Notice2024-18985
Public Company Accounting Oversight Board; Order Granting Approval of Auditing Standard 1000, General Responsibilities of the Auditor in Conducting an Audit, and Amendments to PCAOB Standards
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Published
August 23, 2024
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 89 Issue 164 (Friday, August 23, 2024)</title>
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[Federal Register Volume 89, Number 164 (Friday, August 23, 2024)]
[Notices]
[Pages 68217-68219]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-18985]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100773; File No. PCAOB-2024-01]
Public Company Accounting Oversight Board; Order Granting
Approval of Auditing Standard 1000, General Responsibilities of the
Auditor in Conducting an Audit, and Amendments to PCAOB Standards
August 20, 2024.
I. Introduction
On May 24, 2024, 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'') 1000, General Responsibilities of the
Auditor in Conducting an Audit; rescind AS 1001, Responsibilities and
Functions of the Independent Auditor, AS 1005, Independence, AS 1010,
Training and Proficiency of the Independent Auditor, AS 1015, Due
Professional Care in the Performance of Work, and AS 2815, The Meaning
of ``Present Fairly in Conformity with Generally Accepted Accounting
Principles;'' and amend several other related existing PCAOB standards
(collectively, the ``Amendments''). The Amendments were published for
comment in the Federal Register on June 11, 2024.\3\ On July 1, 2024,
the Commission extended the public comment period until July 16, 2024,
and extended the date by which the Commission shall either approve or
disapprove, or institute proceedings to determine whether to
disapprove, the Amendments to August 25, 2024.\4\ We received eleven
(11) comment letters in response to the Notice of Filing of Proposed
Rules.\5\ 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.
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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 General Responsibilities of the Auditor
in Conducting an Audit and Amendments to PCAOB Standards, Release
No. 34-100276 (June 5, 2024) [89 FR 49730 (June 11, 2024)] (``Notice
of Filing of Proposed Rules''), available at <a href="https://www.sec.gov/files/rules/pcaob/2024/34-100276.pdf">https://www.sec.gov/files/rules/pcaob/2024/34-100276.pdf</a>.
\4\ See Public Company Accounting Oversight Board; Extension of
Comment and Approval Periods for Proposed Rules on General
Responsibilities of the Auditor in Conducting an Audit and
Amendments to PCAOB Standards and A Firm's System of Quality Control
and Related Amendments to PCAOB Standards, Release No. 34-100451
(July 1, 2024) [89 FR 55993], available at <a href="https://www.sec.gov/files/rules/pcaob/2024/34-100451.pdf">https://www.sec.gov/files/rules/pcaob/2024/34-100451.pdf</a>.
\5\ We received comment letters from Stephen W. Hall, Legal
Director and Securities Specialist and Brady Williams, Legal
Counsel, Better Markets, Inc. (July 2, 2024) (``Better Markets''),
Dennis McGowan, Vice President, Professional Practice, Center for
Audit Quality (July 2, 2024) (``CAQ''), Jack T. Ciesielski, CPA, CFA
(July 2, 2024) (``Ciesielski''), Brandon J. Rees, Deputy Director,
Corporations and Capital Markets, American Federation of Labor and
Congress of Industrial Organizations (July 1, 2024) (``AFLCIO''),
Sandra J. Peters, CPA, CFA, Senior Head, Global Financial Reporting
Policy Advocacy, and Matthew P. Winters, CPA, CFA, Senior Director,
Global Financial Reporting Policy Advocacy, CFA Institute (July 1,
2024) (``CFAI''), Micah Hauptman, Director of Investor Protection,
Consumer Federation of America (July 1, 2024) (``Consumer Federation
of America''), PricewaterhouseCoopers LLP (June 28, 2024) (``PwC''),
Members of the Investor Advisory Group (June 28, 2024) (``MIAG''),
Deloitte & Touche LLP (June 28, 2024) (``Deloitte''), Jeffrey P.
Mahoney, General Counsel, Council of Institutional Investors (June
27, 2024) (``CII''), and Robert A. Conway, CPA (June 26, 2024)
(``Conway''). Comment letters received by the Commission on the
Amendments are available on the Commission's website at <a href="https://www.sec.gov/comments/pcaob-2024-01/pcaob202401.htm">https://www.sec.gov/comments/pcaob-2024-01/pcaob202401.htm</a>.
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II. Description of the Amendments
On May 13, 2024, the Board unanimously adopted the Amendments.\6\
The Amendments are intended to modernize, clarify, and streamline the
general principles and responsibilities of the auditor and provide a
more logical presentation, which should enhance the useability of the
standards by making them easier to read, understand, and apply. 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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\6\ See General Responsibilities of the Auditor in Conducting an
Audit and Amendments to PCAOB Standards, PCAOB Release No. 2024-004
(May 13, 2024) (``Adopting Release''), available at <a href="https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-049/2024-004-as1000.pdf?sfvrsn=3ba6358a_2">https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-049/2024-004-as1000.pdf?sfvrsn=3ba6358a_2</a>.
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A. Changes to PCAOB Standards
Among other things, the Amendments enhance the existing general
principles and responsibilities of an auditor by:
<bullet> Including introductory language that reaffirms the
auditor's fundamental obligation to protect investors through the
preparation and issuance of independent auditor's reports; \7\
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\7\ See AS 1000.01.
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<bullet> Including objectives related to the audit of the
effectiveness of a company's internal control over financial reporting;
\8\
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\8\ See AS 1000.03.
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<bullet> Retaining and clarifying the general principles and
responsibilities that are foundational for an audit, including
reasonable assurance,\9\ due professional care,\10\ professional
skepticism,\11\ and professional judgment; \12\
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\9\ See AS 1000.13 and .14.
\10\ See AS 1000.09 and .10.
\11\ See AS 1000.11.
\12\ See AS 1000.12.
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<bullet> Aligning the engagement partner's supervisory
responsibilities under AS 1201, Supervision of the Audit Engagement,
with due professional care; \13\
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\13\ See AS 1000.10 and AS 1201.03 and .04, as amended.
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<bullet> Retaining the requirement for the auditor to be
independent but expressing the obligation more directly by referring to
PCAOB independence rules and standards and SEC independence rules and
regulations; \14\
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\14\ See AS 1000.04 and .05.
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<bullet> Describing the auditor's obligations to (i) comply with
ethics requirements,\15\ (ii) obtain and maintain competence,\16\ and
(iii) prepare audit documentation; \17\
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\15\ See AS 1000.06.
\16\ See AS 1000.07 and .08.
\17\ See AS 1000.16.
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<bullet> Expressing the auditor's responsibilities by using the
terms set forth in PCAOB Rule 3101, Certain Terms Used in Auditing and
Related Professional Practice Standards; \18\ and
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\18\ See AS 1000.17 through .20.
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<bullet> Removing language that is outdated, inconsistent, and not
relevant to audits conducted under the standards of the PCAOB.
The Amendments also improve other PCAOB auditing standards that
address responsibilities fundamental to the conduct of an audit,
including by:
<bullet> Clarifying the engagement partner's existing
responsibilities for supervision and review by providing more
specificity related to such activities; \19\
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\19\ See AS 1201.05, AS 1215.02 and .15, and AS 2101.03, as
amended.
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<bullet> Clarifying the requirements for audit documentation in AS
1215 to identify who performed the work, who reviewed the work, and the
date of such review; \20\
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\20\ See AS 1215.06, as amended.
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<bullet> Accelerating the period in AS 1215 to assemble a complete
and final set of audit documentation for retention from 45 days to 14
days (``documentation completion date''); \21\ and
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\21\ See AS 1215.15, as amended.
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<bullet> Updating \22\ and incorporating the underlying
requirements of AS 2815 into AS 2810, Evaluating Audit Results, and
rescinding AS 2815, while preserving the meaning of ``presents fairly''
and streamlining the requirements to provide a more logical
presentation.\23\
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\22\ See e.g., supra note 6 at 54 (``The requirements of the SEC
for the company under audit are included in SEC Rule 4-01(a), which
we reference in a new footnote to paragraph .30A, to remind auditors
of the company's obligation regarding additional information that
may need to be disclosed in the financial statements so that the
financial statements are not misleading.'').
\23\ See AS 2810.17 and .30 through .31, as amended.
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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, 2024, except that,
for registered public accounting firms that provide audit opinions for
100 or fewer issuers during the calendar year ending December 31, 2024,
the amendment relating to the documentation completion date will take
effect 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''),\24\ as discussed in Section IV below.
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\24\ 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 <a href="https://www.sec.gov/files/rules/final/2022/33-11098.pdf">https://www.sec.gov/files/rules/final/2022/33-11098.pdf</a>.
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III. Comment Letters
As noted above, to date the Commission has received eleven (11)
comment letters on the Amendments.\25\ Commenters were generally
supportive of the Amendments.\26\
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\25\ See supra note 5.
\26\ See, e.g., letters from Conway; Deloitte; CAQ; and MIAG.
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Some commenters suggested that the Commission encourage the PCAOB
to provide implementation support and to undertake a post-
implementation review of the Amendments to assess whether they have met
their stated objectives. \27\ The Board has a historical practice of
post-implementation review \28\ as well as issuing appropriate
implementation guidance for new standard and rule amendments when
needed. We acknowledge the importance of monitoring the implementation
of the Amendments and the Commission staff works closely with the PCAOB
as part of the Commission's general oversight mandate.\29\ As part of
that oversight, Commission staff will keep itself apprised of the
PCAOB's activities for monitoring and supporting the implementation of
the Amendments and update the Commission, as necessary.
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\27\ See, e.g., letters from CAQ (regarding implementation
support) and MIAG and CII (regarding post-implementation review).
\28\ 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 <a href="https://assets.pcaobus.org/pcaob-dev/docs/default-source/economicandriskanalysis/pir/documents/estimates-specialists-interim-analysis-report.pdf?sfvrsn=e1b0eb15_4">https://assets.pcaobus.org/pcaob-dev/docs/default-source/economicandriskanalysis/pir/documents/estimates-specialists-interim-analysis-report.pdf?sfvrsn=e1b0eb15_4</a>.
\29\ See Section 107 of SOX.
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Some commenters stated that because the Amendments extend the
concept of due professional care, specifically professional skepticism,
beyond a critical assessment of audit evidence to a critical assessment
of other information related to the audit, the Amendments will result
in increased focus on the preparation of Form AP, Audit Participants,
among other things.\30\ We acknowledge this comment and, because due
professional care and professional skepticism are foundational elements
of auditing, we agree with the Board's assessment that it is
appropriate to apply the concept of due professional care to all
aspects of the audit, including aspects of the audit that extend beyond
the issuance of the auditor's report, such as the completion of audit
documentation and the public reporting requirements in Form AP.\31\
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\30\ See letters from PwC and CAQ.
\31\ See Notice of Filing of Proposed Rules, at Section
III.B.4.i.
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The same commenters observed that the effective date of the
Amendments related to the 14-day documentation completion date
requirement does not reference interim reviews or stub periods and
requested clarification.\32\ We note that existing AS 1215 applies to
documentation completion and specifies that, for reviews of interim
financial information, the standard takes effect beginning with the
first quarter ending after the first financial statement audit covered
by the standard. For audits, the application of the effective date is
explicit in the Adopting Release. For audits of stub periods, we
believe the effective date of the document completion requirement is
clear. Nevertheless, we encourage the PCAOB staff to consider the need
to provide additional guidance which could be useful to firms.
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\32\ See letters from PwC and CAQ.
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SOX requires us to determine whether the Amendments are consistent
with the requirements of Title I of SOX and the rules and regulations
thereunder or are necessary or appropriate in the public interest or
for the protection of investors.\33\ 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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\33\ 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 Proposed Rules, the Board recommended
that the Commission determine that the Amendments apply to audits of
EGCs.\34\ 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.
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\34\ See Notice of Filing of Proposed Rules.
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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 explained why it
believes the Amendments should apply to audits of EGCs. The Board
sought public input on the application of the Amendments to the audits
of EGCs, and those that responded to the Board generally agreed the
Amendments should apply to the audits of EGCs.\35\
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\35\ See Adopting Release, supra note 6 at 93 to 95.
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We agree with the Board's assessment and believe that applying the
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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 non-EGCs, 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\
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\36\ See Adopting Release, supra note 6 at 94.
\37\ Id.
\38\ Id.
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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\
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\39\ Id. at 95.
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As the PCAOB explained in its analysis, the amendment to accelerate
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.
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\40\ Id.
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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
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,
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\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.'').
\42\ See Rule 4-01 under Regulation S-X, 17 CFR 210.4-01(a).
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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-
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
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