[Federal Register Volume 75, Number 13 (Thursday, January 21, 2010)]
[Notices]
[Pages 3509-3511]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-1028]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61363; File No. PCAOB-2009-02]


Public Company Accounting Oversight Board; Order Approving 
Proposed Rules on Auditing Standard No. 7, Engagement Quality Review, 
and Conforming Amendment

January 15, 2010.

I. Introduction

    On August 4, 2009, the Public Company Accounting Oversight Board 
(the ``Board'' or the ``PCAOB'') filed with the Securities and Exchange 
Commission (the ``Commission'') a notice (the ``Notice'') of proposed 
rules (File No. PCAOB-2009-02) on Auditing Standard No. 7, Engagement 
Quality Review, and Conforming Amendment to the Board's Interim Quality 
Control Standards, pursuant to Section 107(b) of the Sarbanes-Oxley Act 
of 2002 (the ``Act''). Notice of the proposed rules was published in 
the Federal Register on November 5, 2009.\1\ The Commission received 
nine comment letters relating to the proposed rules. For the reasons 
discussed below, the Commission is granting approval of the proposed 
rules. As specified by the Board, the rules are

[[Page 3510]]

effective for the engagement quality review (``EQR'') of audits and 
interim reviews for fiscal years beginning on or after December 15, 
2009.
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    \1\ See SEC Release No. 34-60903 (October 29, 2009); 74 FR 57357 
(November 5, 2009).
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II. Description

    Section 103 of the Act directs the Board, among other things, to 
set standards for public company audits, including a requirement for 
each registered public accounting firm to ``provide a concurring or 
second partner review and approval of [each] audit report (and other 
related information), and concurring approval in its issuance * * * .'' 
According to the Board, the proposed rules would strengthen and expand 
the Board's existing requirements for concurring reviews.
    According to the Board, a well-performed EQR can serve as an 
important safeguard against erroneous or insufficiently supported audit 
opinions and, accordingly, can contribute to audit quality. As 
described in the Notice, the engagement quality review will serve as a 
meaningful check on the work performed by the engagement team, and the 
Board believes this should increase the likelihood that a registered 
public accounting firm will identify any significant engagement 
deficiencies before it issues its audit report.
    Auditing Standard No. 7 requires the engagement quality reviewer 
(or the ``reviewer'') to evaluate the significant judgments made and 
related conclusions reached by the engagement team in forming the 
overall conclusion on the engagement and in preparing the engagement 
report. Auditing Standard No. 7 also requires the engagement quality 
reviewer to perform certain procedures designed to focus the reviewer 
on those judgments and conclusions. As discussed in the Notice, the 
procedures required of an engagement quality reviewer are different in 
nature from the procedures required of the engagement team. Unlike the 
engagement team, a reviewer does not perform substantive procedures or 
obtain sufficient evidence to support an opinion on the financial 
statements or internal control over financial reporting. If more audit 
work is necessary before the reviewer may provide concurring approval 
of issuance, the engagement team--not the reviewer--is responsible 
under PCAOB standards for performing the work. In contrast, the 
reviewer fulfills the obligation to perform an EQR by holding 
discussions with the engagement team, reviewing documentation, and 
determining whether to provide concurring approval of issuance.
    The proposed rules also amend the Board's interim quality control 
standards by replacing the third sentence of paragraph 18 of QC section 
20, ``System of Quality Control for a CPA Firm's Accounting and 
Auditing Practice'' with a statement that a firm's quality control 
policies and procedures also should address engagement quality reviews 
pursuant to PCAOB Auditing Standard No. 7.

III. Discussion

    The Commission received nine comment letters on the proposed rules. 
Seven letters were received from registered public accounting firms, 
and two letters were received from professional organizations.\2\ The 
commenters generally agreed with the requirements of Auditing Standard 
No. 7 and also expressed agreement with the changes made by the PCAOB 
in response to its comment process.\3\
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    \2\ See comments of Deloitte & Touche LLP (``Deloitte''), Ernst 
& Young LLP (``EY''), Grant Thornton LLP (``Grant''), KPMG LLP 
(``KPMG''), McGladrey & Pullen LLP (``McGladrey''), Piercy Bowler 
Taylor & Kern (``PBTK''), PricewaterhouseCoopers LLP (``PWC''), 
Center for Audit Quality (``CAQ''), and Center for Capital Markets 
Competitiveness of the U.S. Chamber of Commerce (``CCMC'').
    \3\ One commenter (CCMC) provided comments related to the 
PCAOB's standard-setting process in general, including due process 
and convergence with international auditing standards. These 
comments were similar to comments received by the PCAOB during its 
standard-setting process for Auditing Standard No. 7. In response, 
the PCAOB stated in its adopting release for Auditing Standard No. 7 
that it continuously endeavors to improve its processes, including 
the standard-setting process, and is considering comments it 
receives. The Commission encourages the Board to continue to 
consider comments to improve the Board's standard-setting process. 
The Commission will continue to provide oversight as the Board 
endeavors to improve all of its processes.
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PCAOB Use and Purpose of Release Text

    Many of the comments indicated that there is a lack of clarity 
resulting from perceived inconsistencies between Auditing Standard No. 
7 and text in the Board's adopting release.\4\ One commenter expressed 
a concern whether the release text has the ``same weight'' as the 
standard itself.\5\ One commenter expressed a concern that the release 
text issued with an adopted standard is not subject to the PCAOB's 
comment process.\6\
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    \4\ See comments of CAQ, CCMC, Deloitte, EY, Grant, KPMG, 
McGladrey, and PWC.
    \5\ See comments of PBTK.
    \6\ See comments of CCMC.
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    The release text summarizes issues that the Board considered 
significant in reaching the conclusions set forth in the standard, 
including responses to comments and the rationale for accepting certain 
approaches and rejecting others. The Commission publishes notice of and 
approves the ``Rules of the Board'' as defined in Section 2(a)(13) of 
the Act, including the auditing standards adopted by the Board. The 
release text accompanying the Board's issuance of an auditing standard 
is not part of the ``Rules of the Board'' that are approved by the 
Commission; rather, it is a statement made by the PCAOB to provide 
insight into the Board's decisionmaking process.

Documentation of the EQR

    Commenters generally expressed agreement with the documentation 
requirement as set forth in Auditing Standard No. 7.\7\ Many of the 
same commenters, however, expressed concerns regarding an example in 
the PCAOB's adopting release that describes the documentation 
requirement for significant engagement deficiencies identified by the 
engagement quality reviewer. The release states that ``the EQR 
documentation should contain sufficient information to enable an 
experienced auditor, having no previous connection with the engagement, 
to understand, e.g., the significant deficiency identified, how the 
reviewer communicated the deficiency to the engagement team, why such 
matter was important, and how the reviewer evaluated the engagement 
team's response.''
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    \7\ See comments of CAQ, Deloitte, EY, Grant, KPMG, McGladrey, 
and PWC.
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    Commenters were concerned that the example in the release could be 
read to be inconsistent with the requirement in the standard and could 
result in unintended consequences in terms of performance. The primary 
concern was that the engagement quality reviewer may be compelled to 
document every interaction with the engagement team, not knowing 
whether a matter will ultimately be identified as a significant 
engagement deficiency. Commenters viewed this as a documentation 
requirement for an EQR that is incremental to the requirements of PCAOB 
Auditing Standard No. 3, Audit Documentation. Auditing Standard No. 3 
does not require the auditor to document each discussion and 
preliminary conclusion.
    In addition, one commenter was concerned that the example provided 
in the PCAOB's adopting release may disrupt the communication between 
the engagement team and the engagement quality reviewer.\8\ The 
commenter expressed a view that, if unable to

[[Page 3511]]

determine which matters may be significant, the engagement quality 
reviewer would need to document every issue and therefore would not 
perform any review procedures until the engagement team completed all 
audit work and finalized all of its conclusions.
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    \8\ See comments of KPMG.
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    The Commission does not believe that there is any inconsistency 
between the example in the adopting release and the requirements of 
Auditing Standard No. 7. The PCAOB specified in its adopting release 
that the example applies ``if a reviewer identified a significant 
engagement deficiency to be addressed by the engagement team.'' We 
believe that documentation suggested in the example from the adopting 
release is appropriate after the engagement quality reviewer has 
concluded that he or she has identified a significant engagement 
deficiency. However, since several comments were related to this point, 
we encourage the PCAOB to provide further implementation guidance on 
the documentation requirement.\9\
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    \9\ We note clarifications have been provided in other contexts. 
For example, see PCAOB Staff Q&A at http://www.pcaobus.org/Standards/Staff_Questions_and_Answers/2009/09-02_FASB_Codification.pdf.
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Standard of Care

    Commenters generally expressed agreement with the revisions that 
the PCAOB made to the description of due professional care in the 
standard in response to comments, including establishing the expected 
standard of performance by referring to AU Section 230, Due 
Professional Care in the Performance of Work (``AU 230'').\10\ However, 
many of the same commenters expressed concern with language in the 
adopting release about the concept of due professional care. 
Particularly, many commenters pointed to language in the adopting 
release that a qualified reviewer who has performed the required review 
with due professional care ``will, necessarily, have discovered any 
significant engagement deficiencies that could reasonably have been 
discovered under the circumstances.'' Certain commenters expressed a 
view that the language in the release could be read as requiring 
absolute assurance or a ``flawless'' review.\11\
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    \10\ See comments of CAQ, Deloitte, EY, Grant, KPMG, and PWC.
    \11\ See comments of Deloitte, Grant, and KPMG.
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    The Commission believes that the PCAOB adequately responded to 
comments in this area during its reproposal process. We do not find any 
inconsistency between the PCAOB's adopting release and the requirement 
to conduct the EQR with due professional care as described in 
paragraphs 12 and 17 of Auditing Standard No. 7. Paragraph 12 of 
Auditing Standard No. 7 references AU 230, which is the source of 
guidance regarding due professional care in the PCAOB's interim 
auditing standards. Moreover, the PCAOB specified in its adopting 
release that ``the Board is not redefining due professional care in the 
context of the EQR standard.''

Definition of Partner

    One commenter suggested that the PCAOB revise the description of 
the qualifications of the engagement quality reviewer in Auditing 
Standard No. 7 to specify that equity ownership in the firm is not a 
requirement for a reviewer.\12\ The commenter believed Board language 
in its adopting release on the distinction between ``partner'' and 
``non-partner'' could be considered ``muddying and potentially biasing 
(and perhaps unintended) restrictive language.''
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    \12\ See comments of PBTK.
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    The discussion of requiring a partner or an individual in an 
equivalent position to perform the EQR is consistent with the 
Commission's independence rules.\13\ We do not believe that equity 
ownership is necessarily inherent in the analysis; rather the analysis 
of whether an individual is a partner or in an equivalent position is 
based on the organization of the individual firm and other related 
facts and circumstances.
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    \13\ 17 CFR 210.2-01(f)(7)(ii).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed PCAOB Rules on Auditing Standard No. 7, Engagement Quality 
Review, and Conforming Amendment (File No. PCAOB-2009-02) are 
consistent with the requirements of the Act and the securities laws and 
are necessary or appropriate in the public interest or 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 the proposed PCAOB Rules on 
Auditing Standard No. 7, Engagement Quality Review, and Conforming 
Amendment (File No. PCAOB-2009-02) be and hereby are approved.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-1028 Filed 1-20-10; 8:45 am]
BILLING CODE 8011-01-P