[Federal Register Volume 69, Number 69 (Friday, April 9, 2004)]
[Notices]
[Pages 18991-18994]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-8084]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49528; File No. PCAOB-2003-10]
Public Company Accounting Oversight Board; Notice of Filing of
Proposed Auditing Standard No. 1, References in Auditors' Reports to
the Standards of the Public Company Accounting Oversight Board
April 6, 2004.
Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the
``Act''), notice is hereby given that on December 22, 2003, the Public
Company Accounting Oversight Board (the ``Board'' or the ``PCAOB'')
filed with the Securities and Exchange Commission (the ``Commission''
or the ``SEC'') the proposed rule described in Items I and II below,
which items have been prepared by the Board.\1\ The Commission is
publishing this notice to solicit comments on the proposed rule from
interested persons.
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\1\ Section 3(c) of the Act provides that ``[n]othing in this
Act or the rules of the Board shall be construed to impair or limit
* * * (2) the authority of the Commission to set standards for
accounting or auditing practices or auditor independence, derived
from other provisions of the securities laws or the rules or
regulations thereunder, for purposes of the preparation and issuance
of any audit report, or otherwise under applicable law * * *.'' When
an independent accountant prepares a report for submission or filing
with the Commission, the independent accountant would be considered
to be representing that it has complied with the applicable federal
securities laws and Commission rules and staff guidance, as well as
with the standards of the Public Company Accounting Standards Board
(United States) as referenced explicitly in the Board's proposed
Auditing Standard No. 1. In a note to PCAOB Rule 3600T, Interim
Independence Standards, the Board specifically provided that the
PCAOB's rules do not supersede the Commission's rules, and,
therefore, registered public accounting firms must comply with the
more restrictive of the Commission's or the Board's rules.
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I. Board's Statement of the Terms of Substance of the Proposed Rule
On December 17, 2003, the Board adopted a rule, Auditing Standard
No. 1, References in Auditors' Reports to the Standards of the Public
Company Accounting Oversight Board (``the proposed rule''). The text of
the proposed rule is set out below.
The text of the proposed rule, including an appendix of
illustrative auditor's reports, is as follows:
Auditing Standard No. 1--References in Auditors' Reports to the
Standards of the Public Company Accounting Oversight Board
1. The Sarbanes-Oxley Act of 2002 authorized the Public Company
Accounting Oversight Board (``PCAOB'') to establish auditing and
related professional practice standards to be used by registered public
accounting firms. PCAOB Rule 3100, Compliance with Auditing and Related
Professional Practice Standards, requires the auditor to comply with
all applicable auditing and related professional practice standards of
the PCAOB.
2. The Board has adopted as interim standards, on an initial,
transitional basis, the generally accepted auditing standards,
described in the American Institute of Certified Public Accountants'
(``AICPA'') Auditing Standards Board's Statement on Auditing Standards
No. 95, Generally Accepted Auditing Standards, in existence on April
16, 2003.\2\
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\2\ The Board's rules on interim standards were adopted by the
Board on April 16, 2003, and approved by the Commission on April 25,
2003. See Release No. 33-8222 (April 25, 2003).
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3. Accordingly, in connection with any engagement performed in
accordance with the auditing and related professional practice
standards of the PCAOB, whenever the auditor is required by the interim
standards to make reference in a report to generally accepted auditing
standards, U.S. generally accepted auditing standards, auditing
standards generally accepted in the United States of America, or
standards established by the AICPA, the auditor must instead refer to
``the standards of the Public Company Accounting Oversight Board
(United States).'' An auditor must also include the city and state (or
city and country, in the case of non-U.S. auditors) from which the
auditor's report has been issued.
4. This auditing standard is effective for auditors' reports issued
or reissued on or after the 10th day following approval of this
auditing standard by the Securities and Exchange Commission.
5. Audit reports issued prior to the effective date of this
standard were required to state that the audits that supported those
reports were performed in accordance with generally accepted auditing
standards. The PCAOB adopted those generally accepted auditing
standards, including their respective effective dates, as they existed
on April 16, 2003, as interim standards. Therefore, reference to ``the
standards of the Public Company Accounting Oversight Board (United
States)'' with respect to audits of financial statements performed
prior to the effective date of this standard is equivalent to the
previously-required reference to generally accepted auditing standards.
Accordingly, upon adoption of this standard, a reference to generally
accepted auditing standards in auditors' reports is no longer
appropriate or necessary.
Note: The term ``auditor'' in this standard is intended to
include both registered public accounting firms and associated
persons thereof.
APPENDIX
Illustrative Reports
The following is an illustrative report on an audit of financial
statements:
Report of Independent Registered Public Accounting Firm
We have audited the accompanying balance sheets of X Company as of
December 31, 20X3 and 20X2, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 20X3. These
[[Page 18992]]
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Company
as of [at] December 31, 20X3 and 20X2, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 20X3, in conformity with U.S. generally accepted
accounting principles.
[Signature]
[City and State or Country]
[Date]
The following is an illustrative report on a review of interim
financial information:
Report of Independent Registered Public Accounting Firm
We have reviewed the accompanying [describe the interim financial
information or statements reviewed] of X Company as of September 30,
20X3 and 20X2, and for the three-month and nine-month periods then
ended. This (these) interim financial information (statements) is (are)
the responsibility of the Company's management.
We conducted our review in accordance with the standards of the
Public Company Accounting Oversight Board (United States). A review of
interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with the standards of the Public
Company Accounting Oversight Board, the objective of which is the
expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying interim financial (statements)
for it (them) to be in conformity with U.S. generally accepted
accounting principles.
[Signature]
[City and State or Country]
[Date]
II. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rule
In its filing with the Commission, the Board included statements
concerning the purpose of, and basis for, the proposed rule and
discussed any comments it received on the proposed rule. The text of
these statements may be examined at the places specified in Item IV
below. The Board has prepared summaries, set forth in sections A, B,
and C below, of the most significant aspects of such statements.
A. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rule
(a) Purpose
Section 103(a)(1) of the Act authorized the PCAOB to establish, by
rule, auditing standards to be used by registered public accounting
firms in the preparation and issuance of audit reports, as required by
the Act. PCAOB Rule 3100, ``Compliance with Auditing and Related
Professional Practice Standards,'' requires auditors to comply with all
applicable auditing and related professional practice standards
established by the PCAOB. The Board has adopted as interim standards,
on an initial, transitional basis, the generally accepted auditing
standards, described in the American Institute of Certified Public
Accountants' (``AICPA'') Auditing Standards Board's Statement on
Auditing Standards No. 95, Generally Accepted Auditing Standards, in
existence on April 16, 2003 (the ``interim standards'').
The Board's interim standards--as did the profession's generally
accepted auditing standards that preceded the Board's standards--
require auditors to make reference in their audit and review reports to
the standards that they followed in conducting the audits and reviews.
To conform the language of auditors' reports to the requirement that
auditors comply with PCAOB standards, the Board's proposed rule would
require auditors' reports to refer to ``the standards of the U.S.
Public Company Accounting Oversight Board (United States).''
In addition, to make the Board's interim standards consistent with
the Act and Rule 3100, this proposed rule provides that all references
in the interim standards to generally accepted auditing standards, U.S.
generally accepted auditing standards, auditing standards generally
accepted in the United States of America, and standards established by
the AICPA, would mean ``the standards of the Public Company Accounting
Oversight Board (United States).''
(b) Statutory Basis
The statutory basis for the proposed rule is Title I of the Act.
B. Board's Statement on Burden on Competition
The Board does not believe that the proposed rule will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. Pursuant to the Act and PCAOB
Rule 3100, registered public accounting firms must comply with all
applicable auditing and related professional practice standards
established by the PCAOB. The proposed rule would simply require a
registered public accounting firm to make reference in the auditor's
report to the standards of the PCAOB whenever the engagement was
performed pursuant to the Board's auditing and related professional
practice standards.
C. Board's Statement on Comments on the Proposed Rule Received From
Members, Participants or Others
The Board released the proposed rule for public comment in PCAOB
Release No. 2003-021 (November 12, 2003). A copy of PCAOB Release No.
2003-021 and the comment letters received in response to the PCAOB's
request for comment are available on the PCAOB's Web site at
www.pcaobus.org. The Board received eight written comments. The Board
has clarified and modified certain aspects of the proposed rule and the
instructions to the related form in response to comments it received,
as discussed below.
The Board received several comments related to transitional issues,
including how the proposed standard would affect the reissuance of a
report originally issued before the proposed standard became effective;
issuance of a report on comparative financial statements when the
audits of the financial statements for periods presented for
comparative purposes were conducted before the proposed standard became
effective and/or before the Board adopted its interim standards; and
issuance of a dual-dated report that include dates that
[[Page 18993]]
straddle the effective date of this standard.
In the proposed standard, the Board had recommended the standard be
effective for auditors' reports dated on or after the later of January
1, 2004 or the 10th day after SEC approval of the standard as adopted
by the Board. In evaluating the comments with regard to transition, the
Board decided to modify the effective date of this standard. Rather
than linking the effective date of this standard to the date of the
report, this auditing standard will be effective for reports issued or
reissued on or after the 10th day following SEC approval of this
auditing standard. After this standard becomes effective, any auditor's
report issued or reissued with respect to the financial statements of a
public company must state that the engagement was performed in
accordance with ``the standards of the Public Company Accounting
Oversight Board (United States).''
One commenter also expressed concern that the proposed standard's
requirement that a report state that an audit performed prior to the
PCAOB's adoption of interim standards was performed in accordance with
PCAOB standards would, in essence, require the auditor to re-audit the
prior period's financial statements in order to bring that audit or
review into conformity with current PCAOB standards. The Board does not
intend to require auditors to bring audits that were performed in
accordance with then-prevailing standards into conformity with later-
prevailing standards in order to reissue a previously-issued report.
When the Board adopted as interim standards the generally accepted
auditing standards established by the ASB, the Board also adopted the
effective dates of those standards. Therefore, reference in auditors'
reports to the standards of the PCAOB with respect to financial
statements audited or reviewed prior to the effective date of Auditing
Standard No. 1 is equivalent to the previously-required reference to
generally accepted auditing standards. The reference relates to those
standards that were in effect when the audit or review was completed
and should not be interpreted to imply a representation that the audit
or review complied with standards that became effective after the audit
or review was completed.
Several commenters recommended that the Board only require
auditors' reports to refer to the auditing standards of the PCAOB for
audits of financial statements and not to the standards of the PCAOB
generally. The Board intends for report references to ``the standards
of the Public Company Accounting Oversight Board (United States)'' to
mean those auditing and related professional practice standards that
are applicable to the particular engagement. For example, if an issuer
does not use any outside service organization that would affect its
internal control over financial reporting, then the interim auditing
standard on service organizations `` described in the Codification of
Statements on Auditing Standards at AU section 324 (Service
Organizations), would not be applicable. On the other hand, the Board's
independence standards apply to registered public accounting firms, and
associated persons thereof, in connection with the preparation and
issuance of audit reports for issuers.
As another example, quality control standards generally apply to a
firm's system of quality control over its accounting and auditing
practice and not to individual audit engagements. Thus, a breakdown in
the system of quality control does not necessarily mean that a
particular audit was not conducted in accordance with the standards of
the PCAOB. However, such a breakdown might result in a deficient audit
if it caused or contributed to an audit deficiency. The determination
as to whether a particular auditing or related professional practice
standard is applicable in the context of a particular audit is
dependent on the nature of the standard in question and on the nature
of the engagement at issue.
Thus a reference to ``auditing standards'' of the PCAOB would be
too narrow and preclusive to other standards applicable to the audit.
The Board believes that reference to ``the standards of the Public
Company Accounting Oversight Board (United States)'' is a more
descriptive reference to the standards applied in the audit.
The Board received a number of comments recommending that auditors'
reports, with respect to financial statement audits, describe PCAOB
standards as generally accepted auditing standards. The notion of
general acceptance developed at a time when auditing and accounting
standards were not established with the force of law by governmental or
other authoritative bodies, but rather were established by consensus
among the members of the accounting profession.
As far as auditing and related professional practice standards are
concerned, the Board gained authority to establish such standards by
the enactment of the Act. Professional consensus is no longer
sufficient to establish auditing standards, and therefore the Board
believes that it is no longer appropriate to refer to the standards
with which an auditor of the financial statements of a public company
must comply as ``generally accepted.'' While those standards may be
generally accepted in a variety of contexts, what gives them the force
of law in the context of public company audits is adoption by the PCAOB
and approval by the SEC.
Therefore, for purposes of any engagement performed in accordance
with the applicable auditing and related professional practice
standards of the PCAOB, references in the interim standards to
generally accepted auditing standards, U.S. generally accepted auditing
standards, auditing standards generally accepted in the United States
of America, and standards established by the AICPA, mean the standards
of the PCAOB.
The Board also received comments recommending that the Board
continue to require auditors to state in their reports that the
standards according to which they performed their engagements were
those standards applicable in the United States. Adopting this
recommendation will make it easier for readers of audit reports that
are used in cross-border offerings and listings of securities to
quickly identify the jurisdiction in which the standards were
promulgated. As such, the Board has required in Auditing Standard No. 1
that auditors' reports describe the PCAOB's standards as ``the
standards of the Public Company Accounting Oversight Board (United
States).''
Another commenter recommended that auditors identify in their
reports the city and state (or country) of the registered firms issuing
the reports. The SEC's rules require disclosure in the auditor's report
of the city and state of the accounting firm's office issuing the
report. (17 CFR 210.2-02). The Board also concurs with this
recommendation and, accordingly, has modified the auditing standard and
the illustrative reports in the appendix to Auditing Standard No. 1.
The Board was asked to clarify the applicability of this standard,
and the Board's standards generally, to circumstances where more than
one auditing firm contributes to an audit of a consolidated entity. For
example, a firm other than the firm engaged to report on the company's
consolidated financial statements may be hired to audit the financial
statements of a subsidiary company. In such circumstances, the auditor
that conducts the majority of the audit is referred to as the principal
auditor and the auditor of the subsidiary company is referred to as the
other auditor. (See Codification of
[[Page 18994]]
Auditing Standards, AU section 543). Depending on the significance of
the portion of the financial statements audited by the other auditor,
the principal auditor may divide responsibility with the other auditor
by making reference to the audit of the other auditor in his or her
report, or the principal auditor may take responsibility for the work
of the other auditor by not making any reference to the other auditor.
In either event, the entire audit must be performed in accordance
with the Board's standards. Section 103 of the Act, and the Board's
Rule 3100, require registered public accounting firms, and associated
persons thereof, to comply with all applicable auditing and related
professional practice standards in connection with the preparation and
issuance of audit reports on the financial statements of issuers.
Whether the other auditor is a registered public accounting firm or an
associated person of a registered public accounting firm, the other
auditor must comply with the standards of the PCAOB.
Another commenter asked the Board to clarify whether non-U.S.
public accounting firms--who are not required to register with the
PCAOB until 2004--will be permitted, until registered with the PCAOB,
to continue to reference ``auditing standards generally accepted in the
United States of America'' when reporting on an issuer's financial
statements. Like the Board's interim standards, with which a public
accounting firm is required to comply even before the firm's mandatory
registration date, during the period preceding the mandatory
registration date, standards of the PCAOB apply to firms engaged in
work that requires their registration. Therefore, non-U.S. public
accounting firms that have not yet registered, that engage in work that
would require them to be registered as of the mandatory registration
date, are nevertheless required to reference ``the standards of the
Public Company Accounting Oversight Board (United States).''
Another commenter recommended that the Board expand the proposed
standard to specifically address the various scenarios that auditors
will encounter with respect to reporting in conjunction with initial
public offerings. The SEC's Rule 3-01 of Regulation S-X requires that,
like other SEC filings that must comply with Regulation S-X, a
registration statement filed in connection with an initial public
offering must include or otherwise incorporate ``for the registrant and
its subsidiaries consolidated, audited balance sheets as of the end of
each of the two most recent fiscal years.'' (17 CFR 210.3-01). In
addition, Rule 3-02 of Regulation S-X requires that there ``be filed,
for the registrant and its subsidiaries consolidated and for its
predecessors, audited statements of income and cash flows for each of
the three fiscal years preceding the date of the most recent audited
balance sheet.'' (17 CFR 210.3-02). Thus an issuer desiring to register
a transaction involving the sale of securities must have financial
statements audited in accordance with standards as required by the
securities laws.
In Section 103 of the Act, Congress has provided the Board
authority to establish auditing and related professional practice
standards ``to be used by registered public accounting firms in the
preparation and issuance of audit reports.'' In addition, the PCAOB has
adopted, and the SEC has approved, PCAOB Rule 3100, which requires
registered public accounting firms to comply with all applicable
auditing and related professional practice standards of the PCAOB in
connection with the preparation and issuance of audit reports on the
financial statements of issuers. Accordingly, audit reports on the
financial statements of issuers must now comply with--and under
Auditing Standard No. 1 auditors must state that they performed the
audit in accordance with--the standards of the PCAOB. So long as audits
that were performed prior to April 25, 2003, were performed in
accordance with then-prevailing generally accepted auditing standards,
an auditor need not re-audit any financial statements that relate to
periods preceding April 25, 2003. Further, as discussed above, because
the Board adopted the ``generally accepted auditing standards'' in
effect as of April 16, 2003, the Board believes it is appropriate to
require auditors who issue or reissue reports on periods prior to the
date Auditing Standard No. 1 becomes effective to state that their
audits were performed in accordance with PCAOB standards, so long as
they were performed in accordance with the ``generally accepted
auditing standards'' prevailing at the time the audits were performed.
III. Date of Effectiveness of the Proposed Rule and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register, or within such longer period (i) as the Commission
may designate up to 90 days of such date if it finds such longer period
to be appropriate and publishes its reasons for so finding or (ii) as
to which the Board consents, the Commission will:
(a) By order approve such proposed rule; or
(b) Institute proceedings to determine whether the proposed rule
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed
rules are consistent with the Act. Comments may be submitted
electronically or by paper. Electronic comments may be submitted by:
(1) Electronic form on the SEC Web site (http://www.sec.gov) or (2) e-
mail to [email protected]. Mail paper comments in triplicate to
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450
Fifth Street, NW., Washington, DC 20549-0609. All submissions should
refer to File No. PCAOB-2003-10; this file number should be included on
the subject line if e-mail is used. To help us process and review your
comments more efficiently, please use only one method. The Commission
will post all comments on the Commission's internet Web site (http://www.sec.gov). Comments are also available for public inspection and
copying in the Commission's Public Reference Room, 450 Fifth Street,
NW., Washington, DC 20549. We do not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All comments should be submitted
on or before April 30, 2004.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-8084 Filed 4-8-04; 8:45 am]
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