[Federal Register Volume 69, Number 98 (Thursday, May 20, 2004)]
[Rules and Regulations]
[Pages 29064-29066]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11399]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 211, 231, and 241

[Release Nos. 33-8422; 34-49708; FR-73]


Commission Guidance Regarding the Public Company Accounting 
Oversight Board's Auditing and Related Professional Practice Standard 
No. 1

AGENCY: Securities and Exchange Commission.

ACTION: Interpretation.

-----------------------------------------------------------------------

SUMMARY: The Commission is publishing interpretive guidance regarding 
Auditing and Related Professional Practice Standard No. 1, References 
in Auditors' Reports to the Standards of the Public Company Accounting 
Oversight Board (``Auditing Standard No. 1'') of the Public Company 
Accounting Oversight Board (the ``PCAOB'').

DATES: Effective Date: May 14, 2004.

FOR FURTHER INFORMATION CONTACT: Questions about specific filings 
should be directed to staff members responsible for reviewing the 
documents the registrant files with the Commission. General questions 
about this release should be referred to Consuelo Hitchcock, Division 
of Corporation Finance, at (202) 942-2960 or to Esmeralda Rodriguez, 
Office of the Chief Accountant, at (202) 942-4400, Securities and 
Exchange Commission, 450 5th Street NW., Washington, DC 20549-0401.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 103(a) of the Sarbanes-Oxley Act of 2002 (the ``Act'') 
authorized the PCAOB to establish auditing and related professional 
practice standards to be used by registered public accounting firms.\1\ 
On December 23, 2003, the PCAOB filed with the Commission proposed 
Auditing Standard No. 1, References in Auditing Reports to the 
Standards of the Public Company Accounting Oversight Board.\2\ After 
soliciting comments on the proposed standard,\3\ the Commission today 
approved Auditing Standard No. 1, effective for auditors' reports 
issued or reissued on or after May 24, 2004.\4\ Auditing Standard No. 1 
directly impacts certain of the Commission's

[[Page 29065]]

rules, regulations, releases and staff bulletins (collectively referred 
to in this release as ``Commission rules and staff guidance'') and 
certain provisions in the federal securities laws, which refer to 
Generally Accepted Auditing Standards (``GAAS'') and to specific 
standards under GAAS (including related professional practice 
standards), because it directs auditors to cease referring to GAAS in 
audit reports relating to financial statements of issuers and instead 
to refer to the ``standards of the Public Company Accounting Oversight 
Board (United States).'' \5\ The Commission is therefore issuing 
interpretive guidance to avoid confusion on the part of issuers, 
auditors and investors. The guidance in this release is applicable only 
to auditors' engagements that are governed by PCAOB rules.\6\
---------------------------------------------------------------------------

    \1\ Pub. L. 107-204, 116 Stat. 745 (2002).
    \2\ The PCAOB approved Auditing Standard No. 1 on December 17, 
2003. PCAOB Release No. 2003-25 (December 17, 2003) (the ``PCAOB 
Adopting Release'').
    \3\ Release No. 34-49528 (April 6, 2004).
    \4\ Release No. 34-49707 (May 14, 2004).
    \5\ PCAOB Adopting Release at A-2.
    \6\ The PCAOB, for example, has not established particular 
auditing standards for non-issuer broker-dealers or investment 
advisers. This release is not applicable to such engagements and 
related filings.
---------------------------------------------------------------------------

II. Discussion

A. References to GAAS in Commission Rules and Staff Guidance and in the 
Federal Securities Laws

    PCAOB Rule 3100 requires registered public accounting firms and 
their associated persons to comply with all applicable auditing and 
related professional practice standards established or adopted by the 
PCAOB. Because of this and because the PCAOB has adopted interim 
standards incorporating generally accepted auditing standards, 
references to GAAS and standards established by the American Institute 
of Certified Public Accountants (the ``AICPA'') are now superseded. 
Auditing Standard No. 1 requires that an auditor's report issued in 
connection with any engagement performed in accordance with the 
auditing and related professional practice standards of the PCAOB state 
that the engagement was performed in accordance with ``the standards of 
the Public Company Accounting Oversight Board (United States).'' \7\ In 
addition, Auditing Standard No. 1 states that ``a reference to 
generally accepted auditing standards in auditors' reports is no longer 
appropriate or necessary.'' \8\
---------------------------------------------------------------------------

    \7\ PCAOB Adopting Release at A-2.
    \8\ Id. at 7.
---------------------------------------------------------------------------

    Many parts of Commission rules and staff guidance include direct 
references to GAAS. For example, Regulation S-X, which, together with 
the Commission's Financial Reporting Releases, sets forth the form and 
content of and requirements for financial statements required to be 
filed with the Commission,\9\ includes Rule 2-02 regarding the 
accountant's report.\10\ Rule 2-02 of Regulation S-X states in relevant 
part:
---------------------------------------------------------------------------

    \9\ 17 CFR 210.1-01.
    \10\ 17 CFR 210.2-02.
---------------------------------------------------------------------------

``Representations as to the audit. The accountant's report: (1) Shall 
state whether the audit was made in accordance with generally accepted 
auditing standards * * *.'' \11\
---------------------------------------------------------------------------

    \11\ Id.

    Moreover, some Commission rules and staff guidance refer to 
specific auditing standards under GAAS. For example, Accounting Series 
Release No. 296, which is now in Section 601 of Financial Reporting 
Codification, references AU 220.03 of the Codification of Auditing 
Standards published by the AICPA.\12\ Finally, some parts of Commission 
rules and staff guidance could be said to include indirect references 
to GAAS because in releases or staff bulletins the Commission or its 
staff has interpreted rules and regulations by directing registrants, 
auditors and investors to GAAS.
---------------------------------------------------------------------------

    \12\ FRC 601. AU 220.03 is among the standards adopted by the 
PCAOB on an interim, transitional basis.
---------------------------------------------------------------------------

    In addition, the federal securities laws refer to GAAS. 
Specifically Section 10A(a) of the Securities Exchange Act of 1934 
states:

``[e]ach audit required pursuant to this title of the financial 
statements of an issuer by a registered public accounting firm shall 
include [the following procedures and an evaluation], in accordance 
with generally accepted auditing standards, as may be modified or 
supplemented from time to time by the Commission * * *.'' \13\
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78j-1.
---------------------------------------------------------------------------

    Given the possible confusion between Commission rules and staff 
guidance and references in the federal securities laws, on the one 
hand, and the PCAOB's rules, on the other hand, the Commission believes 
it is necessary to publish the guidance in this release. Effective 
immediately, references in Commission rules and staff guidance and in 
the federal securities laws to GAAS or to specific standards under 
GAAS, as they relate to issuers, should be understood to mean the 
standards of the PCAOB plus any applicable rules of the Commission. The 
Commission intends to codify this interpretation in the near future.
    It should be noted that although the PCAOB has stated that Auditing 
Standard No. 1 supersedes references 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,'' \14\ Auditing Standard No. 1 
does not supersede Commission rules or regulations. 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 
guidance, as well as with the standards of the Public Company 
Accounting Oversight Board (United States), as referenced explicitly in 
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.
---------------------------------------------------------------------------

    \14\ PCAOB Adopting Release at 3.
---------------------------------------------------------------------------

B. Incorporation by Reference

    Some registrants are able to incorporate by reference previously 
issued and filed reports by including an auditor's consent to the use 
of their report in the registrant's filing that requires the audit 
report. If a registrant incorporates by reference a report previously 
filed with the Commission, rather than including a new report in the 
filing, the report incorporated by reference would not need to include 
the otherwise-required reference to the standards of the PCAOB.

List of Subjects

17 CFR Part 211

    Reporting and recordkeeping requirements, Securities.

17 CFR Parts 231 and 241

    Securities.

Amendments to the Code of Federal Regulations

0
For the reasons set forth above, the Commission is amending title 17,

[[Page 29066]]

chapter II of the Code of Federal Regulations as set forth below:

PART 211--INTERPRETATIONS RELATING TO FINANCIAL REPORTING MATTERS

0
1. Part 211, Subpart A, is amended by adding Release No. FR-73 and the 
release date of May 14, 2004 to the list of interpretive releases.

PART 231--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES ACT OF 
1933 AND GENERAL RULES AND REGULATIONS THEREUNDER

0
2. Part 231 is amended by adding Release No. 33-8422 and the release 
date of May 14, 2004 to the list of interpretive releases.

PART 241--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES 
EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER

0
3. Part 241 is amended by adding Release No. 34-49708 and the release 
date of May 14, 2004 to the list of interpretive releases.

    Dated: May 14, 2004.

    By the Commission.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-11399 Filed 5-19-04; 8:45 am]
BILLING CODE 8010-01-P