm.
5 Section 103(a) of SOX directs the Board, by rule,
to establish ‘‘ethics standards . . . to be used by
registered public accounting firms in the
preparation and issuance of audit reports, as
required by [SOX] or the rules of the Commission,
or as may be necessary or appropriate in the public
interest or for the protection of investors.’’
6 See Amendment to PCAOB Rule 3502 Governing
Contributory Liability, PCAOB Release No. 2024–
008 (June 12, 2024) (‘‘Adopting Release’’), available
at https://assets.pcaobus.org/pcaob-dev/docs/
default-source/rulemaking/053/2024-008-rule-3502adoption.pdf?sfvrsn=9819bcd3_2.
2 15
PO 00000
Frm 00099
Fmt 4703
Sfmt 4703
68223
exercise reasonable care or
competence,’’ 7 recklessness requires
‘‘extreme departure from the standard of
ordinary care’’ that ‘‘presents a danger
to investors or to the markets that is
either known to the (actor) or is so
obvious that the actor must have been
aware of it.’’ 8
Following notice and comment, and
based on its experience with Rule 3502
since the Commission approved the
ethics rule in 2006,9 the PCAOB
determined that the Amendment would
better align Rule 3502 with the scope of
the PCAOB’s enforcement authority
under SOX, thus further advancing the
PCAOB’s mission of investor protection.
The PCAOB determined that under
the current formulation of Rule 3502, an
incongruity exists between the
respective requisite mental states for
liability of a registered firm resulting
from an associated person’s conduct and
for liability of the associated person.
Specifically, a firm, which acts through
its associated persons, can commit a
primary violation of certain laws, rules,
or standards by acting negligently, but
an associated person who directly and
substantially contributed to that
violation must have acted at least
recklessly to be secondarily liable. The
PCAOB determined that this
incongruity means that associated
persons may have weaker incentives to
exercise the appropriate level of care in
their audit work, and that the
modification to Rule 3502’s liability
standard from recklessness to
negligence would incentivize associated
persons to be more deliberate and
careful in their actions.
The PCAOB also determined that the
current version of Rule 3502 prevents
the Board from executing its investorprotection mandate to the fullest extent
that Congress authorized in SOX.
According to the PCAOB, in the
instances in which the Board has
instituted proceedings against firms for
negligence-based violations, the Board
has not been able to charge individuals
who negligently, directly, and
substantially contributed to the firms’
violations. The Amendment would
allow the Board to do so.
7 In re S.W. Hatfield, C.P.A., SEC Release No. 34–
69930, at 35 n.169 (July 3, 2013) (describing the
standards for recklessness and negligence) (citation
and quotation marks omitted).
8 Id. at 29 (citation and quotation marks omitted).
9 See Public Company Accounting Oversight
Board; Order Approving Proposed Ethics and
Independence Rules Concerning Independence, Tax
Services, and Contingent Fees and Notice of Filing
and Order Granting Accelerated Approval of the
Amendment Delaying Implementation of Certain of
these Rules, Release No. 34–53677 (Apr. 19, 2006),
available at https://www.sec.gov/files/rules/pcaob/
2006/34-53677.pdf.
E:\FR\FM\23AUN1.SGM
23AUN1
]]>Agencies
[Federal Register Volume 89, Number 164 (Friday, August 23, 2024)]
[Notices]
[Pages 68219-68223]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-18986]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100774; File No. PCAOB-2024-03]
Public Company Accounting Oversight Board; Order Granting
Approval of Amendments Related to Aspects of Designing and Performing
Audit Procedures That Involve Technology-Assisted Analysis of
Information in Electronic Form
August 20, 2024.
I. Introduction
On June 20, 2024, the Public Company Accounting Oversight Board
(the ``Board'' or the ``PCAOB'') filed
[[Page 68220]]
with the Securities and Exchange Commission (the ``Commission''),
pursuant to section 107(b) \1\ of the Sarbanes-Oxley Act of 2002
(``SOX'') and section 19(b) \2\ of the Securities Exchange Act of 1934
(the ``Exchange Act''), a proposal to adopt amendments to auditing
standard (``AS'') 1105, Audit Evidence, and AS 2301, The Auditor's
Responses to the Risks of Material Misstatement, and conforming
amendments to AS 2501, Auditing Accounting Estimates, Including Fair
Value Measurements (collectively, the ``Amendments''). The Amendments
were published for comment in the Federal Register on July 2, 2024.\3\
We received six (6) comment letters in response to the Notice of Filing
of Proposed Rules.\4\ This order approves the Amendments, which we find
to be consistent with the requirements of Title I of SOX and the rules
and regulations issued thereunder 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\ See Public Company Accounting Oversight Board; Notice of
Filing of Proposed Rules on Amendments Related to Aspects of
Designing and Performing Audit Procedures that Involve Technology-
Assisted Analysis of Information in Electronic Form, Release No. 34-
100430 (June 26, 2024) [89 FR 54922 (July 2, 2024)] (``Notice of
Filing of Proposed Rules''), available at https://www.sec.gov/files/rules/pcaob/2024/34-100276.pdf.
\4\ The Commission received comment letters from Deloitte &
Touche LLP (July 18, 2024) (``Deloitte''); KPMG LLP (July 23, 2024)
(``KPMG''); PricewaterhouseCoopers LLP (July 23, 2024) (``PWC'');
RSM US LLP (July 23, 2024) (``RSM''); Center for Audit Quality (July
23, 2024) (``CAQ''); and Ernst & Young LLP (Aug. 12, 2024) (``EY'').
Comment letters received by the Commission on the Amendments are
available on the Commission's website at https://www.sec.gov/comments/pcaob-2024-003/pcaob2024003.htm.
---------------------------------------------------------------------------
II. Description of the Amendments
On June 12, 2024, the Board unanimously adopted the Amendments.\5\
The Amendments are intended to more specifically address certain
aspects of designing and performing audit procedures that involve
analyzing information in electronic form with technology-based tools
(i.e., technology-assisted analysis). The Amendments should promote
investor protection by enhancing the quality of audits. The
requirements contained within the Amendments are discussed further
below.
---------------------------------------------------------------------------
\5\ See Amendments Related to Aspects of Designing and
Performing Audit Procedures that Involve Technology-Assisted
Analysis of Information in Electronic Form, PCAOB Release No. 2024-
007 (June 12, 2024) (``Adopting Release''), available at https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-052/2024-007-adoptingrelease.pdf?sfvrsn=28f44e9e_2.
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A. Changes to PCAOB Standards
The Amendments are principles-based in how they further specify and
clarify certain existing auditor responsibilities and are therefore
intended to be adaptable to the evolving nature of the use of
technology in the audit. In particular, the Amendments:
Clarify the description of what constitutes a test of
details; \6\
---------------------------------------------------------------------------
\6\ See AS 2301.48.
---------------------------------------------------------------------------
Specify auditor responsibilities when identifying items
that require further investigation when performing tests of details;
\7\
---------------------------------------------------------------------------
\7\ See AS 2301.10, .49 and .50.
---------------------------------------------------------------------------
Specify that if the auditor uses an audit procedure for
more than one purpose (e.g., risk assessment, test of controls, or
substantive procedure), the auditor should achieve each objective of
the procedure; \8\
---------------------------------------------------------------------------
\8\ See AS 1105.14.
---------------------------------------------------------------------------
Specify auditor responsibilities for evaluating the
reliability of external information provided by the company under
audit; \9\
---------------------------------------------------------------------------
\9\ See AS 1105.10A.
---------------------------------------------------------------------------
Emphasize the importance of controls over information
technology; \10\
---------------------------------------------------------------------------
\10\ See AS 1105.08, .10, and .15.
---------------------------------------------------------------------------
Emphasize the importance of appropriate disaggregation or
detail of information to the relevance of audit evidence; \11\ and
---------------------------------------------------------------------------
\11\ See AS 1105.07.
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Make conforming changes to AS 2501.\12\
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\12\ See AS 2501.12 and footnote 14 to paragraph .13.
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B. Applicability and Effective Date
The Amendments will be effective for audits of financial statements
for fiscal years beginning on or after December 15, 2025. The PCAOB has
proposed application of the Amendments to include audits of emerging
growth companies (``EGCs''),\13\ as discussed in section IV below.
---------------------------------------------------------------------------
\13\ 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
Inflation Adjustments under Titles I and III of the JOBS Act,
Release No. 33-11098 (Sept. 9, 2022) [87 FR 57394 (Sept. 20, 2022)],
available at https://www.sec.gov/files/rules/final/2022/33-11098.pdf.
---------------------------------------------------------------------------
III. Comment Letters
As noted above, to date the Commission has received six (6) comment
letters in response to the Notice of Filing of Proposed Rules.\14\
Commenters generally supported the Board's efforts to modernize the
requirements related to certain aspects of designing and performing
audit procedures that involve technology-assisted analysis to support
the objective of improving audit quality. A number of commenters, while
generally supportive of the Amendments, sought clarification of
specific issues raised, which are detailed below.\15\
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\14\ See supra note 4.
\15\ See letters from KPMG; PWC; RSM; CAQ; and EY. PWC expressed
support for the overall goal of the rulemaking but indicated that it
could not support the Amendments ``without further amendment or
contemporaneous interpretive guidance'' to address its concerns.
---------------------------------------------------------------------------
A number of commenters identified the requirements in new paragraph
.10A(b) of AS 1105 as requiring further clarity or modification.\16\
Commenters stated their view that the requirements could be read as not
allowing the auditor to apply a risk-based approach, but instead
requiring the auditor, in all circumstances, to either test each piece
of external information obtained from the company to determine if it
was modified before it was provided to the auditor, or test controls
over receiving, maintaining, and, if applicable, processing the
information.\17\ Commenters stated that this reading of the
requirements appeared to be in conflict with language included in the
Adopting Release that indicated that a risk-based approach could be
taken \18\ as well as with AS 1105.09, which states that the auditor is
not expected to be an expert in documentation authentication.\19\
Commenters also stated that if the requirements were not risk-based,
they would likely result in significant additional costs, without a
commensurate benefit, that have not been accounted for in the Board's
economic analysis.\20\ Commenters also stated that, in some cases, an
entity may not have identified the risk of modification as one that
represents a reasonable possibility of a material misstatement, and
thus such controls would not likely be currently part of the entity's
internal control over financial reporting.\21\ Some of these commenters
stated that, in such circumstances, they
[[Page 68221]]
believe the Amendments may require the company to establish controls
solely to satisfy the requirements of its auditors.\22\ Commenters
raised concerns about auditors' ability to compare electronic
information to source records as many companies do not have physical
copies or original paper records because the information is obtained
and maintained only in electronic form.\23\ According to these
commenters, this potential limitation on the ability to compare
electronic information to source records would result in the auditor
being required to test management's controls over receiving,
maintaining, and processing the electronic information, which would not
be possible if the controls do not exist or were not operating
effectively.\24\
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\16\ See letters from KPMG; PWC; RSM; CAQ; and EY.
\17\ See, e.g., letter from PWC.
\18\ See letters from PWC; RSM; and CAQ.
\19\ See letters from KPMG; PWC; CAQ; and EY (Expressing its
concerns in the context of the interaction between AS 1105.10A(b)
and the PCAOB's proposed paragraph AS 2301.40A, which is part of the
Substantive Analytical Procedures Proposal. Infra note 25. We
believe EY's concern with respect to the Amendments is addressed by
the risk-based considerations discussed herein, and, with respect to
concerns about the Substantive Analytical Procedures Proposal
currently under consideration by the Board, we intend to encourage
the Board to consider the comments in that proposal.).
\20\ See letters from PWC and EY.
\21\ See letters from KPMG; PWC; CAQ; and EY.
\22\ See letters from KPMG; PWC; and CAQ.
\23\ See letters from KPMG; PWC; RSM; CAQ; and EY.
\24\ Id.
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All commenters stated that either interpretive or other
implementation guidance was warranted to facilitate implementation of
the Amendments. One commenter recommended the Commission delay the
effective date of the Amendments to align with the effective date of
the recently proposed amendments to AS 2305.\25\
---------------------------------------------------------------------------
\25\ See letter from KPMG. See Proposed Auditing Standard--
Designing and Performing Substantive Analytical Procedures and
Amendments to Other PCAOB Standards, PCAOB Release No. 2024-005
(June 12, 2024) (``Substantive Analytical Procedures Proposal''),
available at https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-056/2024-006-as-2305-proposal.pdf?sfvrsn=d174cacf_2.
---------------------------------------------------------------------------
As discussed above, a number of commenters were of the view that
new paragraph AS1105.10A(b) requires the auditor, in all circumstances,
to test whether each piece of information provided to the auditor by
the company, which the company received from external sources, has been
modified by the company. Although we understand the concerns raised by
such commenters, we believe these concerns may be misplaced,
particularly in light of the guidance provided by the Board in the
Adopting Release. For example, in the Adopting Release, the Board
stated that ``[it was] not prescribing the nature, timing, or extent of
the auditor's procedures to evaluate the reliability of the external
information.'' \26\ Instead, as the Board explained, ``[a]n auditor
would design the procedures considering the wide variety of types of
external information received by companies and differences in the
processes for receiving, maintaining and, where applicable, processing
such information.'' \27\ Therefore, our understanding of the
Amendments, when read in the overall context of the PCAOB auditing
standards, is that they do not preclude a risk-based approach to
testing external information. Nevertheless, given the concerns raised
by commenters, we encourage the PCAOB to provide further implementation
guidance on this point. Given our understanding of the risk-based
nature of the standards, we believe the commenters' concern that the
costs of this requirement were not appropriately considered in the
Board's economic analysis reflects a misunderstanding of the nature of
the requirement and that the Board adequately considered the costs
related to the Amendments.\28\
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\26\ Adopting Release, supra note 5 at 26-32.
\27\ Id. See also AS 2110 Identifying and Assessing Risks of
Material Misstatement; AS 1105.08; AS 1105.09; and new AS
1105.10A(a).
\28\ See letters from PWC and EY.
---------------------------------------------------------------------------
Regarding commenter concerns about the availability of source
records, we do not believe that having source records only available in
electronic form would inhibit procedures to compare information to
source records. Source records are not defined in the PCAOB's auditing
standards and may exist in many forms, including in electronic form. We
note that, when considering the reliability of such a record, AS
1105.10A and AS 1105.09 require the auditor to consider, among other
things, the means by which it was obtained, including any processing by
the company and whether there are indications that it may not be
authentic.
We also do not believe that the Amendments would require management
to establish new controls solely for purposes of satisfying the
requirements of the auditor as raised by commenters. The PCAOB
addressed this concern in the Adopting Release by explicitly stating
that the Amendments do not require testing of controls to establish
reliability.\29\
---------------------------------------------------------------------------
\29\ See Adopting Release, supra note 5 at 30.
---------------------------------------------------------------------------
One commenter stated that aspects of revised AS 2301.48 ``impact
auditors' ability to consistently determine whether a particular audit
procedure qualifies as a test of details.'' \30\ This comment appears
to be based on a misunderstanding of the amendment. AS 2301.48 provides
examples of items in an account or disclosure for which audit
procedures are performed, but does not specify at what level audit
procedures should be applied. In the Adopting Release, the Board was
explicit that the Amendments are not intended to define ``items
included in an account or disclosure'' because a definition is
impractical, and the Board explained that the auditor will determine
the level of disaggregation or detail based on the facts and
circumstances of the individual audit engagement.\31\ We believe the
approach to allow the auditor to determine what level of disaggregation
is most appropriate in light of the specific circumstances of the
engagement is appropriate.
---------------------------------------------------------------------------
\30\ See letter from KPMG.
\31\ See Adopting Release, supra note 5 at 18.
---------------------------------------------------------------------------
Regarding the comment recommending the Commission delay the
effective date to align with the Substantive Analytical Procedures
Proposal, the effective date was addressed by the Board in the Adopting
Release, and the Board specifically highlighted that they considered
``the effective dates for other Board rulemaking projects.'' \32\ We
agree with the Board's assessment and support the conclusion reached.
---------------------------------------------------------------------------
\32\ See Adopting Release, supra note 5 at 61.
---------------------------------------------------------------------------
We acknowledge commenters' concerns about the need for
implementation guidance and we note that the Board has a historical
practice of performing a post-implementation review \33\ as well as
issuing appropriate implementation guidance for new standards and rule
amendments when needed.\34\ We encourage the Board to do the same with
respect to the Amendments. We also acknowledge the importance of
monitoring the implementation of the Amendments and the Commission
staff works closely with the PCAOB as part of our general oversight
mandate.\35\ As part of that oversight, Commission staff will keep
itself apprised of the PCAOB's activities for monitoring the
implementation of the Amendments and update the Commission, as
necessary.
---------------------------------------------------------------------------
\33\ See, e.g., Interim Analysis Report--Evidence of the Initial
Impact of New Requirements for Auditing Accounting Estimates and the
Auditor's Use of the Work of Specialists, Release No. 2022-008 (Dec.
8, 2022), available at https://assets.pcaobus.org/pcaob-dev/docs/default-source/economicandriskanalysis/pir/documents/estimates-specialists-interim-analysis-report.pdf?sfvrsn=e1b0eb15_4.
\34\ See, e.g., Staff Guidance--Auditing Accounting Estimates
(Aug. 22, 2019), available at https://assets.pcaobus.org/pcaob-dev/docs/default-source/standards/documents/staff-guidance-auditing-accounting-estimates.pdf?sfvrsn=80016a49_0.
\35\ See section 107 of SOX.
---------------------------------------------------------------------------
IV. Effect on Emerging Growth Companies
In the Notice of Filing of Proposed Rules, the Board recommended
that the Commission determine that the Amendments apply to audits of
EGCs.\36\
[[Page 68222]]
Section 103(a)(3)(C) of SOX 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 Amendments do not fall into
these categories.
---------------------------------------------------------------------------
\36\ See Notice of Filing of Proposed Rules.
---------------------------------------------------------------------------
Section 103(a)(3)(C) further provides that ``[a]ny additional
rules'' adopted by the PCAOB 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
Amendments fall within this category. Having considered those statutory
factors, we find that applying the Amendments to the audits of EGCs is
necessary or appropriate in the public interest.
With respect to the Commission's determination of whether the
Amendments will apply to audits of EGCs, the PCAOB provided
information, including data and analysis of EGCs that sets forth its
views as to why it believes the Amendments should apply to audits of
EGCs.\37\ In addition, the Board sought public input on the application
of the Amendments to the audits of EGCs. Commenters who responded to
the Board agreed the Amendments should apply to the audits of EGCs.\38\
---------------------------------------------------------------------------
\37\ See Adopting Release, supra note 5 at 58-61.
\38\ Id.
---------------------------------------------------------------------------
The Board indicated in its assessment that for all audits performed
pursuant to PCAOB standards, including audits of EGCs, the Amendments
may lead to higher audit quality, more efficient audits, lower audit
fees, or some combination of the three.\39\ These benefits may apply
both to audit engagements where auditors currently incorporate
technology-assisted analysis into their audit approach and engagements
where auditors have been previously reluctant to use technology-
assisted analysis because of the risk of noncompliance.\40\ As the
Board noted in its assessment, the use of technology-assisted analysis
appears to be less prevalent among U.S. non-affiliated firms (``NAFs'')
than U.S. global network firms (``GNFs'').\41\ Therefore, since EGCs
are more likely than non-EGCs to be audited by NAFs,\42\ and to the
extent NAFs are not more likely than other firms to newly implement
technology-assisted analysis in response to the Amendments, the impacts
of the Amendments on EGC audits may be less than on non-EGC audits.\43\
Nevertheless, the Board stated that it expects the Amendments to
enhance the efficiency and quality of EGC audits that implement
technology-assisted analysis and contribute to an increase in the
credibility of financial reporting by those EGCs.\44\ An improvement in
EGCs' financial reporting quality, may also improve the efficiency of
capital allocation and enhance capital formation.\45\
---------------------------------------------------------------------------
\39\ Id. at 45.
\40\ Id. at 46-47.
\41\ See Adopting Release, supra note 5 at 36. The U.S. GNFs are
BDO USA P.C., Deloitte & Touche LLP, Ernst & Young LLP, Grant
Thornton LLP, KPMG LLP, and PricewaterhouseCoopers LLP. The U.S. NAF
firms include registered public accounting firms that are not
members of global network firms.
\42\ See Adopting Release, supra note 5 at 60. PCAOB staff
analysis indicates that, compared to exchange-listed non-EGCs,
exchange-listed EGCs are approximately 2.6 times more likely to be
audited by an NAF and approximately 1.3 times more likely to be
audited by a triennially inspected firm.
\43\ See Adopting Release, supra note 5 at 60.
\44\ Id.
\45\ Id.
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The Board noted that the Amendments could impact the ability of
EGCs to compete if the costs of the Amendments to audited companies (as
a result of any increase in costs to their auditors) disproportionately
impact EGCs relative to their competitors.\46\ However, as the direct
costs associated with the Amendments are expected to be relatively
modest, the Board concluded that the impact of the Amendments on
competition, if any, is likewise expected to be limited.\47\
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\46\ Id. at 54.
\47\ Id. at 60.
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We agree with the Board's findings and further emphasize the
benefits of the Amendments for EGCs. The Amendments may promote higher
audit quality for EGC audits employing technology-assisted analysis,
and thus a higher reliability of financial reporting for the affected
EGCs. An increased reliability of financial reporting may enhance
investor protection and lead to an improved efficiency of capital
allocation and enhanced capital formation with respect to EGCs. These
benefits may be moderated relative to the effects on other issuers,
because, for example, the auditors of EGCs are currently less likely to
employ technology-assisted analysis. However, any potential costs
passed down to EGCs may be similarly moderated.
We note that the Amendments could also impact competition for
capital or in product markets in which EGCs compete. For example, if
non-EGCs are more likely to be the subject of audits using technology-
assisted analysis, these issuers may experience greater improvements in
the reliability of their financial reporting and thereby attract more
capital than EGCs. Alternatively, if any incremental costs or savings
passed down to audited companies by auditors as a result of the
Amendments are disproportionately directed to either EGCs or their
competitors, competition may be affected. However, given that the
direct benefits and costs of the rule (including effects on audit
quality and audit fees) are expected to be relatively modest, any
resulting impact on competition is likely to be relatively limited.
While there may be additional effects if the Amendments result in a
larger number of auditors newly incorporating or expanding the use of
technology-assisted analysis in their audits, and it is difficult to
predict which auditors and which engagements would most likely be the
subject of such changes, it is not clear that such effects would
disproportionately favor the competitors of EGCs. Further, many of the
potential effects on competition are unlikely to be mitigated by
applying the Amendments only to audits of non-EGCs.
Accordingly, 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 Amendments to the audits of EGCs is necessary or
appropriate in the public interest.
V. Conclusion
The Commission has reviewed and considered the Amendments, the
information submitted therewith by the PCAOB, the comment letters
received, and the recommendation of the Commission's staff. The
Commission concludes that the determinations made by the PCAOB as
described in the Adopting Release are reasonable. In particular, the
Amendments address challenges with the rapidly evolving use of
technology-based analytical tools that may not be sufficiently
addressed under current professional audit standards. Addressing these
challenges will advance the Board's investor protection mandate under
SOX given that (1) the use of technology-based analytical tools is
substantially increasing and is expected to continue to do so; (2)
technology-based analytical tools have the potential to enhance the
effectiveness of audit procedures by, for example, increasing the
amount of data an auditor is able to analyze or
[[Page 68223]]
otherwise validate, allowing the auditor to perform more robust
analysis or analyze more complex relationships, or by allowing the
auditor to focus their procedures on the transactions with the most
risk; and (3) PCAOB research indicates that some auditors may be
reluctant to implement new technologies due to perceived regulatory
uncertainty, which can be addressed through the clarity provided in the
Amendments.\48\ Therefore, in connection with the PCAOB's filing and
the Commission's review,
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\48\ See Adopting Release, supra note 5 at 12. (``The [Data and
Technology] research [project] further suggests that clarifications
to PCAOB standards could more specifically address certain aspects
of designing and performing audit procedures that involve
technology-assisted analysis. The Board's Investor Advisory Group
has also noted that auditors' use of technology-assisted analysis is
an area of concern due to auditors' potential overreliance on
company-produced information, and that addressing the use of such
analysis in the standards could be beneficial.'').
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A. The Commission finds that the Amendments are consistent with the
requirements of Title I of SOX and the rules and regulations thereunder
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
Amendments 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 SOX and section
19(b)(2) of the Exchange Act, that the Amendments (File No. PCAOB-2024-
03) be and hereby are approved.
By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-18986 Filed 8-22-24; 8:45 am]
BILLING CODE 8011-01-P
