Notice2022-17723
Public Company Accounting Oversight Board; Order Granting Approval of Amendments to Auditing Standards Governing the Planning and Supervision of Audits Involving Other Auditors and Dividing Responsibility for the Audit With Another Accounting Firm
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Published
August 18, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 159 (Thursday, August 18, 2022)</title>
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[Federal Register Volume 87, Number 159 (Thursday, August 18, 2022)]
[Notices]
[Pages 50891-50894]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-17723]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95488; File No. PCAOB-2022-001]
Public Company Accounting Oversight Board; Order Granting
Approval of Amendments to Auditing Standards Governing the Planning and
Supervision of Audits Involving Other Auditors and Dividing
Responsibility for the Audit With Another Accounting Firm
August 12, 2022.
I. Introduction
On June 24, 2022, 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 (``AS'') 1206, Dividing
Responsibility for the Audit with Another Accounting Firm (AS 1206);
rescind AS 1205, Part of the Audit Performed by Other Independent
Auditors (AS 1205), and AI 10, Part of the Audit Performed by Other
Independent Auditors: Auditing Interpretations of AS 1205 (AI 10); and
amend several other existing auditing standards, interpretations,
rules, and forms (collectively, the ``Amendments''). The Amendments
were published for comment in the Federal Register on July 1, 2022.\3\
We received three comment letters in response to the notice.\4\ This
order approves the Amendments, 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.
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\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 Planning and Supervision of Audits
Involving Other Auditors and Dividing Responsibility for the Audit
with Another Accounting Firm, Release No. 34-95159 (June 24, 2022)
[87 FR 39680 (July 1, 2022)] (the ``Notice of Filing of Proposed
Rules''), available at <a href="https://www.sec.gov/rules/pcaob/2022/34-95159.pdf">https://www.sec.gov/rules/pcaob/2022/34-95159.pdf</a>.
\4\ We received comment letters from Deloitte & Touche LLP (July
21, 2022); PricewaterhouseCoopers LLP (July 22, 2022); and KPMG LLP
(July 22, 2022). Copies of the comment letters received on the
Commission order noticing the Proposed Rules are available on the
Commission's website at <a href="https://www.sec.gov/comments/pcaob-2022-01/pcaob202201.htm">https://www.sec.gov/comments/pcaob-2022-01/pcaob202201.htm</a>.
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II. Description of the Amendments
On June 21, 2022, the Board adopted the Amendments.\5\ The
Amendments would (i) strengthen requirements for audits involving
accounting firms and individual accountants other than the accounting
firm that issues the auditor's report (``other auditors'' and the
``lead auditor,'' respectively), and (ii) update requirements to
address relatively uncommon situations in which the lead auditor
divides responsibility for the audit with another accounting firm (the
``referred-to auditor''). The Amendments are intended to increase and
improve the lead auditor's involvement in,
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supervision of, and evaluation of the other auditors' work, which will
improve communication among auditors and the lead auditor's ability to
prevent or detect deficiencies in that work. This should promote
investor protection by enhancing the quality of audits involving other
auditors. The requirements contained within the Amendments are
discussed further below.
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\5\ See Planning and Supervision of Audits Involving Other
Auditors and Dividing Responsibility for the Audit with Another
Accounting Firm, PCAOB Release No. 2022-002 (June 21, 2022) (``PCAOB
Adopting Release''), available at <a href="https://pcaob-assets.azureedge.net/pcaob-dev/docs/default-source/rulemaking/docket042/pcaob-other-auditors-adopting-release-6-21-2022.pdf?sfvrsn=c3712668_4">https://pcaob-assets.azureedge.net/pcaob-dev/docs/default-source/rulemaking/docket042/pcaob-other-auditors-adopting-release-6-21-2022.pdf?sfvrsn=c3712668_4</a>.
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A. Changes to PCAOB Standards
The Amendments are intended to improve the PCAOB's standards
principally by (i) applying a risk-based supervisory approach to the
lead auditor's oversight of other auditors whose work the lead auditor
assumes responsibility for, and (ii) requiring that the lead auditor
perform certain procedures when planning and supervising an audit that
involves other auditors. The Amendments take into account recent
professional practice developments in the lead auditor's oversight of
other auditors' work, including the greater use of communication
technology. The Amendments build on existing communication requirements
and increase those communication requirements between the lead auditor
and other auditor. Whether or not the lead auditor is leveraging
technology for those communications, audit documentation supporting the
lead auditor's conclusions will need to contain a record that the lead
auditor fulfilled its responsibilities under PCAOB standards, including
regarding matters such as determinations related to other auditors'
work \6\ and audit documentation.\7\
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\6\ See, e.g., AS 1201, Supervision of the Audit Engagement,
paragraph .13 (requiring the lead auditor to make certain
determinations based on a review of the documentation provided by
the other auditor, discussions with the other auditor, and other
information obtained by the lead auditor).
\7\ See, e.g., AS 1215, Audit Documentation, paragraphs .06 and
.18, as amended.
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In summary, the Amendments:
<bullet> Require that the engagement partner \8\ determine whether
their firm's participation in the audit is sufficient for the firm to
carry out the responsibilities of a lead auditor and report as such.\9\
The Amendments include considerations for the engagement partner to use
in making this determination \10\ and require that the audit's
engagement quality reviewer review the determination.\11\
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\8\ The term ``engagement partner'' means the member of the
engagement team with primary responsibility for the audit. See AS
1201, Appendix A, as amended.
\9\ See AS 2101, Audit Planning, paragraph .06A, as amended.
\10\ See id.
\11\ See AS 1220, Engagement Quality Review, paragraph .10a, as
amended.
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<bullet> Require that the lead auditor, when determining the
engagement's compliance with independence and ethics requirements,
understand the other auditor's knowledge of those requirements and
experience in applying them.\12\ The lead auditor is required to obtain
and review written affirmations regarding the other auditor's policies
and procedures related to those requirements and regarding its
compliance with the requirements, and a description of certain auditor-
client relationships related to independence.\13\ In addition, the
Amendments require the sharing of information about changes in
circumstances and the updating of affirmations and descriptions in
light of those changes.\14\
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\12\ See AS 2101.06Da, as amended.
\13\ See AS 2101.06Db, as amended.
\14\ See AS 2101.06Dc(1) and .06Dc(2), as amended.
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<bullet> Require that the lead auditor understand the knowledge,
skill, and ability of other auditors' engagement team members who
assist the lead auditor with planning and supervision,\15\ and obtain a
written affirmation from the other auditor that its engagement team
members possess the knowledge, skill, and ability to perform assigned
tasks.\16\
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\15\ See AS 2101.06Ha, as amended.
\16\ See AS 2101.06Hb, as amended.
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<bullet> Require that the lead auditor supervise other auditors
under the Board's standard on audit supervision and inform other
auditors about the scope of their work, identified risks of material
misstatement, and certain other key matters.\17\ The Amendments also
require that the lead auditor and other auditors communicate about the
audit procedures to be performed, and any changes needed to the
procedures.\18\ In addition, the lead auditor is required to obtain and
review a written affirmation from the other auditor about its
performance of work in accordance with the lead auditor's instructions,
and to direct other auditors to provide certain documentation about
their work.\19\
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\17\ See AS 1201.08, as amended.
\18\ See AS 1201.09 and .10, as amended.
\19\ See AS 1201.11 and .12, as amended.
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<bullet> Provide that, in multi-tiered audits, a first other
auditor may assist the lead auditor in performing certain required
procedures with respect to second other auditors.\20\
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\20\ See AS 1201.14, and AS 2101.06E and .06I, as amended.
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In addition, this rulemaking rescinds AS 1205 and AI 10 but carries
forward and strengthens certain existing requirements in new AS 1206
that apply to infrequent situations where the lead auditor divides
responsibility for a portion of the audit with the referred-to auditor
and therefore does not supervise the work performed by that firm. In
those situations, the lead auditor refers to the work of that auditor
in the audit report.\21\
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\21\ Rule 2-05 of Regulation S-X, 17 CFR 210.2-05, requires that
the auditor's report of the referred-to auditor be filed with the
SEC. See also AS 1206.08.
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AS 1206 requires that in these situations the lead auditor
determine that audit procedures were performed regarding the
consolidation or combination of financial statements of the business
units audited by the referred-to auditor into the company's financial
statements. The standard also requires that the lead auditor obtain the
referred-to auditor's written representation that it is independent and
duly licensed to practice, and that the lead auditor disclose in the
audit report the magnitude of the portion of the financial statements,
and, if applicable, of internal controls audited by the referred-to
auditor.
B. Applicability and Effective Date
The Amendments would be effective for audits of financial
statements for fiscal years ending on or after December 15, 2024. The
PCAOB has proposed application of the Amendments to include audits of
emerging growth companies (``EGCs''),\22\ as discussed in Section IV
below, and audits of brokers and dealers under Exchange Act Rule 17a-5.
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\22\ 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 and Other Technical Amendments Under Titles I
and III of the JOBS Act, Release No. 33-10332 (Mar. 31, 2017) [82 FR
17545 (Apr. 12, 2017)], available at <a href="https://www.sec.gov/rules/final/2017/33-10332.pdf">https://www.sec.gov/rules/final/2017/33-10332.pdf</a>.
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III. Comment Letters
The comment period on the Amendments ended on July 22, 2022. We
received three comment letters from accounting firms.\23\ The
commenters generally supported the Amendments and encouraged us to
support the PCAOB's plans to monitor implementation, conduct post-
implementation review, and monitor advancements in technology that may
affect application of the Amendments.\24\
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Additionally, one commenter encouraged the PCAOB to consider the
intersection of a firm's system of quality control with the
requirements in the PCAOB standards and that questions may arise about
compliance with the principles-based requirements, to actively engage
with stakeholders to promote an understanding of the Amendments, and to
be available for consultation.\25\ We agree with the Board that the
Amendments are sufficiently principles-based to accommodate a variety
of scenarios in practice and to allow the lead auditor to adjust its
procedures according to the circumstances of the audit.\26\ We
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.\27\ 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.
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\23\ We received comment letters from Deloitte & Touche LLP
(July 21, 2022); PricewaterhouseCoopers LLP (July 22, 2022) (``PWC
Letter''); and KPMG LLP (July 22, 2022). Copies of the comment
letters are available on the Commission's website at <a href="https://www.sec.gov/comments/pcaob-2022-01/pcaob202201.htm">https://www.sec.gov/comments/pcaob-2022-01/pcaob202201.htm</a>.
\24\ See id.
\25\ See PWC Letter available at <a href="https://www.sec.gov/comments/pcaob-2022-01/pcaob202201-20134692-305861.pdf">https://www.sec.gov/comments/pcaob-2022-01/pcaob202201-20134692-305861.pdf</a>.
\26\ See, e.g., PCAOB Adopting Release, at A4-22, A4-28.
\27\ See Section 107 of the Sarbanes-Oxley Act.
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The Sarbanes-Oxley Act requires us to determine whether the
Amendments 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.\28\ 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.
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\28\ 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.
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IV. Effect on Emerging Growth Companies
In the notice of filing of the Amendments, the Board recommended
that the Commission determine that the Amendments apply to audits of
EGCs.\29\ 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
Amendments do not fall into these categories.\30\
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\29\ See the Notice of Filing of Proposed Rules, supra note 3,
at 191.
\30\ While the precise scope of this category of rules under
Section 103(a)(3)(C) is not entirely clear, we do not interpret this
statutory language as precluding the application of Board rules
requiring inclusion of additional factual information about
referred-to auditors and the scope of their work in connection with
the audits of EGCs. In our view, this approach reflects an
appropriate interpretation of the statutory language and is
consistent with our understanding of the Congressional purpose
underlying this provision.
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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 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 data and
analysis of EGCs identified by the Board's staff from public sources
that sets forth its views as to why the Amendments should apply to
audits of EGCs. Analysis of Form AP filings in 2021 suggests that, when
compared to issuer audits overall, audits of EGCs are less likely to
involve the use of other firms and, even when they do, they typically
involve fewer other firms and those other firms account for a smaller
share of total audit hours.\31\ Thus, because the use of other firms is
less prevalent in audits of EGCs than in audits of non-EGCs, audits of
EGCs generally are less likely than those of non-EGCs to be affected by
the amendments.\32\ EGCs are also likely to be newer companies, which
may increase the importance to investors of the external audit to
enhance the credibility of management disclosures.\33\ Investors in
newer companies may require a larger risk premium that increases the
cost of capital for those companies. Therefore, the improved audit
quality resulting from applying the Amendments to EGC audits could
reduce the cost of capital to those EGCs.\34\ When considering these
and other factors addressed in the PCAOB's analysis, the benefits of
the higher audit quality resulting from the amendment may be greater
for EGCs than for non-EGCs.
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\31\ For example, only 14 percent of audits of EGCs involved
other firms compared to 27 percent of issuer audit overall; in
audits involving other firms, EGC audits involve two or more other
firms in about 35 percent of audits compared to about 61 percent in
audits of issuers overall; and other accounting firms perform 10
percent or more of the audit hours in about 40 percent of audits of
EGCs compared to about 52 percent of audits of issues overall. See
PCAOB Adopting Release, at 54, Figure 6.
\32\ See PCAOB Adopting Release, at 54.
\33\ See PCAOB Adopting Release, at 55, footnote 115.
\34\ See PCAOB Adopting Release, at 55.
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In addition, the Board sought public input on the application of
the Amendments to the audits of EGCs. Commenters on the Board's
proposal generally supported applying the Amendments to audits of EGCs,
citing benefits to the users of EGC financial statements and the
importance of consistent audit requirements for all audits. In the
Board's filing of the Amendments, the Board expressed the view that the
benefits of the higher audit quality resulting from the amendments may
be larger for EGCs than for non-EGCs and that, overall, the Amendments
are expected to enhance audit quality and contribute to an increase in
the credibility of financial reporting by EGCs.
We agree with the Board's analysis and note that the potential
increase in audit quality from the Amendments would strengthen investor
protection and increase informational efficiency of the capital
markets, thus enhancing capital formation. Additionally, improvements
in the quality of the audit may also increase price efficiency by
providing investors with more accurate information. Price efficiency
helps investors make more informed investment decisions facilitative
issuers', including EGCs', access to capital thus enhancing capital
formation. With respect to competition, we note that due to the
additional supervisory requirements, smaller firms may be less able to
compete with larger firms in the audit market for audit involving other
auditors. However, Form AP data shows that smaller firms perform
relatively fewer audits that involve other accounting firms, and, as
noted above, that audits of EGCs are less likely to involve the use of
other firms. Therefore, any impact on competition in
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the overall audit market and for audits of EGCs is likely to be
relatively small. 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 Amendments to the audits of EGCs is
necessary or appropriate in the public interest.
V. Conclusion
The Commission has carefully reviewed and considered the
Amendments, 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 Amendments 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
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 the Sarbanes-
Oxley Act and Section 19(b)(2) of the Exchange Act, that the Amendments
(File No. PCAOB-2022-002) be and hereby are approved.
By the Commission.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-17723 Filed 8-17-22; 8:45 am]
BILLING CODE 8011-01-P
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