[Federal Register Volume 69, Number 120 (Wednesday, June 23, 2004)]
[Notices]
[Pages 35083-35084]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-14233]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49884; File No. PCAOB 2004-03]


Public Company Accounting Oversight Board; Order Approving 
Proposed Auditing Standard No. 2, An Audit of Internal Control Over 
Financial Reporting Performed in Conjunction With an Audit of Financial 
Statements (``Auditing Standard No. 2'')

June 17, 2004.

I. Introduction

    On March 17, 2004, the Public Company Accounting Oversight Board 
(the ``Board'' or the ``PCAOB'') filed with the Securities and Exchange 
Commission (the ``Commission'') proposed Auditing Standard No. 2, An 
Audit of Internal Control Over Financial Reporting Performed in 
Conjunction with an Audit of Financial Statements (``Auditing Standard 
No. 2''), pursuant to section 107 of the Sarbanes-Oxley Act of 2002 
(the ``Act'') and section 19(b) of the Securities Exchange Act of 1934 
(the ``Exchange Act''). Auditing Standard No. 2 would provide the 
professional standards and related performance guidance for independent 
auditors to attest to, and report on, management's assessment of the 
effectiveness of internal control over financial reporting under 
section 404 of the Act. Notice of the proposed standard was published 
in

[[Page 35084]]

the Federal Register on April 16, 2004,\1\ and the Commission received 
31 comment letters. For the reasons discussed below, the Commission is 
granting approval of the proposed standard.
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    \1\ Release No. 34-49544 (April 8, 2004); 69 FR 20672 (April 16, 
2004).
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II. Description

    The Act establishes the PCAOB to oversee the audits of public 
companies and related matters, to protect investors, and to further the 
public interest in preparation of informative, accurate and independent 
audit reports.\2\ Section 103(a) of the Act directs the PCAOB to 
establish auditing and related attestation standards, quality control 
standards, and ethics standards to be used by registered public 
accounting firms in the preparation and issuance of audit reports as 
required by the Act or the rules of the Commission. The Board has 
defined the term ``auditing and related processional practice 
standards'' to mean the standards established or adopted by the Board 
under section 103(a) of the Act.
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    \2\ Section 101(a) of the Act.
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    Section 404 of the Act requires that registered public accounting 
firms attest to and report on an assessment of internal control made by 
management, and that such attestation ``shall be made in accordance 
with standards for attestation engagements issued or adopted by the 
Board.'' The Board's proposed Auditing Standard No. 2 provides the 
professional standards and related performance guidance for independent 
auditors to attest to, and report on, management's assessment of the 
effectiveness of internal control over financial reporting under 
section 404 of the Act. A significant aspect of this proposed standard 
is the requirement of the independent auditor to attest on two items. 
The auditor has to evaluate management's assessment process to be 
satisfied that management has an appropriate basis for its conclusion. 
Additionally, the auditor must test and evaluate both the design and 
the operating effectiveness of internal control to be satisfied that 
management's conclusion is correct and, therefore, fairly stated. The 
auditor's report on internal control over financial reporting will 
express two opinions--an opinion on whether management's assessment of 
the effectiveness of internal control over financial reporting as of 
the end of the most recent fiscal year is fairly stated, and an opinion 
on whether the company has maintained effective internal control over 
financial reporting as of that date.

III. Discussion

    The Commission received 31 comment letters in response to its 
request for comments on Auditing Standard No. 2. The comment letters 
came from issuers, registered public accounting firms, professional 
associations and others. In general, issuers expressed opposition to 
the proposed standard, and accounting firms, professional associations, 
and others expressed support for the proposed standard. Most 
commenters, irrespective of affiliation or position on the proposed 
standard, recommended that the Commission and the PCAOB provide 
additional guidance with respect to a number of different issues. 
Several commenters recommended that the Commission limit the scope of 
management's assessment of the effectiveness of internal control over 
financial reporting by excluding entities that are consolidated but 
over which the issuer lacks control.
    Issuers and many of the professional associations also expressed 
concern with the cost of compliance in terms of management time, 
consultant fees and audit fees. One commenter requested that the PCAOB 
closely monitor the impact of the proposed standard on small and 
medium-sized companies. Other requests included clarifying that an 
adverse internal control report would not of itself result in 
regulatory action; delaying the effective date of the proposed 
standard; providing a one-year deferral to issuers that meet the 
definition of an accelerated filer for the first time in 2004; and 
deferring the accelerated filing date for Forms 10-K filed for year-end 
2004. The PCAOB gave careful consideration to the issues raised by 
these commenters in the course of revising the proposed standard prior 
to its adoption by the Board. The resulting standard is a reasonable 
exercise of the Board's standards-setting authority under the Act.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that proposed 
Auditing Standard No. 2 is consistent with the requirements of the Act 
and the securities laws and is necessary and appropriate in the public 
interest and for the protection of investors.
    It is therefore ordered, pursuant to Section 107 of the Act and 
Section 19(b)(2) of the Exchange Act, that proposed Auditing Standard 
No. 2, An Audit of Internal Control Over Financial Reporting Performed 
in Conjunction With an Audit of Financial Statements (File No. PCAOB-
2004-03) be and hereby is approved.

By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-14233 Filed 6-22-04; 8:45 am]
BILLING CODE 8010-01-P