Notice2023-26773
Public Company Accounting Oversight Board; Order Granting Approval of Auditing Standard Governing the Auditor's Use of Confirmation
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Published
December 6, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 233 (Wednesday, December 6, 2023)</title>
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[Federal Register Volume 88, Number 233 (Wednesday, December 6, 2023)]
[Notices]
[Pages 84837-84839]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-26773]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99060; File No. PCAOB-2023-02]
Public Company Accounting Oversight Board; Order Granting
Approval of Auditing Standard Governing the Auditor's Use of
Confirmation
I. Introduction
On October 4, 2023, 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 (``SOX'') and section 19(b) \2\ of the
Securities Exchange Act of 1934 (the ``Exchange Act''), a proposal to
adopt Auditing Standard (``AS'') 2310, The Auditor's Use of
Confirmation (AS 2310); rescind AS 2310, The Confirmation Process (AS
2310); and amend several other existing auditing standards
(collectively, the ``Amendments''). The Amendments were published for
comment in the Federal Register on October 17, 2023.\3\ We received
three (3) comment letters in response to the notice.\4\ This order
approves the Amendments, which we find to be consistent with the
requirements of SOX 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 The Auditor's Use of Confirmation, and
Other Amendments to PCAOB Standards, Release No. 34-98689 (Oct. 5,
2023) [88 FR 71684 (Oct. 17, 2023)], available at <a href="https://www.sec.gov/rules/pcaob/2023/34-98689.pdf">https://www.sec.gov/rules/pcaob/2023/34-98689.pdf</a>.
\4\ We received comment letters from Deloitte & Touche LLP (Nov.
2, 2023), PricewaterhouseCoopers LLP (Nov. 6, 2023), and Gopal
Krushna Panda (Nov. 6, 2023). Copies of the comment letters received
on the Commission notice of the Amendments are available on the
Commission's website at <a href="https://www.sec.gov/comments/pcaob-2023-02/pcaob202302.htm">https://www.sec.gov/comments/pcaob-2023-02/pcaob202302.htm</a>.
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II. Description of the Amendments
On September 28, 2023, the Board unanimously adopted the
Amendments.\5\ The Amendments are intended to strengthen and modernize
the requirements for the confirmation process by describing principles-
based requirements for all methods of confirmation, including paper-
based and electronic means of communications. In addition, the new
standard is more directly integrated with the PCAOB's risk assessment
standards by incorporating certain risk-based considerations and
emphasizing the auditor's responsibilities for obtaining relevant and
reliable audit evidence through the confirmation process. This should
promote investor protection by enhancing the quality of audits. The
requirements contained within the Amendments are discussed further
below.
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\5\ See The Auditor's Use of Confirmation, and Other Amendments
to PCAOB Standards, PCAOB Release No. 2023-008 (Sept. 28, 2023),
available at <a href="https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket_028/2023-008_confirmation-adopting-release.pdf?sfvrsn=e18cef74_4">https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket_028/2023-008_confirmation-adopting-release.pdf?sfvrsn=e18cef74_4</a>.
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A. Changes to PCAOB Standards
Among other things, the Amendments enhance the existing
confirmation requirements by:
<bullet> Including principles-based requirements that are designed
to apply to all methods of confirmation. These methods include
longstanding practices, such as the use of paper-based confirmation
requests and responses sent via regular mail; methods that involve
electronic means of communications, such as the use of email or an
intermediary to facilitate direct electronic transmission of
confirmation requests and responses; and methods that have yet to
develop.
<bullet> Expressly aligning the requirements for the auditor's use
of confirmation with the requirements of the Board's risk assessment
standards, including AS 1105. The Amendments specify certain risk-based
considerations and emphasize the auditor's responsibility to obtain
relevant and reliable audit evidence when performing confirmation
procedures.\6\
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\6\ See AS 2310.03, as amended.
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<bullet> Strengthening the requirements for the use of confirmation
procedures in certain situations. The Amendments add a requirement that
the auditor should perform confirmation procedures for cash held by
third parties, carry forward the existing requirement that the auditor
normally should perform confirmation procedures for accounts
receivable, and include a new provision that the auditor may otherwise
obtain audit evidence by directly accessing information maintained by a
knowledgeable external source for cash and accounts receivable.\7\ In
addition, the Amendments carry forward the existing requirement that
the auditor consider confirming the terms of certain other
transactions.\8\
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\7\ See AS 2310.24 through .27, as amended.
\8\ See AS 2310.30, as amended.
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<bullet> Addressing situations in which it would not be feasible
for the auditor to obtain information directly from a knowledgeable
external source. The Amendments provide that if it would not be
feasible for the auditor to obtain audit evidence directly from a
knowledgeable external source for accounts receivable, the auditor
should perform other substantive procedures, including tests of
details, that involve obtaining audit evidence from external sources
indirectly.\9\
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\9\ See AS 2310.25, as amended.
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<bullet> Mandatory communications with the audit committee
regarding certain audit responses to significant risks. Under the
Amendments, for significant risks associated with cash or accounts
receivable, the auditor is required to communicate with the audit
committee when the auditor either did not perform confirmation
procedures or otherwise obtained audit evidence by directly accessing
information maintained by a knowledgeable external source.\10\
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\10\ See AS 2310.28, as amended.
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<bullet> Reflecting the relatively insignificant amount of audit
evidence obtained when using negative confirmation requests. Under the
Amendments, the use of negative confirmation requests may provide
sufficient appropriate audit evidence only when combined with other
substantive procedures. The Amendments include examples of situations
in which the use of negative confirmation requests in combination with
other substantive procedures may provide sufficient appropriate audit
evidence.\11\
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\11\ See AS 2310.12 and .13, as amended.
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<bullet> Emphasizing the auditor's responsibility to maintain
control over the confirmation process. The Amendments state that the
auditor should select the items to be confirmed,
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send confirmation requests, and receive confirmation responses.\12\
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\12\ See AS 2310.14 through .17, as amended.
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<bullet> Providing more specific direction for circumstances where
the auditor is unable to obtain relevant and reliable audit evidence
through confirmations. The Amendments identify situations where other
procedures should be performed by the auditor as an alternative to
confirmations. The Amendments also include examples of such alternative
procedures that may provide relevant and reliable audit evidence.\13\
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\13\ See AS 2310.11, .19, .23, and Appendix C, as amended.
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B. Applicability and Effective Date
The Amendments will be effective for all audits of financial
statements for fiscal years ending on or after June 15, 2025. The PCAOB
has proposed application of the Amendments to include audits of
emerging growth companies (``EGCs''),\14\ as discussed in Section IV
below.
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\14\ 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 November 7, 2023. We
received three (3) comment letters.\15\ 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. 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.\16\ 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. Additionally, one commenter
made suggestions for expanded explanations and examples. The adopting
release addresses the points raised by the commenter.
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\15\ See Supra note 4.
\16\ See section 107 of SOX.
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SOX requires us to determine whether the Amendments are consistent
with the requirements of SOX 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.
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\17\ See section 107(b)(3) of SOX. SOX 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 SOX. section
19 of the Exchange Act covers the registration, responsibilities,
and oversight of self-regulatory organizations. Under the procedures
prescribed by SOX 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.\18\ section 103(a)(3)(C) of SOX, 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.\19\
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\18\ See the Notice of Filing of Proposed Rules, supra note 3.
\19\ 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
information, including data and analysis of EGCs identified by the
Board's staff, from public sources that sets forth its views as to why
it believes the Amendments should apply to audits of EGCs. In addition,
the Board sought public input on the application of the Amendments to
the audits of EGCs. Commenters generally supported the application of
the Amendments to the audits of EGCs. The Board noted that while the
associated costs may be higher for EGC audits than for non-EGC audits,
due to the scalability of the risk-based requirements, the costs of
performing the procedures are unlikely to be disproportionate to the
benefits of the procedures. 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 further emphasize the price
efficiency benefits discussed by the PCAOB noting that improvements in
the quality of the audit may be more pronounced on the audits of EGCs,
thereby potentially creating a larger increase to the price efficiency
of EGCs by providing investors with more accurate information. Price
efficiency helps investors make more informed investment decisions--
facilitating issuers', including EGCs', access to capital--thus
enhancing capital formation. Additionally, while the Amendments could
impact competition in the EGC market 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. 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 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 SOX and the securities laws and are necessary or
appropriate in
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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-2023-
02) be and hereby are approved.
By the Commission.
Dated: December 1, 2023.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-26773 Filed 12-5-23; 8:45 am]
BILLING CODE 8011-01-P
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