[Federal Register Volume 75, Number 250 (Thursday, December 30, 2010)]
[Notices]
[Pages 82417-82419]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-32885]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63606; File No. PCAOB 2010-01]
Public Company Accounting Oversight Board; Order Approving
Proposed Rules on Auditing Standards Related to the Auditor's
Assessment of and Response to Risk and Related Amendments to PCAOB
Standards
December 23, 2010.
I. Introduction
On September 15, 2010, the Public Company Accounting Oversight
Board (the ``Board'' or the ``PCAOB'') filed with the Securities and
Exchange Commission (the ``Commission'') a notice (the ``Notice'') of
proposed rules (File No. PCAOB 2010-01) on Auditing Standards Related
to the Auditor's Assessment of and Response to Risk and Related
Amendments to PCAOB Standards. Those eight auditing standards
(hereinafter referred to as ``Risk Assessment Standards''), which will
supersede six of the Board's interim auditing standards, are:
Auditing Standard (``AS'') No. 8, Audit Risk;
AS No. 9, Audit Planning;
AS No. 10, Supervision of the Audit Engagement;
AS No. 11, Consideration of Materiality in Planning and
Performing an Audit;
AS No. 12, Identifying and Assessing Risks of Material
Misstatement;
AS No. 13, The Auditor's Responses to the Risks of
Material Misstatement;
AS No. 14, Evaluating Audit Results; and
AS No. 15, Audit Evidence.
Notice of the proposed rules was published in the Federal Register on
September 27, 2010.\1\ The Commission received two comment letters
relating to the proposed rules. For the reasons discussed below, the
Commission is granting approval of the proposed rules. As specified by
the Board, the rules are effective for audits of fiscal years beginning
on or after December 15, 2010.
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\1\ See Release No. 34-62919 (September 15, 2010) [75 FR 59332
(September 27, 2010)]. The notice included a 21-day comment period.
The comment period closed on October 18, 2010.
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II. Description
The Board adopted eight auditing standards and related amendments
that are designed to benefit investors by establishing requirements
that enhance the effectiveness of the auditor's assessment of and
response to the risks of material misstatement in an audit. Assessing
and responding to risks underlies the entire audit process. The risk
assessment standards that the PCAOB is replacing were part of the
Board's interim standards and were in large part written twenty to
thirty years ago. In adopting the new Risk Assessment Standards, the
Board intended to build upon and improve the risk framework that was
already established by the interim standards, rather than replacing
that framework altogether.
Changes that the Board made to the interim standards reflect:
Improvements that the PCAOB has observed in the audit methodologies of
many registered firms; recommendations from academia; recommendations
from the Board's Standing Advisory Group (``SAG'') and other groups;
the adoption of AS No. 5, An Audit of Internal Control Over Financial
Reporting That is Integrated with an Audit of Financial Statements;
improvements made to similar risk assessment standards by other
standard setters (e.g., the International Auditing and Assurance
Standards Board (``IAASB'') and the Auditing Standards Board (``ASB'')
of the American Institute of Certified Public Accountants); and
observations from the Board's oversight activities.
Key changes made to the standards include an increased emphasis on
fraud risks, an increased emphasis on disclosures, inclusion of multi-
location audit requirements, an alignment of the standards with AS No.
5, and inclusion of a concept of materiality more specifically grounded
to that used in the Federal securities laws.
III. Discussion
The Commission received two comment letters: One from Deloitte &
Touche, LLP (``Deloitte'') and one from the Center for Capital Markets
Competitiveness of the U.S. Chamber of Commerce (``CMCC''). Deloitte
supported approval of the standards, while expressing certain concerns
largely of a more general nature regarding the PCAOB's approach to
standard-setting. The CMCC believed that the Risk Assessment Standards
should not be approved, but rather sent back to the PCAOB in order for
the PCAOB to address certain concerns, most of which also related to
the PCAOB's overall approach to standard-setting as opposed to the
particular standards at issue.
[[Page 82418]]
Integration of Fraud Risk Standard Into the Risk Assessment Standards
One of the significant changes to the Risk Assessment Standards was
the incorporation of aspects of AU sec. 316, Consideration of Fraud in
a Financial Statement Audit, into the Risk Assessment Standards. In
explaining why the PCAOB incorporated portions of the fraud standard
into the Risk Assessment Standards, it stated that:
Incorporating these requirements makes clear that the auditor's
responsibilities for assessing and responding to fraud risks are an
integral part of the audit process rather than a separate, parallel
process. It also benefits investors by prompting auditors to make a
more thoughtful and thorough assessment of fraud risks and to
develop appropriate audit responses.\2\
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\2\ PCAOB Release No. 2010-004, August 5, 2010, p. 3.
The CCMC did not agree with the level of integration. The CCMC made
a similar comment during the PCAOB's due process stage, which the Board
addressed in its adopting release. This comment largely relates to a
disagreement as to the manner in which the standards are constructed,
as compared to the performance required of auditors. The Commission
believes that the PCAOB has given due consideration to the comments
received about this matter.
Effective Date
The effective date of the standards will be for audits of fiscal
years beginning on or after December 15, 2010. The CMCC expressed
concern about the effective date, stating that the effective date
``would not allow adequate time for audit firms to revise their audit
methodologies and train their audit staffs around the world for audits
in 2011.'' In response to similar concerns raised in its comment letter
process, including from the CCMC, the PCAOB stated in its release that
the underlying concepts of risk-based auditing have not changed, and
therefore, while there are many incremental requirements in the updated
standards, these standards should not require wholesale changes to
audit methodologies.\3\ Any delay in the effective date of these
standards would likely delay the implementation for most issuers for at
least one year (e.g., the standards would not be applicable generally
until calendar year 2012 audits related to audit reports to be issued
in 2013).
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\3\ PCAOB Release No. 2010-004, August 5, 2010, p. 8.
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After considering the nature of the changes in the Risk Assessment
Standards, the timing of Commission approval, and the fact that the
standards will not be applicable to audits for which audit reports will
be issued in 2011 (i.e., the first audit reports issued for which
audits would be required to be conducted using the new standards would
not be issued until 2012) we believe the PCAOB's approach for
implementation is not unreasonable.
PCAOB Standard-Setting Process
Both commenters noted various concerns about the PCAOB's standard-
setting process. The concerns identified included divergence from other
standard-setters, what the commenters viewed as a ``prescriptive''
nature of the standards, the lack of a codification of PCAOB standards,
the usefulness of the appendix that compares the PCAOB proposed
standard to the similar standards of other standard-setters, and the
use of certain terms in the standards. These comments all relate more
to the PCAOB's overall approach to standard-setting than particular
concerns with respect to the individual Risk Assessment Standards.
All of these comments are similar to those received by the PCAOB
during its standard-setting process, which the Board addressed. For
example with respect to divergence from other standard-setters, the
Board noted the following:
In previous releases on its proposed risk assessment standards,
the Board has stated that it has sought to eliminate unnecessary
differences with the risk assessment standards and those of other
standards-setters. However, because the Board's standards must be
consistent with the Board's statutory mandate, differences will
continue to exist between the Board's standards and the standards of
the IAASB and ASB, e.g., when the Board decides to retain an
existing requirement in PCAOB standards that is not included in
IAASB or ASB standards. Also, certain differences are often
necessary for the Board's standards to be consistent with relevant
provisions of the federal securities laws or other existing
standards or rules of the Board.\4\
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\4\ See PCAOB Release No. 2010-004, August 5, 2010, pp. A10-91--
A10-92 (internal footnotes omitted).
The Board also noted that it ``continually endeavors to improve its
processes'' and explained other initiatives it uses in both gaining
input on its standard-setting activities (e.g., through its SAG and by
releasing multiple exposure documents) and providing additional
transparency of its standards-setting process (e.g., through posting
its standards-setting agenda and enhanced discussions in its releases
on the Board's conclusions). The Commission notes and encourages the
Board's efforts to consider standards issued by the IAASB and the ASB,
and appreciates the reasons why it is reasonable to expect that the
Board's standards may appropriately differ from such standards. The
Commission and its staff will continue to provide oversight of the
Board and its staff's ongoing endeavor to improve its processes.
Regarding the ``prescriptive'' nature of the standards, we
recognize that there should be an appropriate balance in auditing
standards between providing necessary minimum requirements and allowing
auditors to apply judgment in determining the nature and extent of
audit procedures given the particular circumstances of an individual
engagement. PCAOB standards recognize that the auditor uses judgment in
planning and performing audit procedures and evaluating the evidence
obtained from those procedures. We recognize, however, that overly
broad standards without an appropriate balance of necessary
requirements could lead to a level of discretion in the nature and
extent of audit procedures that may limit the effectiveness of audits.
The Commission believes the PCAOB's approach in the Risk Assessment
Standards is not unreasonable and encourages the PCAOB to monitor
implementation and evaluate the input received during the development
of future standards to continue to strive to achieve an optimal
balance.
Regarding a codification of the auditing standards, the Commission
notes that the Board has recently added this project to its strategic
plan and amended its performance measure on standard-setting activities
to reflect this new initiative.
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed PCAOB Rules on Auditing Standards Related to the Auditor's
Assessment of and Response to Risk and Related Amendments to PCAOB
Standards (File No. PCAOB-2010-01) are consistent with the requirements
of the Sarbanes-Oxley Act of 2002, as amended (the ``Act'') and the
securities laws and are necessary or appropriate in the public interest
or for the protection of investors.
It is therefore ordered, pursuant to Section 107 of the Act and
Section 19(b)(2) of the Securities Exchange Act of 1934, that the
proposed PCAOB Rules on Auditing Standards Related to the Auditor's
Assessment of and Response to Risk and Related Amendments to PCAOB
Standards (File No. PCAOB-2010-01) be and hereby are approved.
[[Page 82419]]
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-32885 Filed 12-29-10; 8:45 am]
BILLING CODE 8011-01-P