[Federal Register Volume 75, Number 250 (Thursday, December 30, 2010)]
[Notices]
[Pages 82417-82419]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-32885]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63606; File No. PCAOB 2010-01]


Public Company Accounting Oversight Board; Order Approving 
Proposed Rules on Auditing Standards Related to the Auditor's 
Assessment of and Response to Risk and Related Amendments to PCAOB 
Standards

December 23, 2010.

I. Introduction

    On September 15, 2010, 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 2010-01) on Auditing Standards Related 
to the Auditor's Assessment of and Response to Risk and Related 
Amendments to PCAOB Standards. Those eight auditing standards 
(hereinafter referred to as ``Risk Assessment Standards''), which will 
supersede six of the Board's interim auditing standards, are:
     Auditing Standard (``AS'') No. 8, Audit Risk;
     AS No. 9, Audit Planning;
     AS No. 10, Supervision of the Audit Engagement;
     AS No. 11, Consideration of Materiality in Planning and 
Performing an Audit;
     AS No. 12, Identifying and Assessing Risks of Material 
Misstatement;
     AS No. 13, The Auditor's Responses to the Risks of 
Material Misstatement;
     AS No. 14, Evaluating Audit Results; and
     AS No. 15, Audit Evidence.

Notice of the proposed rules was published in the Federal Register on 
September 27, 2010.\1\ The Commission received two 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 effective for audits of fiscal years beginning 
on or after December 15, 2010.
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    \1\  See Release No. 34-62919 (September 15, 2010) [75 FR 59332 
(September 27, 2010)]. The notice included a 21-day comment period. 
The comment period closed on October 18, 2010.
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II. Description

    The Board adopted eight auditing standards and related amendments 
that are designed to benefit investors by establishing requirements 
that enhance the effectiveness of the auditor's assessment of and 
response to the risks of material misstatement in an audit. Assessing 
and responding to risks underlies the entire audit process. The risk 
assessment standards that the PCAOB is replacing were part of the 
Board's interim standards and were in large part written twenty to 
thirty years ago. In adopting the new Risk Assessment Standards, the 
Board intended to build upon and improve the risk framework that was 
already established by the interim standards, rather than replacing 
that framework altogether.
    Changes that the Board made to the interim standards reflect: 
Improvements that the PCAOB has observed in the audit methodologies of 
many registered firms; recommendations from academia; recommendations 
from the Board's Standing Advisory Group (``SAG'') and other groups; 
the adoption of AS No. 5, An Audit of Internal Control Over Financial 
Reporting That is Integrated with an Audit of Financial Statements; 
improvements made to similar risk assessment standards by other 
standard setters (e.g., the International Auditing and Assurance 
Standards Board (``IAASB'') and the Auditing Standards Board (``ASB'') 
of the American Institute of Certified Public Accountants); and 
observations from the Board's oversight activities.
    Key changes made to the standards include an increased emphasis on 
fraud risks, an increased emphasis on disclosures, inclusion of multi-
location audit requirements, an alignment of the standards with AS No. 
5, and inclusion of a concept of materiality more specifically grounded 
to that used in the Federal securities laws.

III. Discussion

    The Commission received two comment letters: One from Deloitte & 
Touche, LLP (``Deloitte'') and one from the Center for Capital Markets 
Competitiveness of the U.S. Chamber of Commerce (``CMCC''). Deloitte 
supported approval of the standards, while expressing certain concerns 
largely of a more general nature regarding the PCAOB's approach to 
standard-setting. The CMCC believed that the Risk Assessment Standards 
should not be approved, but rather sent back to the PCAOB in order for 
the PCAOB to address certain concerns, most of which also related to 
the PCAOB's overall approach to standard-setting as opposed to the 
particular standards at issue.

[[Page 82418]]

Integration of Fraud Risk Standard Into the Risk Assessment Standards

    One of the significant changes to the Risk Assessment Standards was 
the incorporation of aspects of AU sec. 316, Consideration of Fraud in 
a Financial Statement Audit, into the Risk Assessment Standards. In 
explaining why the PCAOB incorporated portions of the fraud standard 
into the Risk Assessment Standards, it stated that:

    Incorporating these requirements makes clear that the auditor's 
responsibilities for assessing and responding to fraud risks are an 
integral part of the audit process rather than a separate, parallel 
process. It also benefits investors by prompting auditors to make a 
more thoughtful and thorough assessment of fraud risks and to 
develop appropriate audit responses.\2\
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    \2\ PCAOB Release No. 2010-004, August 5, 2010, p. 3.

    The CCMC did not agree with the level of integration. The CCMC made 
a similar comment during the PCAOB's due process stage, which the Board 
addressed in its adopting release. This comment largely relates to a 
disagreement as to the manner in which the standards are constructed, 
as compared to the performance required of auditors. The Commission 
believes that the PCAOB has given due consideration to the comments 
received about this matter.

Effective Date

    The effective date of the standards will be for audits of fiscal 
years beginning on or after December 15, 2010. The CMCC expressed 
concern about the effective date, stating that the effective date 
``would not allow adequate time for audit firms to revise their audit 
methodologies and train their audit staffs around the world for audits 
in 2011.'' In response to similar concerns raised in its comment letter 
process, including from the CCMC, the PCAOB stated in its release that 
the underlying concepts of risk-based auditing have not changed, and 
therefore, while there are many incremental requirements in the updated 
standards, these standards should not require wholesale changes to 
audit methodologies.\3\ Any delay in the effective date of these 
standards would likely delay the implementation for most issuers for at 
least one year (e.g., the standards would not be applicable generally 
until calendar year 2012 audits related to audit reports to be issued 
in 2013).
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    \3\ PCAOB Release No. 2010-004, August 5, 2010, p. 8.
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    After considering the nature of the changes in the Risk Assessment 
Standards, the timing of Commission approval, and the fact that the 
standards will not be applicable to audits for which audit reports will 
be issued in 2011 (i.e., the first audit reports issued for which 
audits would be required to be conducted using the new standards would 
not be issued until 2012) we believe the PCAOB's approach for 
implementation is not unreasonable.

PCAOB Standard-Setting Process

    Both commenters noted various concerns about the PCAOB's standard-
setting process. The concerns identified included divergence from other 
standard-setters, what the commenters viewed as a ``prescriptive'' 
nature of the standards, the lack of a codification of PCAOB standards, 
the usefulness of the appendix that compares the PCAOB proposed 
standard to the similar standards of other standard-setters, and the 
use of certain terms in the standards. These comments all relate more 
to the PCAOB's overall approach to standard-setting than particular 
concerns with respect to the individual Risk Assessment Standards.
    All of these comments are similar to those received by the PCAOB 
during its standard-setting process, which the Board addressed. For 
example with respect to divergence from other standard-setters, the 
Board noted the following:

    In previous releases on its proposed risk assessment standards, 
the Board has stated that it has sought to eliminate unnecessary 
differences with the risk assessment standards and those of other 
standards-setters. However, because the Board's standards must be 
consistent with the Board's statutory mandate, differences will 
continue to exist between the Board's standards and the standards of 
the IAASB and ASB, e.g., when the Board decides to retain an 
existing requirement in PCAOB standards that is not included in 
IAASB or ASB standards. Also, certain differences are often 
necessary for the Board's standards to be consistent with relevant 
provisions of the federal securities laws or other existing 
standards or rules of the Board.\4\
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    \4\ See PCAOB Release No. 2010-004, August 5, 2010, pp. A10-91--
A10-92 (internal footnotes omitted).

The Board also noted that it ``continually endeavors to improve its 
processes'' and explained other initiatives it uses in both gaining 
input on its standard-setting activities (e.g., through its SAG and by 
releasing multiple exposure documents) and providing additional 
transparency of its standards-setting process (e.g., through posting 
its standards-setting agenda and enhanced discussions in its releases 
on the Board's conclusions). The Commission notes and encourages the 
Board's efforts to consider standards issued by the IAASB and the ASB, 
and appreciates the reasons why it is reasonable to expect that the 
Board's standards may appropriately differ from such standards. The 
Commission and its staff will continue to provide oversight of the 
Board and its staff's ongoing endeavor to improve its processes.
    Regarding the ``prescriptive'' nature of the standards, we 
recognize that there should be an appropriate balance in auditing 
standards between providing necessary minimum requirements and allowing 
auditors to apply judgment in determining the nature and extent of 
audit procedures given the particular circumstances of an individual 
engagement. PCAOB standards recognize that the auditor uses judgment in 
planning and performing audit procedures and evaluating the evidence 
obtained from those procedures. We recognize, however, that overly 
broad standards without an appropriate balance of necessary 
requirements could lead to a level of discretion in the nature and 
extent of audit procedures that may limit the effectiveness of audits. 
The Commission believes the PCAOB's approach in the Risk Assessment 
Standards is not unreasonable and encourages the PCAOB to monitor 
implementation and evaluate the input received during the development 
of future standards to continue to strive to achieve an optimal 
balance.
    Regarding a codification of the auditing standards, the Commission 
notes that the Board has recently added this project to its strategic 
plan and amended its performance measure on standard-setting activities 
to reflect this new initiative.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed PCAOB Rules on Auditing Standards Related to the Auditor's 
Assessment of and Response to Risk and Related Amendments to PCAOB 
Standards (File No. PCAOB-2010-01) are consistent with the requirements 
of the Sarbanes-Oxley Act of 2002, as amended (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 Securities Exchange Act of 1934, that the 
proposed PCAOB Rules on Auditing Standards Related to the Auditor's 
Assessment of and Response to Risk and Related Amendments to PCAOB 
Standards (File No. PCAOB-2010-01) be and hereby are approved.


[[Page 82419]]


    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-32885 Filed 12-29-10; 8:45 am]
BILLING CODE 8011-01-P