[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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