[Federal Register Volume 69, Number 177 (Tuesday, September 14, 2004)]
[Notices]
[Pages 55478-55479]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2184]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50331; File No. PCAOB-2004-06]


Public Company Accounting Oversight Board; Order Approving 
Proposed Rule 3101, Certain Terms Used in Auditing and Related 
Professional Practice Standards and an Amendment to Rule 1001, 
Definitions of Terms Employed in Rules

September 8, 2004.

I. Introduction

    On June 18, 2004, the Public Company Accounting Oversight Board 
(the ``Board'' or the ``PCAOB'') filed with the Securities and Exchange 
Commission (the ``Commission'') proposed Rule 3101, Certain Terms Used 
in Auditing and Related Professional Practice Standards (``Rule 
3101''), and an amendment to paragraph (a)(xii) of Rule 1001, 
Definitions of Terms Employed in Rules (``Rule 1001(a)(xii)''), 
pursuant to the Sarbanes-Oxley Act of 2002 (the ``Act'') \1\ and 
Section 19(b) of the Securities Exchange Act of 1934 (the ``Exchange 
Act''). Rule 3101 sets forth the terminology the PCAOB will use to 
describe the degree of responsibility that the auditing and related 
professional practice standards impose on auditors that conduct 
engagements pursuant to the standards of the PCAOB and Rule 
1001(a)(xii) defines the term ``auditor'' when applied to rules and 
standards adopted by the PCAOB. Notice of proposed Rule 3101 and Rule 
1001(a)(xii) was published in the Federal Register on August 2, 
2004,\2\ and the Commission received five comment letters. For the 
reasons discussed below, the Commission is granting approval of Rule 
3101 and Rule 1001(a)(xii).
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    \1\ Sections 101, 103, and 107 of the Act.
    \2\ Release No. 34-50077 (July 26, 2004); 69 FR 46189 (August 2, 
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 the preparation of informative, accurate and 
independent audit reports.\3\ Section 103(a)(3) of the Act also states 
that the Board may adopt any statement of auditing or related 
professional practice standards developed by a professional group of 
accountants as interim or transitional standards, with the Board 
retaining full authority to modify, supplement, revise or subsequently 
amend, modify or repeal, in whole or in part, any such statements. 
Pursuant to this authority, the PCAOB adopted the auditing and related 
professional practice standards of the American Institute of Certified 
Public Accountants, as they existed on April 16, 2003, as interim or 
transitional standards (the ``interim standards'').\4\
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    \3\ Section 101(a) of the Act.
    \4\ The Commission approved the PCAOB's action in Release No. 
34-47745, Order Regarding Section 103(a)(3)(B) of the Sarbanes-Oxley 
Act of 2002, (April 25, 2003).
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    The Board's proposed Rule 3101 sets forth the terminology the PCAOB 
will use to describe the degree of responsibility that the auditing and 
related professional practice standards impose on auditors that conduct 
engagements pursuant to the standards of the PCAOB. The accounting 
profession had not previously defined imperative terms, such as 
``should'' or ``must,'' used to describe different degrees of auditor 
responsibility when conducting engagements in accordance with 
professional standards. The PCAOB determined that defining the level of 
imperatives would assist auditors with their work by clarifying their 
responsibilities and thus would enhance the consistency of the work and 
the quality of the audits. In addition, clear definitions would aid the 
PCAOB in writing new standards in a uniform and understandable 
language. Thus, the PCAOB decided that it was important to clarify the 
meaning of these imperatives, since they are an integral part of every 
standard adopted or established by the PCAOB.
    The general requirements of the proposed rule create three 
categories of imperatives, which impose different degrees of 
responsibility on the part of the auditor:
    (1) Unconditional Responsibility: The words ``must,'' ``shall,'' 
and ``is required'' indicate unconditional responsibilities. The 
auditor must fulfill responsibilities of this type in all cases in 
which the circumstances exist to which the requirement applies.
    (2) Presumptively Mandatory Responsibility: The word ``should'' 
indicates responsibilities that are presumptively mandatory. The 
auditor must comply with requirements of this type specified in the 
Board's standards unless the auditor demonstrates that alternative 
actions he or she followed in the circumstances were sufficient to 
achieve the objectives of the standard.
    (3) Responsibility To Consider: The words ``may,'' ``might,'' 
``could,'' and other similar terms and phrases describe actions and 
procedures that auditors have a responsibility to consider. Matters 
described in this fashion require the auditor's attention and 
understanding. How and whether the auditor implements these matters in 
the audit will depend on the exercise of professional judgment in the 
circumstances consistent with the objectives of the standard.
    Proposed Rule 1001(a)(xii) defines the term ``auditor,'' which 
means both public accounting firms registered with the PCAOB and 
associated persons thereof.

 III. Discussion

    The Commission's comment period on the proposed rules ended on 
August 23, 2004, with the Commission receiving five comment letters. 
The comment letters came from four

[[Page 55479]]

registered public accounting firms and one professional association.
    In general, commenters were supportive of the changes made by the 
PCAOB to its initially proposed rules. Two of the comment letters 
expressed general support and contained no suggestions. However, 
regarding Rule 3101, one commenter expressed concern about the 
requirement for auditors to document their decisions not to perform 
actions or procedures in the Board's standards that are presumptively 
mandatory. The commenter indicated that the lack of specificity in the 
proposed rule may prompt auditors to produce extensive and unnecessary 
documentation in circumstances where a procedure is not followed simply 
because it is not applicable. In its adopting release, the PCAOB 
concluded that for a presumptively mandatory responsibility, 
circumstances will be rare in which the auditor will perform an 
alternative procedure, thus, the documentation requirement ought not to 
result in unduly onerous consequences. The same commenter also was 
concerned that standard setters may be inclined to over use the terms 
``must,'' ``shall,'' or ``is required'' in formulating new standards, 
which could ultimately be counterproductive and detrimental to audit 
quality, because the use of mandated procedures in inappropriate 
circumstances may provoke unthinking performance on the part of 
auditors. We note, however, that in proposing this rule, the PCAOB 
concluded that ``must'' appears infrequently in the interim standards, 
and that it expects unconditional responsibilities will be used 
sparingly in future PCAOB standards.
    Two comment letters focused on the effective date. Proposed Rule 
3101 provides that the documentation requirement for not performing a 
presumptively mandatory responsibility would apply to audits or other 
engagements performed for fiscal years ending (as opposed to 
``beginning'') on or after the later of November 15, 2004 or 30 days 
after the date of approval of the final rule by the Commission. The 
commenters indicated that in many instances audit procedures are 
performed throughout the period of audit, and documentation to support 
these procedures is prepared contemporaneously with the audit, creating 
the potential need to update already created documentation. As 
previously noted, the PCAOB concluded that circumstances will be rare 
in which the auditor will perform an alternative procedure for a 
presumptively mandatory responsibility. Based on that conclusion, the 
frequency of such situations occurring during the transition period 
should be limited. The PCAOB also concluded that the documentation 
requirements in the proposed rule for a presumptively mandatory 
responsibility should coincide with the effective date for PCAOB 
Auditing Standard No. 3, Audit Documentation.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that proposed 
Rule 3101 and Rule 1001(a)(xii) are consistent with the requirements of 
the Act and the securities laws and are 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 Rule 3101, Certain 
Terms Used in Auditing and Related Professional Practice Standards, and 
amendment to Rule 1001, Definitions of Terms Employed in Rules (File 
No. PCAOB-2004-06), be and hereby are approved.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-2184 Filed 9-13-04; 8:45 am]
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