[Federal Register Volume 82, Number 207 (Friday, October 27, 2017)]
[Notices]
[Pages 49886-49899]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-23379]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81916; File No. PCAOB-2017-01]


Public Company Accounting Oversight Board; Order Granting 
Approval of Proposed Rules on the Auditor's Report on an Audit of 
Financial Statements When the Auditor Expresses an Unqualified Opinion, 
and Departures From Unqualified Opinions and Other Reporting 
Circumstances, and Related Amendments to Auditing Standards

October 23, 2017.

I. Introduction

    On July 19, 2017, the Public Company Accounting Oversight Board 
(the ``Board'' or the ``PCAOB'') filed with the Securities and Exchange 
Commission (the ``Commission''), pursuant to Section 107(b) \1\ of the 
Sarbanes-Oxley Act of 2002 (the ``Sarbanes-Oxley Act'') and Section 
19(b) \2\ of the Securities Exchange Act of 1934 (the ``Exchange 
Act''), a proposal to adopt AS 3101, The Auditor's Report on an Audit 
of Financial Statements When the Auditor Expresses an Unqualified 
Opinion and related amendments to other auditing standards 
(collectively, the ``Proposed Rules'').\3\ The Proposed Rules were 
published for comment in the Federal Register on July 28, 2017.\4\ At 
the time the notice was issued, the Commission extended to October 26, 
2017 the date by which the Commission should take action on the 
Proposed Rules.\5\ The Commission received approximately 50 comment 
letters in response to the notice.\6\ This order approves the Proposed 
Rules, which we find to be consistent with the requirements of the 
Sarbanes-Oxley Act and the securities laws and necessary or appropriate 
in the public interest or for the protection of investors.
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    \1\ 15 U.S.C. 7217(b).
    \2\ 15 U.S.C. 78s(b).
    \3\ The Board originally issued a concept release on these 
matters in 2011. See Concept Release on Possible Revisions to PCAOB 
Standards Related to Reports on Audited Financial Statements and 
Related Amendments to PCAOB Standards, PCAOB Release No. 2011-003 
(June 21, 2011) (``PCAOB Concept Release''), available at https://pcaobus.org/Rulemaking/Docket034/Concept_Release.pdf. In 2013, the 
Board issued a proposed rule. See Proposed Auditing Standards--The 
Auditor's Report on an Audit of Financial Statements When the 
Auditor Expresses an Unqualified Opinion; The Auditor's 
Responsibilities Regarding Other Information in Certain Documents 
Containing Audited Financial Statements and the Related Auditor's 
Report; and Related Amendments to PCAOB Standards, PCAOB Release No. 
2013-005 (August 13, 2013) (``PCAOB Proposal''), available at 
https://pcaobus.org/Rulemaking/Docket034/Release_2013-005_ARM.pdf. 
The Board issued a re-proposal in 2016. See Proposed Auditing 
Standard--The Auditor's Report on an Audit of Financial Statements 
When the Auditor Expresses an Unqualified Opinion and Related 
Amendments to PCAOB Standards, PCAOB Release No. 2016-003 (May 11, 
2016) (``PCAOB Re-proposal''), available at https://pcaobus.org/Rulemaking/Docket034/Release-2016-003-ARM.pdf.
    \4\ See Release No. 34-81187 (July 21, 2017), 82 FR 35396 (July 
28, 2017) available at https://www.sec.gov/rules/pcaob/2017/34-81187.pdf.
    \5\ See id.
    \6\ Copies of the comment letters received on the Commission 
order noticing the Proposed Rules are available on the Commission's 
Web site at https://www.sec.gov/comments/pcaob-2017-01/pcaob201701.htm.
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II. Description of the Proposed Rules

    On June 1, 2017, the Board adopted AS 3101, The Auditor's Report on 
an Audit of Financial Statements When the Auditor Expresses an 
Unqualified Opinion, which replaces portions of AS 3101, Reports on 
Audited Financial Statements, and re-designates the remaining portions 
of AS 3101 as AS 3105, Departures from Unqualified Opinions and Other 
Reporting Circumstances. The Proposed Rules will require that the 
auditor provide new information about the audit that is intended to 
make the auditor's report

[[Page 49887]]

more informative and relevant to investors and other financial 
statement users, as discussed further below.

A. Changes to PCAOB Standards

    The Proposed Rules retain the pass/fail opinion of the existing 
auditor's report but make significant changes to the existing auditor's 
report, including the following:
     Critical audit matters (``CAMs''). The Proposed Rules 
require the auditor to communicate in the auditor's report any CAMs 
arising from the current period's audit or state that the auditor 
determined that there are no CAMs.
     A CAM is defined as any matter arising from the audit of 
the financial statements that was communicated or required to be 
communicated to the audit committee and that:
    (1) Relates to accounts or disclosures that are material to the 
financial statements; and
    (2) involved especially challenging, subjective, or complex auditor 
judgment.
     In determining whether a matter involved especially 
challenging, subjective, or complex auditor judgment, the auditor 
should take into account, alone or in combination, the following 
factors, as well as other factors specific to the audit:
     The auditor's assessment of the risks of material 
misstatement, including significant risks;
     The degree of auditor judgment related to areas in the 
financial statements that involved the application of significant 
judgment or estimation by management, including estimates with 
significant measurement uncertainty;
     The nature and timing of significant unusual transactions 
and the extent of audit effort and judgment related to these 
transactions;
     The degree of auditor subjectivity in applying audit 
procedures to address the matter or in evaluating the results of those 
procedures;
     The nature and extent of audit effort required to address 
the matter, including the extent of specialized skill or knowledge 
needed or the nature of consultations outside the engagement team 
regarding the matter; and
     The nature of audit evidence obtained regarding the 
matter.
     The communication of each CAM within the auditor's report 
includes:
     Identifying the CAM;
     Describing the principal considerations that led the 
auditor to determine that the matter is a CAM;
     Describing how the CAM was addressed in the audit; and
     Referring to the relevant financial statement accounts or 
disclosures.
     For each matter arising from the audit of the financial 
statements that (a) was communicated or required to be communicated to 
the audit committee, and (b) relates to accounts or disclosures that 
are material to the financial statements, the auditor must document 
whether or not the matter was determined to be a CAM (i.e., involved 
especially challenging, subjective, or complex auditor judgment) and 
the basis for such determination.
     Additional Changes to the Auditor's Report. The Proposed 
Rules also include a number of other changes to the auditor's report 
that are primarily intended to clarify the auditor's role and 
responsibilities related to the audit of the financial statements, 
provide additional information about the auditor, and make the 
auditor's report easier to read. These include:
     Auditor tenure--a statement disclosing the year in which 
the auditor began serving consecutively as the company's auditor;
     Independence--a statement regarding the requirement for 
the auditor to be independent;
     Addressee--the auditor's report will be addressed to the 
company's shareholders and board of directors or equivalents 
(additional addressees are also permitted);
     Amendments to basic elements--certain standardized 
language in the auditor's report has been changed, including adding the 
phrase ``whether due to error or fraud,'' when describing the auditor's 
responsibility under PCAOB standards to obtain reasonable assurance 
about whether the financial statements are free of material 
misstatement; and
     Standardized form of the auditor's report--the opinion 
will appear in the first section of the auditor's report, and section 
titles have been added to guide the reader.
    The amendments to other PCAOB standards include:
     AS 3105, Departures from Unqualified Opinions and Other 
Reporting Circumstances to (1) require the communication of CAMs in 
certain circumstances; (2) revise certain terminology to align with AS 
3101 of the Proposed Rules; and (3) amend the illustrative reports for 
the basic elements of AS 3101 of the Proposed Rules and the required 
order of certain sections of the auditor's report;
     AS 1220, Engagement Quality Review to require the 
engagement quality reviewer to evaluate the engagement team's 
determination, communication, and documentation of CAMs;
     AS 1301, Communications with Audit Committees to require 
the auditor to provide to and discuss with the audit committee a draft 
of the auditor's report;
     AS 2201, An Audit of Internal Control Over Financial 
Reporting That Is Integrated with An Audit of Financial Statements to 
conform the example auditor's report with the example auditor's report 
on the financial statements in AS 3101 of the Proposed Rules;
     AS 2820, Evaluating Consistency of Financial Statements to 
include the existing reporting requirements and illustrative 
explanatory language related to a change in accounting principle or a 
restatement that is currently in AS 3105; and
     AS 4105, Reviews of Interim Financial Information to 
include the basic elements of AS 3101 of the Proposed Rules, where 
applicable.

B. Applicability

Critical Audit Matters
    Under the Proposed Rules, communication of CAMs in the auditor's 
report is not required for audits of emerging growth companies 
(``EGCs''); \7\ brokers and dealers reporting under Exchange Act Rule 
17a-5; \8\ investment companies other than business development 
companies (``BDCs''); and employee stock purchase, savings, and similar 
plans.
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    \7\ The term ``emerging growth company'' is defined in Section 
3(a)(80) of the Exchange Act (15 U.S.C. 78c(a)(80)). See also 
Inflation Adjustments and Other Technical Amendments Under Titles I 
and III of the JOBS Act, SEC Rel. 33-10332 (Mar. 31, 2017), 82 FR 
17545 (Apr. 12, 2017), available at https://www.sec.gov/rules/final/2017/33-10332.pdf.
    \8\ If the broker or dealer is an issuer, the requirement to 
communicate CAMs would apply.
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Additional Changes to the Auditor's Report
    The additional changes to the auditor's report contained in the 
Proposed Rules apply for all audits performed under PCAOB standards, 
including audits of EGCs, as discussed in Section IV below.

C. Effective Date

    The Proposed Rules would be effective as follows:
    a. All paragraphs of the Proposed Rules, except the paragraphs 
related to CAMs in AS 3101 of the Proposed Rules (paragraphs .11 
through .17) and amendments related to those paragraphs: All audits of 
fiscal years ending on or after December 15, 2017; and
    b. All paragraphs related to CAMs in AS 3101 of the Proposed Rules

[[Page 49888]]

(paragraphs .11 through .17) and amendments related to those 
paragraphs:
     For audits of large accelerated filers: Fiscal years 
ending on or after June 30, 2019; and
     For audits of all other companies to which the 
requirements apply: Fiscal years ending on or after December 15, 2020.

III. Comment Letters

    The Commission's comment period on the Proposed Rules ended on 
August 18, 2017. The Commission received approximately 50 comment 
letters from investors and investor associations, accounting firms, 
issuers and issuer organizations, and others.\9\ Most commenters 
generally supported the Board's objective to improve the auditor's 
report to make it more informative and relevant to financial statement 
users. Commenters' views varied on the nature and extent of specific 
changes, particularly those related to CAMs. Investors and investor 
associations were supportive of the Proposed Rules, including 
communication of CAMs, and encouraged adoption without delay. Larger 
accounting firms were generally supportive but raised certain practical 
concerns and asked for guidance during the implementation phase, a 
safe-harbor related to CAMs, or post-implementation reviews. A number 
of other commenters raised questions and concerns about the Proposed 
Rules and their application and recommended the Commission not approve 
the Proposed Rules in their current form. These concerns generally 
relate to: (1) Usefulness of the information in CAMs; (2) the auditor's 
role as the potential source of original information about the company 
in CAMs; (3) the potential impact of CAMs on the role of the audit 
committee and the communication among the audit committee, management, 
and the auditor; (4) the potential liability impact of CAMs; (5) the 
economic analysis of CAMs; (6) practicability matters related to CAMs; 
(7) disclosure of auditor tenure in the auditor's report; (8) the 
effective dates of the Proposed Rules; and (9) implementation efforts.
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    \9\ See supra footnote 6.
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    As background, for several years, the Board has been considering 
changes to the auditor's report, throughout which the Board has, in 
various settings and formats, considered commenters' concerns on such 
changes. In June 2011, the Board issued the PCAOB Concept Release to 
solicit comment on a number of potential changes to the auditor's 
report. The Board also held a public roundtable in September 2011 to 
obtain additional insight on the alternatives presented in the PCAOB 
Concept Release.
    After considering the results of its outreach and comments on the 
PCAOB Concept Release, in August 2013, the Board issued the PCAOB 
Proposal that included, among other things, new requirements for 
auditors to communicate CAMs, as well as additional changes to the 
auditor's report. In April 2014, the Board held a public meeting to 
obtain further input on the PCAOB Proposal from a diverse group of 
investors and other financial statement users, preparers, audit 
committee members, auditors, and others.
    In May 2016, the Board issued the PCAOB Re-proposal that modified 
the PCAOB Proposal in several respects in response to feedback 
received. In particular, the PCAOB Re-proposal modified the source, 
definition, and communication requirements for CAMs.
    Throughout the rulemaking process, the Board received comments from 
investors and investor associations that consistently stressed the 
importance and value to them of additional communication from the 
auditor. In particular, commenters indicated that tailored, audit-
specific information from the auditor's point of view would reduce 
information asymmetries and make the auditor's report more relevant and 
useful, a view which also was shared by at least one of the larger 
accounting firms. Based on these comments and its own analysis, the 
Board concluded that requiring auditors to provide more information 
about the audit through the communication of CAMs will benefit 
investors and other market participants.
    As further explained below, the Board also made changes in the 
Proposed Rules to address the significant comments received on the 
PCAOB Proposal and the PCAOB Re-proposal. In particular, the Board 
sought to balance the potential benefits of CAM communications with the 
concerns expressed by some commenters about potential consequences, 
including: The auditor's role as the potential source of original 
information about the company; the potential impact of CAMs on the role 
of the audit committee and communication among the audit committee, 
management, and the auditor; and the potential liability impact of 
CAMs. To balance among these competing factors, the Board, among other 
things, limited the source of CAMs to matters communicated or required 
to be communicated to the audit committee, added a materiality 
component to the definition of a CAM, and narrowed the definition of a 
CAM to only those matters that involved especially challenging, 
subjective, or complex auditor judgment. In its release accompanying 
the Proposed Rules, the Board acknowledged that a variety of claims can 
be raised related to the statements in the auditor's report and that 
litigation is inherently uncertain. The Board also stated that it will 
monitor the Proposed Rules after implementation for any unintended 
consequences.
    The Sarbanes-Oxley Act requires us to determine whether the 
Proposed Rules are consistent with the requirements of the Sarbanes-
Oxley Act and the securities laws or are necessary or appropriate in 
the public interest or for the protection of investors.\10\ In making 
this determination, we have considered the comments received by the 
Commission as well as the feedback received and modifications made by 
the PCAOB throughout its rulemaking process. The discussion below 
addresses the significant points raised in the comment letters received 
by the Commission, which were generally consistent with the comments 
the PCAOB received during its deliberations.
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    \10\ See Section 107(b)(3) of the Sarbanes-Oxley Act. The 
Sarbanes-Oxley Act also specifies that the provisions of Section 
19(b) of the Exchange Act shall govern the proposed rules of the 
Board. See Section 107(b)(4) of the Sarbanes-Oxley Act. Section 19 
of the Exchange Act covers the registration, responsibilities, and 
oversight of self-regulatory organizations. Under the procedures 
prescribed by the Sarbanes-Oxley Act and Section 19(b)(2) of the 
Exchange Act, the Commission must either approve or disapprove, or 
institute proceedings to determine whether the proposed rules of the 
Board should be disapproved; and these procedures do not expressly 
permit the Commission to amend or supplement the proposed rules of 
the Board.
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A. Usefulness of the Information in CAMs

    A number of commenters provided feedback related to the potential 
usefulness of CAMs. Comments from investors and investor associations 
consistently indicated they would find CAM communications to be 
beneficial in understanding the audit.\11\ One commenter stated that 
CAMs will provide tailored, audit-specific information directly from 
the auditor's point of view and should provide insights that will add 
to the mix of information that could be used in investors' capital 
allocation and voting

[[Page 49889]]

decisions.\12\ This commenter also stated a belief that CAMs will 
benefit investors, particularly institutional investors, in engaging 
with management and the audit committee and in voting on the 
ratification of the auditor.\13\ Another commenter noted that CAMs will 
reduce the information asymmetry between investors and auditors, which 
in turn should reduce the information asymmetry between investors and 
management about the company's financial performance.\14\ One commenter 
noted that, from its perspective as a long-term investor, the 
communication of CAMs would provide an augmented basis from which 
investors can more fully understand challenging, subjective, or complex 
auditor judgment.\15\ Another commenter stated that, through CAMs, 
investors would have more information from which to make investment 
decisions.\16\ The same commenter noted that, as it indicated in 
comment letters to the PCAOB, the inclusion of CAMs would enhance 
transparency, relevance, reliability, and credibility in audits.\17\ 
Another commenter, noting that the Board has balanced the differing 
perspectives of various stakeholders, indicated that investors desire 
robust information within the auditor's report beyond the requirements 
in the Proposed Rules.\18\
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    \11\ See e.g., Letter from Council of Institutional Investors, 
August 8, 2017 (``CII Letter''); Letter from Hermes Investment 
Management, August 18, 2017 (``Hermes Letter''), Letter from CFA 
Institute, August 24, 2017 (``CFA Institute Letter'').
    \12\ See CII Letter.
    \13\ See id.
    \14\ See Letter from J. Robert Brown Jr., et. al., August 21, 
2017 (``J. Robert Brown Jr. Letter'')
    \15\ See Letter from California State Teachers' Retirement 
System, August 23, 2017.
    \16\ See Letter from California Public Employees' Retirement 
System, August 18, 2017 (``CalPERS Letter'').
    \17\ See id.
    \18\ See CFA Institute Letter.
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    In commenting on the Proposed Rules, one large accounting firm 
acknowledged that many financial statement users have expressed 
dissatisfaction with the current reporting by auditors.\19\ This same 
commenter also stated that the enhanced transparency of the audit 
process benefits all stakeholders and promotes the important role of 
independent auditors in serving the public interest.\20\ Another large 
accounting firm generally agreed with the views of investors and 
investor associations that communication of CAMs will enhance the value 
and relevance of audits to the capital markets.\21\
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    \19\ See Letter from Ernst & Young LLP, August 18, 2017 (``EY 
Letter'').
    \20\ See id.
    \21\ See Letter from Deloitte & Touche LLP, August 18, 2017 
(``Deloitte Letter'').
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    We agree with these commenters and the Board that communicating 
CAMs to investors will reduce information asymmetries. In particular, 
we are persuaded that the communication of CAMs, as structured in the 
Proposed Rules, will add to the total mix of information available to 
investors by eliciting more information about the audit itself--
information that is uniquely within the perspective of the auditor and, 
thus, not otherwise available to investors and other financial 
statement users. In so doing, we believe the communication of CAMs 
could enhance the value and relevance of audits to the capital markets 
and be useful to investors and other financial statement users in 
assessing a company's financial reporting and making capital allocation 
and voting decisions. We are, therefore, of the view that the 
requirement to communicate CAMs, as structured in the Proposed Rules, 
is consistent with the Sarbanes-Oxley Act and the securities laws and 
is necessary or appropriate in the public interest or for the 
protection of investors.
    We recognize that some commenters questioned the usefulness of 
CAMs, including asserting that the communications will not provide 
meaningful information, likely will duplicate management disclosures, 
or will use standardized language (some commenters referred to this as 
``boilerplate'').\22\ A few commenters expressed concern that CAMs 
could also provide information that conflicts with management 
disclosures, which some argued would be confusing to investors.\23\ 
Some commenters indicated CAMs will force issuers to make reactive 
disclosures because they will not want auditors to be the source of 
information about the company that would not otherwise have been 
disclosed (which commenters referred to as ``original information''), 
which they argued could increase costs and reduce disclosure 
effectiveness.\24\ Some commenters expressed concern that auditors may 
communicate an overabundance of CAMs to reduce litigation risk, as CAMs 
may be seen as a shield from litigation.\25\
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    \22\ See e.g., Letter from Aetna Inc. et al., August 18, 2017 
(``Aetna Letter''); Letter from Quest Diagnostics Inc., August 15, 
2017 (``Quest Letter''); Letter from Northrop Grumman Corporation, 
August 18, 2017 (``Northrop Grumman Letter''); Letter from New York 
City Bar, August 18, 2017 (``New York City Bar Letter''); Letter 
from Davis Polk & Wardell LLP, August 18, 2017 (``Davis Polk 
Letter''); Letter from Robert N. Waxman, August 19, 2017 (``Robert 
Waxman Letter'').
    \23\ See e.g., Aetna Letter; Letter from Society for Corporate 
Governance, August 18, 2017 (``Society for Corporate Governance 
Letter'').
    \24\ See e.g., Society for Corporate Governance Letter; Letter 
from Sullivan & Cromwell LLP, August 18, 2017 (``Sullivan & Cromwell 
Letter''). We discuss commenters' concerns regarding the auditor's 
role as the potential source of original information in section 
III.B below.
    \25\ See e.g., Davis Polk Letter; Quest Letter.
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    Similar concerns were raised in the PCAOB's rulemaking process. In 
response to these concerns, the Board stated in the release 
accompanying the Proposed Rules that the requirements in the Proposed 
Rules ``aim to provide investors with the auditor's unique perspective 
on the areas of the audit that involved the auditor's especially 
challenging, subjective, or complex judgments. Limiting critical audit 
matters to these areas should mitigate the extent to which expanded 
auditor reporting could become standardized. Focusing on auditor 
judgment should limit the extent to which expanded auditor reporting 
could become duplicative of management's reporting.''
    We acknowledge the risks identified by commenters that CAMs will 
not provide meaningful incremental information, either because the 
information is duplicative of what is already provided by the issuer, 
or because auditors will communicate numerous or boilerplate CAMs. With 
respect to the duplication risk, the requirement for CAM communications 
focuses on the auditor's perspective, not the issuer's. Specifically, 
as discussed above in Section II.A, ``Changes to PCAOB Standards,'' the 
auditor must identify the CAM, describe the principal considerations 
that led the auditor to determine that the matter is a CAM, describe 
how the CAM was addressed in the audit, and refer to the relevant 
financial statement accounts or disclosures. With the exception of the 
reference to the relevant portions of the financial statements, those 
required communications are not expected to overlap with the 
Commission's required issuer disclosures, which generally do not focus 
on the audit. Also, the required reference to the relevant financial 
statement accounts or disclosures provides context for the CAM-related 
communications but does not necessarily duplicate those disclosures.
    With respect to the risk that auditors would communicate 
unnecessary CAMs or boilerplate CAMs, we acknowledge that our own 
experience with the disclosure by companies of risk factors under Item 
503(c) of Regulation S-K \26\ illustrates the potential challenges of 
disclosure practices. The Commission and SEC staff have issued numerous 
releases and other guidance seeking to

[[Page 49890]]

induce registrants to focus on clear discussions of the ``most 
significant factors,'' rather than numerous boilerplate risk 
factors.\27\
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    \26\ 17 CFR 229.503(c).
    \27\ See e.g., Plain English Disclosure, Release No. 33-7497 
(Jan. 28, 1998), 63 FR 6370 (Feb. 6, 1998), available at https://www.sec.gov/rules/final/33-7497.txt.
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    We believe that some of these concerns are lessened by the way that 
the Board has defined CAMs. Specifically, as it relates to the concern 
of auditors reporting an overabundance of CAMs, we note that, under the 
Proposed Rules, a matter must meet each element of the definition of a 
CAM. In our view, the inclusion of a materiality component in the 
definition; narrowing the source of potential CAMs to matters 
communicated or required to be communicated to the audit committee; 
limiting CAMs to those areas that involved especially challenging, 
subjective, or complex auditor judgment; and refining the factors to 
take into account in determining whether a matter involved especially 
challenging, subjective, or complex auditor judgment should all act to 
mitigate the risk of auditors reporting too many CAMs.
    Similarly, we believe that the focus on auditor judgment in the 
definition of CAMs, along with the requirement to disclose why a matter 
is a CAM and how it was addressed, should mitigate the extent to which 
expanded auditor reporting could become standardized. Moreover, we 
believe these concerns must be balanced against the additional insights 
into the audit that we believe would be gained from the reporting of 
CAMs.
    Having considered the public comments, we are persuaded that the 
reporting of CAMs, as structured in the Proposed Rules will be 
beneficial. The communication of CAMs should not be numerous and 
boilerplate and will provide additional information about the audit--
and from the auditor's own unique perspective--that will be useful to 
investors and other financial statement users in assessing a company's 
financial reporting and making capital allocation and voting decisions.

B. The Auditor's Role as the Potential Source of Original Information 
About the Company

    A number of commenters expressed concern with the auditor 
potentially disclosing original information, including potentially 
immaterial or confidential information.\28\ Some of these commenters 
asserted that this runs counter to the U.S. regulatory framework, or 
confuses the role of the auditor.\29\ Further, at least one commenter 
questioned whether the PCAOB has the regulatory authority to require 
such disclosure.\30\ Conversely, as stated in the Board's release 
accompanying the Proposed Rules, ``[i]nvestor commenters, including the 
auditor's report working group of the Investor Advisory Group, argued 
that there should not be any limitation on the auditor providing 
original information and that [the PCAOB Re-proposal] went too far in 
constraining the auditor from providing original information in 
response to concerns expressed by other commenters. . . .'' 
Furthermore, as discussed above, investors and investor associations 
have indicated that there is a benefit in receiving information about 
the audit directly from the auditor's point of view.\31\
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    \28\ See e.g., Letter from Center for Capital Markets 
Competitiveness, U.S. Chamber of Commerce, August 11, 2017 (``CCMC 
Letter''); Quest Letter; Letter from Eli Lilly and Company, August 
15, 2017 (``Eli Lilly Letter''); Letter from Regions Financial 
Corporation, August 17, 2017 (``Regions Letter''); Sullivan & 
Cromwell Letter; Letter from American Tower Corporation, et al., 
August 18, 2017 (``American Tower Letter''); New York City Bar 
Letter; Davis Polk Letter; Letter from Financial Executives 
International, August 18, 2017 (``FEI Letter''); Robert Waxman 
Letter; Letter from Cleary Gottlieb Steen & Hamilton LLP, August 24, 
2017 (``Cleary Gottlieb Letter'').
    \29\ See e.g., CCMC Letter; Quest Letter.
    \30\ See e.g., CCMC Letter.
    \31\ See e.g., CII Letter; Letter from The Capital Group 
Companies Inc., August 15, 2017 (``Capital Group Letter'').
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    Similar concerns regarding the auditor being the source of original 
information about the company were raised in response to the PCAOB 
Concept Release, PCAOB Proposal, and PCAOB Re-proposal. The Board 
acknowledged these concerns and made certain modifications in the 
Proposed Rules in an effort to balance investor interests in expanded 
auditor reporting and the concerns of other stakeholders, primarily 
issuers and issuer organizations and audit committees, related to the 
costs, benefits, and potential unintended consequences associated with 
communicating CAMs. For example, the Board added a materiality 
component in the definition of a CAM ``to respond to investor requests 
for informative and relevant auditor's reports while, at the same time, 
addressing other commenters' concerns regarding auditor communication 
of immaterial information that management is not required to disclose 
under the applicable financial reporting framework and SEC reporting 
requirements.'' Further, in an effort to clarify the requirements, the 
Board stated in the release accompanying the Proposed Rules, among 
other things, that ``while auditor reporting of original information is 
not prohibited, it is limited to areas uniquely within the perspective 
of the auditor: describing the principal considerations that led the 
auditor to determine that the matter is a critical audit matter and how 
the matter was addressed in the audit.'' AS 3101 of the Proposed Rules 
includes the following note to the same effect, ``When describing 
critical audit matters in the auditor's report, the auditor is not 
expected to provide information about the company that has not been 
made publicly available by the company unless such information is 
necessary to describe the principal considerations that led the auditor 
to determine that a matter is a critical audit matter or how the matter 
was addressed in the audit.'' \32\
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    \32\ See Note 2 to Paragraph 14 of AS 3101 within the Proposed 
Rules.
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    With respect to whether mandating such disclosure would run counter 
to the U.S. regulatory framework or exceed the Board's authority, the 
Board observed in the release accompanying the Proposed Rules that 
there is no PCAOB standard, SEC rule, or other financial reporting 
requirement prohibiting auditor reporting of information that 
management has not previously disclosed.\33\ Moreover, in the release 
accompanying the Proposed Rules, the Board stated its belief that 
requiring expanded auditor reporting to make the auditor's report more 
relevant and informative as prescribed in the Proposed Rules is 
consistent with the statutory mandate of the PCAOB.\34\
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    \33\ In the release accompanying the Proposed Rules, the Board 
states, ``there are areas under current law and auditing standards 
that require auditor reporting that goes beyond attesting to the 
compliance of management disclosures (e.g., substantial doubt about 
a company's ability to continue as a going concern or illegal 
acts).'' See also Cleary Gottlieb Letter (acknowledging that no 
legal prohibition prevents the auditor from communicating original 
information).
    \34\ The mission of the PCAOB, as provided in Section 101(a) of 
the Sarbanes-Oxley Act, is ``to oversee the audit of companies that 
are subject to the securities laws, and related matters, in order to 
protect the interests of investors and further the public interest 
in the preparation of informative, accurate, and independent audit 
reports.'' (emphasis added).
---------------------------------------------------------------------------

    We agree with commenters that, in general, the preparation and 
disclosure of information about an issuer should be the primary 
responsibility of the issuer, and that the auditor's role, by contrast, 
is to audit the issuer's financial statements and to provide a report 
thereon. That said, we disagree with those commenters who expressed an

[[Page 49891]]

absolute view of the relative roles and responsibilities of the issuer 
and the auditor. Nothing prohibits exceptions to this general 
principle, and indeed, existing requirements contemplate a role for the 
auditor in disclosing original information.\35\ Until recently, for 
example, the auditor's role in preparing the ``going concern'' 
explanatory paragraph contemplated that the auditor would be required 
to provide original information. Pursuant to Section 101(a) of 
Sarbanes-Oxley Act, part of the Board's mission is ``to further the 
public interest in the preparation of informative, accurate, and 
independent audit reports.'' Providing investors and other users of 
financial statements with the unique perspective of the auditor 
regarding CAMs can give them valuable insight about the audit. This 
furthers the underlying purpose of the auditor's report itself--to 
provide investors and other users with information to use in evaluating 
a company's financial statements and make informed investment 
decisions--and is consistent with the U.S. regulatory framework.
---------------------------------------------------------------------------

    \35\ See supra footnote 33.
---------------------------------------------------------------------------

    Nor do we believe that CAMs, particularly as currently proposed, 
will displace the financial reporting responsibilities of management. 
Instead, we believe the communication of CAMs should add to the total 
mix of information available to investors by eliciting more information 
about the audit itself, which is uniquely within the perspective of the 
auditor, irrespective of the financial reporting responsibilities of 
management. Requiring communication of information about the audit, 
from the auditor's perspective, as the Proposed Rules require, should 
limit the extent to which original information would be provided by the 
auditor. Moreover, to the extent original information would need to be 
communicated in a CAM, we anticipate that the auditor, management, and 
the audit committee will engage in a dialogue about that communication.
    While we acknowledge the important concerns raised by several 
commenters in this area and intend to closely monitor the 
implementation of the Proposed Rules, as discussed further below, we 
believe that the requirements for communicating CAMs in the auditor's 
report are reasonably designed to ameliorate these concerns and are 
within the Board's authority. As a result, we believe that the Proposed 
Rules are consistent with the Sarbanes-Oxley Act and the securities 
laws and are necessary or appropriate in the public interest or for the 
protection of investors. We address more specific concerns on this 
matter in the following paragraphs.
1. Definition of CAM
    As discussed in Section II.A, ``Changes to PCAOB Standards'' above, 
under the Proposed Rules, a CAM is defined as any matter arising from 
the audit of the financial statements that was communicated or required 
to be communicated to the audit committee and that: (1) Relates to 
accounts or disclosures that are material to the financial statements, 
and (2) involved especially challenging, subjective, or complex auditor 
judgment.
    Some commenters questioned the scope of the definition of CAMs, 
which states that a CAM ``relates to'' accounts or disclosures that are 
material to the financial statements, rather than specifying that a CAM 
itself has to be material to the financial statements.\36\ Commenters 
also questioned whether there is sufficient clarity on how to apply 
this requirement.\37\
---------------------------------------------------------------------------

    \36\ See e.g., CCMC Letter; American Tower Letter; Eli Lilly 
Letter; New York City Bar Letter.
    \37\ See e.g., CCMC Letter; Eli Lilly Letter.
---------------------------------------------------------------------------

    The commenters that raised questions about the scope of the CAM 
definition principally explained their concerns by discussing specific 
examples that might result in the auditor disclosing original 
information about the company as it relates to the identification of a 
CAM or immaterial information that is not otherwise required to be 
disclosed by the financial reporting framework or SEC regulations. 
Specifically, commenters questioned whether significant deficiencies, 
illegal acts, and remote loss contingencies should be identified as 
CAMs. The same questions were posed to the Board in response to the 
PCAOB Re-proposal. In the release accompanying the Proposed Rules, the 
Board directly addressed each of the examples by providing guidance 
that: (1) The determination that there is a significant deficiency in 
internal control over financial reporting, in and of itself, cannot be 
a CAM; (2) a potential illegal act, if an appropriate determination had 
been made that no disclosure of it was required in the financial 
statements, would not meet the definition of a CAM; and (3) a potential 
loss contingency that was communicated to the audit committee, but that 
was determined to be remote and was not recorded in the financial 
statements or otherwise disclosed under the applicable financial 
reporting framework, would not meet the definition of a CAM.
    Other than the specific examples described above, no other examples 
raising concerns with the definition of a CAM have been brought to the 
attention of the PCAOB or the Commission. We recognize that some 
commenters suggested an alternative approach to materiality, but we 
agree with the balance struck by the PCAOB between the benefits of 
communicating CAMs and the possibility of the auditor providing 
information that has not previously been disclosed by the company. 
Under the Proposed Rules, communication of original information should 
be limited to rare circumstances, as we further discuss in section 
III.B.2 below, and relate only to the discussion of the principal 
considerations as to why a matter was a CAM or how the auditor 
addressed the CAM. Moreover, we believe this approach is consistent 
with the Board's statutory mandate under Section 101(a) of the 
Sarbanes-Oxley Act to further the public interest in the preparation of 
informative, accurate, and independent audit reports. Requiring the 
communication of CAMs will provide additional information about the 
audit from the auditor's own unique perspective that investors have 
indicated, and which we have found, could reduce information 
asymmetries and be useful to investors, in assessing a company's 
financial reporting and making capital allocation and voting 
decisions.\38\
---------------------------------------------------------------------------

    \38\ See e.g., J. Robert Brown Jr. Letter; CII Letter; Letter 
from Colorado Public Employees' Retirement Association, August 18, 
2017 (``Colorado PERA Letter'').
---------------------------------------------------------------------------

    Commenters also suggested that their alternative approach to 
materiality would be easier to apply in determining which matters to 
communicate as CAMs. However, given the clarifications provided by the 
Board, we believe commenters' concerns regarding the scope of the CAM 
definition have been adequately addressed and that the Proposed Rules' 
materiality component, which specifies that a CAM ``relates to'' 
accounts or disclosures that are material to the financial statements, 
will be both workable and effective in assisting an auditor in 
determining which matters to communicate as a CAM. Indeed, we note that 
the accounting firms that would be responsible for implementing the 
Proposed Rules, while calling for active PCAOB and SEC monitoring both 
pre- and post-implementation, did not raise additional concerns in 
their comment letters to the Commission regarding any lack of clarity 
within the definition of a CAM under the Proposed Rules.\39\
---------------------------------------------------------------------------

    \39\ See e.g., Letter from BDO USA LLP, August 15, 2017 (``BDO 
Letter''); Letter from PricewaterhouseCoopers LLP, August 18, 2017 
(``PwC Letter''); Deloitte Letter; EY Letter.

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[[Page 49892]]

2. Disclosure of `Why' a Matter Is a CAM and How It Was Addressed
    As discussed in section II.A, ``Changes to PCAOB Standards,'' 
above, under the Proposed Rules, the communication of each CAM 
includes: (1) Identifying the CAM; (2) describing the principal 
considerations that led the auditor to determine that the matter is a 
CAM; (3) describing how the CAM was addressed in the audit; and (4) 
referring to the relevant financial statement accounts or disclosures 
that relate to a CAM.
    Some commenters, while acknowledging that much of the discussion in 
CAMs will focus on the audit itself, expressed concerns that the 
description as to why \40\ a matter was designated as a CAM could 
frequently include information not otherwise required to be disclosed 
by a company.\41\ The example cited most frequently in comment letters 
as a concern was a significant deficiency in internal control over 
financial reporting (or control deficiencies, generally). At least one 
commenter suggested removing the requirements to describe (1) the 
principal considerations that led the auditor to determine that the 
matter is a CAM, and (2) how the matter was addressed in the audit.\42\
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    \40\ Commenters indicated the second communication requirement 
``describing the principal considerations that led the auditor to 
determine that the matter is a CAM'' is effectively a requirement to 
communicate `why' a matter is a CAM.
    \41\ See e.g., Sullivan & Cromwell Letter.
    \42\ See e.g., Cleary Gottlieb Letter.
---------------------------------------------------------------------------

    By contrast, comments from investors and investor associations 
indicated a desire for information directly from the auditor's point of 
view.\43\ One commenter specifically stated that CAMs will make the 
auditor's report more relevant and useful to investors and other 
readers by providing tailored, audit specific information.\44\ This 
same commenter noted that CAMs should provide insights that could be 
used in investors' capital allocation decisions by, for instance, 
enabling comparison of certain aspects of the audit across companies 
and over time.\45\
---------------------------------------------------------------------------

    \43\ See e.g., CII Letter; Capital Group Letter.
    \44\ See CII Letter.
    \45\ See CII Letter.
---------------------------------------------------------------------------

    Regarding the requirement to describe the principal considerations 
that led to the identification of a CAM (i.e., the ``why''), the 
release accompanying the Proposed Rules states: ``If auditors can 
adequately convey to investors the principal considerations and how the 
auditor addressed the matter without including previously undisclosed 
information, it is expected that they will. However, the standard 
provides that even when management has not disclosed information, the 
auditor is not constrained from providing such information if it is 
necessary to describe the principal considerations that led the auditor 
to determine that a matter is a critical audit matter or how the matter 
was addressed in the audit.'' With regard to the specific control 
deficiency point raised by commenters, in the release accompanying the 
Proposed Rules, the Board concluded that the determination that there 
is a significant deficiency, in and of itself, cannot be a CAM, as it 
does not relate to an account or disclosure that is material to the 
financial statements as no disclosure of the determination is required. 
As a result, even though it might involve especially challenging, 
subjective, or complex auditor judgment, this determination would not 
be a CAM.
    Further, should the auditor deem it necessary to discuss control-
related matters that do not rise to the level of a material weakness 
within the communication of a CAM (e.g., a significant deficiency was a 
principal consideration for determining that a matter was a CAM), the 
Board stated that the auditor could ``describe the relevant control-
related issues in a broader context of the critical audit matter 
without using the term significant deficiency.''
    Regarding the requirement to describe how the matter was addressed 
in the audit, the Board indicated in the release accompanying the 
Proposed Rules that including this information would be ``consistent 
with the Board's objective of providing more information about the 
audit and, if developed with an appropriate focus on the intended 
audience, should be of interest to users.'' The Board also indicated 
that this information should be specific to the circumstances of the 
audit and avoid standardized language.
    We agree with the Board and certain commenters that the ``why'' and 
the ``how'' elements of the CAM will provide investors with relevant 
information from the auditor's perspective that could assist them in 
understanding the audit, thereby reducing information asymmetries. We 
believe that, by providing insight into the audit, the ``why'' and the 
``how'' elements will provide additional transparency to investors, 
which in turn will enhance investor confidence in the audit. We 
therefore believe this requirement is consistent with the Board's 
statutory mandate to ``protect the interests of investors and further 
the public interest in the preparation of informative, accurate, and 
independent audit reports.'' In our view, the importance of this 
information to investors justifies the possibility that the auditor 
would provide information about a company that is not otherwise 
required to be disclosed by the company.
    Further, we are not persuaded that the description of principal 
considerations will frequently lead to communication of original 
information, as commenters suggested. We believe that situations where 
auditors would be required to provide information about the company 
that management has not already made public would be exceptions, 
arising only in limited circumstances, and not a pervasive occurrence. 
With respect to providing original information about control 
deficiencies in particular, we similarly believe these situations would 
be rare. The especially challenging, subjective, or complex auditor 
judgment in these cases is typically limited to the determination as to 
whether a control deficiency is a significant deficiency or material 
weakness. The other judgment to consider when a control deficiency 
exists is whether and how the auditor might need to adjust the original 
audit plan (i.e., the audit response). The concerns expressed by 
commenters related to disclosing original information about control 
deficiencies are primarily related to scenarios where the company and 
auditor have concluded a material weakness in internal control over 
financial reporting does not exist but the deficiency is a principal 
consideration for determining that a matter is a CAM. The audit 
response to a deficiency that is not a material weakness is typically 
less extensive because the auditor has already concluded that a 
reasonable possibility of material misstatement due to the control 
deficiency does not exist. For example, the audit response might be 
more of the same procedures being performed without changing the nature 
of the procedures. In those instances, typically, judgments about the 
audit response would not be a principal consideration of why something 
is a CAM and therefore would not need to be reported.
3. Client Confidentiality--Professional Obligations and State Laws
    At least one commenter stated that auditors may have a requirement 
to maintain client confidentiality under certain states' laws or 
professional obligations that could conflict with the Proposed Rules, 
if the Proposed Rules required the auditor to communicate original 
information about the

[[Page 49893]]

company.\46\ In the release accompanying the Proposed Rules, the Board 
noted that auditor's obligations under PCAOB standards arise under 
federal law and regulations and professional or state law duties of 
client confidentiality should not apply to, or should be preempted by, 
the obligation to communicate CAMs.
---------------------------------------------------------------------------

    \46\ See e.g., CCMC Letter.
---------------------------------------------------------------------------

    We agree that the communications called for by the Proposed Rules 
should not be precluded by existing state legal or professional 
obligations as to client confidentiality in light of, among other 
things, existing exceptions for disclosure where required by applicable 
law. For example, the AICPA Code of Professional Conduct articulates 
the professional duties of a member CPA in public practice regarding 
confidential client information and stipulates that ``[a] member in 
public practice shall not disclose any confidential client information 
without the specific consent of the client.'' \47\ However, the Code 
goes on to state that ``[t]his rule shall not be construed . . . to 
prohibit a member's compliance with applicable laws and government 
regulations.'' \48\ While we are sensitive to the importance of client 
confidentiality, and do not believe it should be overridden lightly, we 
believe that the benefits of requiring communication to investors of 
CAMs--within the confines of the Proposed Rules--justify the potential 
that some information that otherwise would be considered a client 
confidence will be made public.\49\
---------------------------------------------------------------------------

    \47\ AICPA Code of Professional Conduct 1.700.001.01.
    \48\ AICPA Code of Professional Conduct 1.700.001.02. See also, 
e.g., Rule 10-4 of the Uniform Accountancy Act Model Rules, which 
has been the basis for many state rules for professional conduct.
    \49\ One commenter stated that the PCAOB reaffirmed the 
propriety of confidentiality requirements imposed on auditors by 
other authorities within PCAOB Release No. 2008-001 which adopted 
Auditing Standard No. 6, Evaluating Consistency of Financial 
Statements (since reorganized as AS 2820) in which the Board stated 
that the revisions contained therein ``did not reflect a decision 
that auditor confidentiality requirements imposed by other 
authorities were inappropriate.'' See CCMC Letter. However, by 
reaffirming the propriety of confidentiality requirements imposed on 
auditors by other authorities in PCAOB Release 2008-001, we believe 
the Board also effectively reaffirmed professional requirements such 
as the AICPA's confidential client information rule, which, as 
discussed above, expressly states that the rule does not prohibit a 
member's compliance with applicable laws and government regulations.
---------------------------------------------------------------------------

C. The Potential Impact of CAMs on the Role of the Audit Committee and 
the Communication Among the Audit Committee, Management, and the 
Auditor

    Commenters provided mixed views on the potential impact of CAM 
reporting on the role of the audit committee and the communication 
among the audit committee, management, and the auditor. Some commenters 
indicated they believe the public reporting of CAMs will likely result 
in improved communications between auditors and audit committees.\50\ 
At least one commenter suggested audit committees should have a 
particular interest in matters communicated by the auditor that are 
likely to be made public in the auditor's report and they will likely 
want to more fully understand any auditing matter that resulted in a 
CAM.\51\
---------------------------------------------------------------------------

    \50\ See e.g., CII Letter; J. Robert Brown Jr. Letter.
    \51\ See e.g., J. Robert Brown Jr. Letter.
---------------------------------------------------------------------------

    Conversely, some commenters indicated they believe there is a risk 
that the requirement for auditors to communicate CAMs will result in 
``chilled'' conversation among audit committees, management, and 
auditors.\52\ Generally, these commenters expressed concern that the 
Proposed Rules could unintentionally discourage free and open 
communication between the auditor and management and between the 
auditor and audit committee. Further, some commenters expressed concern 
that the role of the audit committee will be undermined by the 
auditor's responsibilities under the Proposed Rules.\53\
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    \52\ See e.g., Letter from Bruce J. Nordstrom, August 11, 2017 
(``Bruce J. Nordstrom Letter''); Northrop Grumman Letter; Sullivan & 
Cromwell Letter; Cleary Gottlieb Letter; Letter from Nasdaq, August 
24, 2017.
    \53\ See e.g., Bruce J. Nordstrom Letter; Quest Letter; Aetna 
Letter.
---------------------------------------------------------------------------

    Similar comments were received by the PCAOB in its rulemaking 
process. In the release accompanying the Proposed Rules, the Board 
explained that it believes there should not be a chilling effect or 
reduced communications to the audit committee because of the 
requirements included in AS 1301, Communications with Audit Committees. 
Any potential chilling effect would therefore relate only to matters 
that are not explicitly required to be communicated to the audit 
committee. However, the Board noted that given the broad requirements 
of AS 1301 (particularly paragraph .24), there may be few, if any, 
relevant communications affected by that possibility.
    We acknowledge that there exists a risk that communications between 
the auditor and the audit committee could be chilled, if the auditor 
were to avoid raising certain issues to the audit committee's attention 
so as to not trigger the requirement to determine whether such issues 
are CAMs. However, we agree with the Board's conclusion that the 
existing requirements to communicate matters to the audit committee--an 
auditing standard that would be violated if matters were not 
communicated--limits the risk of chilling to matters not falling within 
the scope of AS 1301, but falling within the scope of a CAM. In this 
regard, we believe it would be highly unusual for a matter to meet the 
definition of a CAM and not be required to be communicated to the audit 
committee. To illustrate this point, the following are examples of 
matters that are required to be communicated to the audit committee 
based on the requirements in AS 1301:
     Significant risks identified during the auditor risk 
assessment procedures; \54\
---------------------------------------------------------------------------

    \54\ See AS 1301.9.
---------------------------------------------------------------------------

     The nature and extent of specialized skill or knowledge 
needed to perform the planned audit procedures or evaluate the audit 
results related to a significant risk; \55\
---------------------------------------------------------------------------

    \55\ See AS 1301.10a.
---------------------------------------------------------------------------

     Critical accounting policies and practices; \56\
---------------------------------------------------------------------------

    \56\ See AS 1301.12b.
---------------------------------------------------------------------------

     Critical accounting estimates; \57\
---------------------------------------------------------------------------

    \57\ See AS 1301.12c.
---------------------------------------------------------------------------

     Significant unusual transactions; \58\
---------------------------------------------------------------------------

    \58\ See AS 1301.12d.
---------------------------------------------------------------------------

     Difficult or contentious matters for which the auditor 
consulted (outside of the engagement team); \59\ and
---------------------------------------------------------------------------

    \59\ See AS 1301.15.
---------------------------------------------------------------------------

     Other matters arising from the audit that are significant 
to the oversight of the company's financial reporting process.\60\
---------------------------------------------------------------------------

    \60\ See AS 1301.24.
---------------------------------------------------------------------------

    The Proposed Rules provide the following nonexclusive list of 
factors that auditors should take into account, alone or in 
combination, in determining whether a matter involved especially 
challenging, subjective, or complex auditor judgment for purposes of 
evaluating whether a matter falls within the definition of a CAM:
     The auditor's assessment of the risks of material 
misstatement, including significant risks;
     The degree of auditor judgment related to areas in the 
financial statements that involved the application of significant 
judgment or estimation by management, including estimates with 
significant measurement uncertainty;

[[Page 49894]]

     The nature and timing of significant unusual transactions 
and the extent of audit effort and judgment related to these 
transactions;
     The degree of auditor subjectivity in applying audit 
procedures to address the matter or in evaluating the results of those 
procedures;
     The nature and extent of audit effort required to address 
the matter, including the extent of specialized skill or knowledge 
needed or the nature of consultations outside the engagement team 
regarding the matter; and
     The nature of audit evidence obtained regarding the 
matter.
    Given the similarity of the two lists, we believe it would be 
difficult to identify an example of a matter that would meet the 
definition of a CAM that would not otherwise need to be communicated to 
the audit committee based on the requirements in AS 1301. Further, it 
is important to bear in mind that the mere communication of information 
from the auditor to the audit committee is not sufficient to meet the 
definition of CAM. The information communicated also would have to meet 
all other criteria in the definition of CAM, including that the matter 
involved especially challenging, subjective, or complex auditor 
judgment. Given auditors' existing responsibilities to discuss the 
matters described above with audit committees, we do not believe that 
the Proposed Rules are likely to chill these conversations.
    As it relates to the risk that the role of the audit committee will 
be undermined, we emphasize that the Commission has a long history of 
promoting effective and independent audit committees.\61\ We believe 
the requirement for every company listed on an exchange to have an 
independent audit committee \62\ plays an important role in protecting 
the interests of investors by assisting the board of directors in 
fulfilling its responsibility to oversee the integrity of a company's 
accounting and financial reporting processes and both internal and 
external audits. Dialogue between audit committees and auditors 
provides real benefits to investors and the financial reporting 
process. The intent of the Proposed Rules is to supplement the role of 
the audit committee by providing information about the audit through 
the lens of the auditor. The Proposed Rules are unlikely to impact this 
relationship or the dialogue between audit committees and auditors, and 
may even encourage audit committees to engage more extensively with 
auditors given that there will be disclosures by the auditor about 
those aspects of the audit that constitute CAMs.
---------------------------------------------------------------------------

    \61\ See e.g., Possible Revisions to Audit Committee 
Disclosures, Release No. 33-9862 (July 1, 2015), 80 FR 38995 (July 
8, 2015) available at https://www.sec.gov/rules/concept/2015/33-9862.pdf.
    \62\ See Section 301 of the Sarbanes Oxley Act and Section 
10A(m) of the Exchange Act.
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D. The Potential Liability Impact of CAMs

    Commenters provided mixed views related to potential liability 
impacts of the introduction of CAMs.\63\ Some commenters expressed 
concern that the communication of CAMs may result in an increase of 
meritless claims under the securities laws by expanding the number and 
variety of statements that will be attributed to the auditor.\64\ Some 
commenters also expressed concerns that the requirements for auditor 
reporting of CAMs will increase litigation risk for both auditors and 
companies.\65\ However, other commenters expressed views that the 
communication of CAMs by the auditor may have the potential to decrease 
liability as it involves disclosure of risks and challenges, and 
accordingly, could effectively provide a defense for the auditor.\66\
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    \63\ Some commenters suggested the Commission undertake 
rulemaking to provide a safe harbor around auditor reporting of 
CAMs. See e.g., PwC Letter, CCMC Letter. The question before the 
Commission at this time, however, is whether the rules as proposed 
meet the statutory criteria for approval. Moreover, we believe it 
would be more appropriate to consider whether any potential 
rulemaking is warranted related to safe harbors after the Board and 
the Commission have the opportunity to observe how the Proposed 
Rules are implemented in practice.
    \64\ See e.g., Quest Letter; PwC Letter; Davis Polk Letter.
    \65\ See e.g., CCMC Letter; American Tower Letter; EY Letter.
    \66\ See e.g., CII Letter; Letter from The Value Alliance and 
Corporate Governance Alliance, August 18, 2017.
---------------------------------------------------------------------------

    These concerns were also raised by commenters during the PCAOB 
rulemaking process. As the Board acknowledged in the release 
accompanying the Proposed Rules, CAMs themselves would be new 
statements that could be the basis for asserted claims against 
auditors. The Board also noted in its release that information provided 
regarding CAMs could be used to impact other aspects of securities 
fraud claims, such as providing evidence to support pleadings against 
an issuer, an auditor, or both.
    In response to these concerns, the Board limited and clarified the 
process for determining CAMs, including by narrowing the source of CAMs 
to matters communicated or required to be communicated to the audit 
committee, adding a materiality component to the CAM definition, and 
refining the factors used to determine CAMs. We believe these 
modifications, as well as the CAM definition's focus on the auditor's 
judgment, should help mitigate potential liability concerns. For 
example, one of the concerns expressed by commenters regarding 
liability is the potential omission of CAMs within the auditor's 
report. By narrowing the potential matters that could be CAMs, 
clarifying the process for determining CAMs, and revising the 
definition of a CAM as discussed above, the Board has provided a 
framework for the auditor to evaluate and demonstrate whether a matter 
meets the definition of a CAM in accordance with the Proposed Rules.
    We recognize, as the Board did, that mandating communication of 
CAMs will, by design, entail new statements in the auditor's report, 
thereby increasing the potential for litigation regarding such 
statements. However, the actual litigation impacts of these 
communications are difficult to predict. As the Board notes, in order 
to succeed, any claim based on these new statements would have to 
establish all of the elements of the relevant cause of action (e.g., 
when applicable, scienter, loss causation, and reliance). Moreover, as 
discussed above, CAMs could be used to defend as well as initiate 
litigation.
    Nevertheless, we recognize reporting of CAMs likely will create an 
incremental risk of litigation and potential liability. To some degree, 
increased litigation risk is the by-product of any new reporting 
requirement and must be balanced against the perceived benefits of the 
required reporting. As discussed above, we are persuaded that the 
communication of CAMs, which can be provided only by auditors, will 
benefit investors and other financial statement users by providing 
insights into the audit--and from the auditor's own unique 
perspective--that can reduce information asymmetries and be used to 
assess a company's financial reporting and make capital allocation and 
voting decisions. In our view, these benefits justify any such 
potential incremental liability risk arising from the communication, 
especially in light of the steps taken by the Board to mitigate such 
risk, as discussed above. However, because of these risks and other 
concerns expressed by commenters, we expect the Board to monitor the 
Proposed Rules after implementation for any unintended consequences.

E. Economic Analysis of CAMs

    Several commenters expressed concerns that the costs of the 
Proposed

[[Page 49895]]

Rules will exceed their benefits, or that the economic analysis 
performed by the Board did not sufficiently analyze the costs and 
benefits of the Proposed Rules.\67\ Some commenters observed 
specifically that the Board's analysis lacked quantitative 
information.\68\ Conversely, some commenters indicated they believe the 
potential costs are not likely to be significant relative to the 
potential benefits, for example because CAMs are based on matters 
already being discussed by the auditor and audit committee.\69\ 
Further, to the extent that costs are incurred related to the Proposed 
Rules, commenters from the investor community stated that, as 
shareholders, they are willing to bear the additional costs of the 
Proposed Rules in exchange for enhanced information about the 
audit.\70\
---------------------------------------------------------------------------

    \67\ See e.g., CCMC Letter; Society for Corporate Governance 
Letter; Davis Polk Letter.
    \68\ See e.g., Robert Waxman Letter; CCMC Letter; Davis Polk 
Letter.
    \69\ See e.g., CII Letter; Letter from Aberdeen Asset 
Management, August 11, 2017 (``Aberdeen Letter''); Hermes Letter; 
CFA Institute Letter.
    \70\ Compliance and implementation costs from the auditor's 
standpoint could be passed through to the company and consequently 
investors in the form of increased audit fees. Moreover, companies 
themselves (and consequently investors) could incur additional costs 
as a consequence of the Proposed Rules, for example by engaging 
additional resources such as legal counsel, and such costs would 
impact investors. See also e.g., CII Letter; Aberdeen Letter; Hermes 
Letter.
---------------------------------------------------------------------------

    The Board's evaluation of the potential costs and benefits of the 
Proposed Rules was informed by information sought and obtained from 
stakeholders. In the course of that analysis, the Board stated that 
``the potential benefits and costs of the [Proposed Rules] are 
inherently difficult to quantify, therefore the Board's economic 
discussion is primarily qualitative in nature.'' The Board also 
observed that commenters that raised concerns about the Proposed Rules' 
costs generally did not quantify those costs and that ``[e]ven those 
[commenters] that, at an earlier stage of the rulemaking, conducted 
limited implementation testing of the proposal were unable to provide a 
quantified cost estimate.'' Moreover, as stated in the release 
accompanying the Proposed Rules, as related to comments provided to the 
Board, ``[c]ommenters provided views on a wide range of issues 
pertinent to economic considerations, including potential benefits and 
costs, but did not provide empirical data or quantified estimates of 
the costs or other potential impacts of the standard.'' As a result, in 
lieu of providing a quantitative analysis, the Board engaged in a 
detailed qualitative assessment of the Proposed Rules' potential 
economic impacts, including consideration of direct and indirect 
benefits, costs, and potential unintended consequences.
    We disagree with commenters' assertions that the Board's analysis 
is defective for failing to adequately quantify the costs and benefits 
of the Proposed Rules. Analyzing the potential economic impacts, 
including the costs and benefits, of a proposed rule is a key way to 
develop regulatory changes that are well-reasoned, with potential costs 
that are warranted in light of the expected benefits. We believe that a 
high-quality qualitative analysis can allow for this type of 
evaluation, particularly in those cases where quantification is not 
feasible.\71\
---------------------------------------------------------------------------

    \71\ Cf. Nat'l Ass'n of Mfrs v. SEC, 748 F.3d 359 (D.C. Cir. 
2014) (acknowledging the reasonableness of the SEC's determination 
that it was unable to quantify benefits because it lacked the data 
necessary to do so).
---------------------------------------------------------------------------

    We also agree with the Board that it would not have been feasible 
to quantify the potential costs and benefits of the Proposed Rules. 
While certain components of the total potential costs related to the 
Proposed Rules might be easier to estimate (e.g., the costs an auditor 
might incur to draft a CAM), several of the significant components of 
the total potential cost are inherently difficult to estimate. For 
example, under the Proposed Rules, the auditor would need to determine 
which matters are CAMs and have incremental discussions with the audit 
committee regarding the draft of the CAM communications. Given the 
audit-specific nature of such matters, it is difficult to predict how 
many hours would need to be involved in the analysis and communication 
process as this will vary based on a number of factors, including, for 
example, the complexity of the company and the number of CAMs.
    In addition, there are potential costs that might be incurred by 
the company as a consequence of the implementation of the Proposed 
Rules. For example, besides the audit committee, other executives and 
legal counsel may be required to expend more time and effort in 
discussing and reviewing the auditor's report as a consequence of the 
Proposed Rules. Again, estimating these costs is difficult because 
these costs likely will vary among audit engagements depending on the 
circumstances.
    Potential benefits from new auditor reporting requirements are also 
inherently difficult to quantify. For example, to quantify the direct 
benefit to investors of a more useful and informative auditor's report, 
one would require an estimate of how their investment or voting 
decisions would be affected by CAMs and an estimate of the amount of 
profit from such decisions. Such estimates are either impossible or 
very difficult to calculate with reasonable reliability. In addition to 
the direct benefits, there may be indirect benefits from the new 
reporting requirements. For example, the communication of CAMs can 
provide some auditors, management, and audit committees with additional 
incentives to enhance audit quality. Enhanced audit quality ultimately 
can lead to a reduced cost of capital. However, at this time, it is 
impossible to predict the amount of reduction in cost of capital that 
would arise from the Proposed Rules.
    Moreover, we agree with the Board's qualitative analysis of the 
possible economic consequences of the Proposed Rules. As they did 
before the Board, investors and investor associations have expressed 
strong support to the Commission for the Proposed Rules and stated that 
they expect the potential benefits to justify the potential costs.\72\ 
As an example, one commenter stated the Proposed Rules will not require 
changes to the audit process and hence should not impose any 
significant incremental costs.\73\ This same commenter further stated 
that, while incremental costs or auditor effort should be minimal, 
there are manifold benefits for investors.\74\ Several commenters also 
informed the Commission that they believe that the information from the 
auditor's perspective that would be required by the Proposed Rules 
would be useful, for example, in forming voting and investment 
decisions.\75\
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    \72\ See e.g., CFA Institute Letter; CII Letter.
    \73\ See e.g., CFA Institute Letter.
    \74\ See id.
    \75\ See e.g., CII Letter; Letter from Public Citizen, August 
18, 2017; CalPERS Letter; Hermes Letter; CFA Institute Letter.
---------------------------------------------------------------------------

    We believe these are important benefits. The Proposed Rules are 
consistent with the broader economic theory regarding the benefits from 
enhanced disclosures. More specifically, we believe that the Proposed 
Rules are likely to improve the information currently available to 
investors and facilitate their efforts to understand the financial 
statements. Importantly, the Proposed Rules will assist investors in 
identifying those matters that relate to the relevant financial 
statement accounts or disclosures that involved especially challenging, 
subjective, or complex auditor judgment. This will, in turn, provide 
investors with audit-specific information directly from the auditor's 
point of view and add to the

[[Page 49896]]

total mix of information that could be used in their capital allocation 
and voting decisions. Further, investors will be able to observe 
reported CAMs for other companies. Within the right context, such 
information could be used by investors to improve their understanding 
of both the audit itself and the company's financial statements.
    Moreover, the Proposed Rules may stimulate discussions between the 
auditor and the company regarding CAMs, and potentially increase 
professional skepticism by the auditor. The public nature of CAMs may 
also act to further enhance auditors' professional skepticism. An 
increase in skepticism may lead to an increase in audit quality and, as 
a consequence, result in lower cost of capital for companies.
    Like the Board, we recognize that there are costs associated with 
complying with the Proposed Rules. The Board indicated that costs to 
auditors are most likely to arise from additional time to prepare and 
review auditor's reports, including discussions with management and 
audit committees, as well as potential legal costs for review of the 
information provided in the CAMs. In addition, auditors may choose to 
perform more audit procedures related to areas reported as CAMs (even 
though auditor performance requirements have not changed in those 
areas), with cost implications for both auditors and companies. For 
auditors, costs might represent both one-time costs and recurring 
costs. One-time costs could be incurred as a result of: (1) Updating 
accounting firm audit and quality control methodologies; and (2) 
developing and conducting training. Recurring costs could include: (1) 
Drafting descriptions of CAMs and related documentation; (2) additional 
reviews by senior members of engagement teams, engagement quality 
reviewers, and national office personnel; and (3) additional time as a 
result of discussions with management or the audit committee regarding 
CAMs.
    Companies, including audit committees, will likely also incur both 
one-time and recurring costs. One-time costs could be incurred, for 
example, in educating audit committee members about the requirements of 
the new standard and in developing management and audit committee 
processes for the review of draft descriptions of CAMs and the related 
interaction with auditors. Recurring costs could include the costs 
associated with carrying out those processes, potential legal 
costs,\76\ as well as any increase in audit fees associated with new 
reporting requirements.
---------------------------------------------------------------------------

    \76\ See discussion in section III.D above, ``The Potential 
Liability Impact of CAMs.''
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    We recognize that there is some level of uncertainty as to the 
costs that will be incurred to comply with the Proposed Rules. However, 
as discussed above, the Board has taken steps to mitigate those costs, 
including by, as an example, limiting the source of CAMs to matters 
communicated or required to be communicated to the audit committee and 
by adding a materiality component to the definition of a CAM. At the 
same time, for the reasons explained above, we believe that the 
Proposed Rules will provide significant new benefits to investors and 
other financial statement users. Based on the economic analysis in the 
release accompanying the Proposed Rules and our own evaluation of 
comments received by both the Board and the Commission regarding the 
potential economic effects of the Proposed Rules, we are persuaded that 
there is a sufficient basis to conclude that the potential benefits of 
the Proposed Rules will justify the potential related costs, and 
therefore, that the Proposed Rules are necessary and appropriate in the 
public interest and for the protection of investors.

F. Practicability Matters Related to CAMs

    Several commenters raised certain practical concerns with the 
Proposed Rules. We discuss each of these concerns in detail below.
1. Timing
    Some commenters expressed concerns that the requirement to 
communicate CAMs will impose additional burdens on auditors, audit 
committees, and preparers during an already time-constrained period as 
management finalizes its annual financial statements.\77\ In the 
release accompanying the Proposed Rules, the PCAOB acknowledged that if 
drafting and reviewing of CAMs takes place towards the end of the 
audit, there will also be an opportunity cost associated with the time 
constraints on the parties involved.
---------------------------------------------------------------------------

    \77\ See e.g., Society for Corporate Governance Letter; Letter 
from ArcBest, August 17, 2017.
---------------------------------------------------------------------------

    We also acknowledge these concerns, but we expect most matters that 
will ultimately need to be communicated as CAMs will be identified 
throughout the audit and not just at the end of the audit. As a result, 
we believe much of the work can be completed prior to the time-
constrained period at the end of the financial reporting process. In 
those cases, we encourage auditors, audit committees, and preparers to 
coordinate and work together before the critical year-end financial 
reporting period so that, if other CAMs arise later in the audit, the 
burden can be lessened during the finalization of the audit.
2. Inconsistent Application by Auditors
    Some commenters also expressed concerns that the principles-based 
nature of the Proposed Rules as it pertains to both the identification 
and communication of CAMs could lead to inconsistent application by 
auditors.\78\ In the release accompanying the Proposed Rules, the Board 
stated that the determination of CAMs is principles-based and the 
Proposed Rules do not specify any items that would always constitute 
CAMs as the auditor determines CAMs in the context of the specific 
audit.
---------------------------------------------------------------------------

    \78\ See e.g., CCMC Letter; Aetna Letter.
---------------------------------------------------------------------------

    We recognize commenters' concerns that the subjective requirements 
related to CAMs could lead to diversity in communications, but we agree 
with the Board that it is important for the CAM requirements, 
particularly the communication requirements, to be principles-based in 
order to meet the Board's objective of having CAM communications 
provide tailored, audit-specific information by the auditor within the 
auditor's report. We also believe the guidance provided by the Board in 
the release accompanying the Proposed Rules will assist auditors in 
implementing the Proposed Rules consistently.
3. Lack of Examples
    Some commenters noted that the PCAOB did not include the 
illustrative example CAMs from the PCAOB Re-proposal in the release 
accompanying the Proposed Rules, and they expressed concern that the 
removal of these examples will add to uncertainties and confusion for 
auditors in reporting CAMs.\79\ As the PCAOB noted in the release 
accompanying the Proposed Rules, given the principles-based nature of 
the requirements for CAMs and the objective of providing tailored, 
audit-specific information, the examples in the PCAOB Re-proposal were 
intended to function as illustrations of how CAMs could be 
communicated, and not as templates for how CAMs should be communicated. 
In this regard, it is important to bear in mind that a number of 
commenters expressed concerns that

[[Page 49897]]

the CAMs will become boilerplate and will not be useful.\80\
---------------------------------------------------------------------------

    \79\ See e.g., CCMC Letter; Robert Waxman Letter.
    \80\ See e.g., Aetna Letter; Quest Letter; Davis Polk Letter.
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    We agree with the Board's objective of providing tailored, audit-
specific information and believe it is important for auditors to 
develop CAM descriptions that comply with the Proposed Rules without 
conforming to an example provided by the Board. As a result, inclusion 
of examples may lead to more boilerplate descriptions of CAMs. In 
addition, the PCAOB does present certain examples in the release 
accompanying the Proposed Rules to provide guidance on how to identify 
and communicate CAMs. The release includes examples such as, whether 
the auditor's evaluation of the company's ability to continue as a 
going concern could also represent a CAM and whether a potential 
illegal act, if an appropriate determination had been made that no 
disclosure of it was required in the financial statements, would be a 
CAM. The Proposed Rules also include a note incorporating four examples 
of potential approaches to addressing the requirement to describe how 
the CAM was addressed in the audit.

G. Disclosure of Auditor Tenure in the Auditor's Report

    Commenters provided mixed perspectives related to the disclosure of 
auditor tenure in the auditor's report. Some commenters did not support 
disclosure of auditor tenure in the auditor's report. These commenters 
indicated such disclosure may give undue prominence to the information, 
thereby giving an impression that a correlation exists between auditor 
tenure and independence or audit quality.\81\ Some of these commenters 
suggested alternative locations for this information, such as the proxy 
statement, so that the information could be provided with context from 
the audit committee, or PCAOB Form AP.\82\ At least one commenter did 
not support requiring the disclosure of auditor tenure as this 
commenter stated the audit committee is in the best position to 
evaluate the auditor's independence.\83\ Other commenters, including 
investors and investor associations, supported the disclosure of 
auditor tenure, indicating the information is useful in matters such as 
proxy voting.\84\
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    \81\ See e.g., CCMC Letter; PwC Letter; Deloitte Letter.
    \82\ See e.g., Davis Polk Letter; Regions Letter.
    \83\ See e.g., Bruce J. Nordstrom Letter.
    \84\ See e.g., Colorado PERA Letter; CFA Institute Letter.
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    As described in the release accompanying the Proposed Rules, 
issuers are not currently required to disclose auditor tenure, although 
some voluntarily choose to do so. Based on recent surveys,\85\ and as 
noted in the release accompanying the Proposed Rules, there is a 
growing trend of voluntary disclosure of auditor tenure in the proxy 
statement, presumably reflecting audit committees' use of and 
investors' demand for such information. We believe it is important to 
note, for issuers that do not disclose auditor tenure voluntarily, 
investors themselves, in some circumstances, may be able to determine 
auditor tenure based on publicly available information. Further, we are 
aware that various third-party commercial databases provide auditor 
tenure information based on public records (e.g., the auditor's report 
in an issuer's annual report on Form 10-K). Institutional investors or 
professional analysts typically have access to such databases; however, 
retail investors typically do not. To the extent that these retail 
investors seek to obtain auditor tenure information, they would need to 
incur the cost to determine this information themselves.\86\ 
Accordingly, we believe requiring this disclosure could lower 
information acquisition costs for such investors, which we find to be a 
compelling potential benefit in support of the requirement.
---------------------------------------------------------------------------

    \85\ See e.g., Deloitte, Center for Board Effectiveness, Audit 
Committee Disclosure in Proxy Statements--2017 Trend (Aug. 2017), 
available at https://www2.deloitte.com/content/dam/Deloitte/us/Documents/center-for-board-effectiveness/us-cbe-august-2017-on-the-boards-agenda.pdf.
    \86\ Though institutional investors and professional analysts 
need to pay to get access to the databases, their marginal cost of 
acquiring this piece of information is likely much lower than that 
of retail investors because the database provider can spread the 
cost among the database's many subscribers.
---------------------------------------------------------------------------

    As it relates to the location of the disclosure, the PCAOB does not 
have the statutory authority to require disclosure in the proxy 
statement. While the Commission does have authority to amend the proxy 
rules, as discussed in the release accompanying the Proposed Rules, not 
all companies required to be audited under PCAOB standards are subject 
to the proxy rules (e.g., foreign private issuers). In addition, 
certain issuers that are not required to hold annual meetings of 
shareholders, such as most registered investment companies, generally 
will solicit proxies less frequently than other issuers. Also, as 
discussed in the release accompanying the Proposed Rules, the Board 
considered disclosure of auditor tenure in Form AP, which requires 
disclosure of the name of the engagement partner and of the names and 
percentage of participation of other accounting firms in the audit for 
all issuer audits. However, Form AP was developed primarily to respond 
to commenter concerns about the potential liability consequences of 
naming persons in the auditor's report, the potential need to obtain 
consents from those named persons in connection with registered 
securities offerings, and the additional time needed to compile 
information about the other accounting firms. The Board's determination 
to create Form AP, rather than require disclosure of these items in the 
auditor's report, was a means to address these concerns.
    We believe it is important to acknowledge that the disclosure of 
auditor tenure does not have the same potential liability or other 
consequences as disclosure of the name of the engagement partner or 
other accounting firms. We therefore agree with the Board that such an 
approach is unnecessary in the Proposed Rules. Overall, we believe it 
is appropriate for this disclosure to appear in the auditor's report 
because it will provide for a consistent location and decrease search 
costs with respect to information about auditor tenure.

H. The Effective Dates of the Proposed Rules

    Some commenters suggested postponement or further consideration of 
the effective dates included in the Proposed Rules.\87\ At least one 
commenter suggested postponement of the effective dates as companies 
and auditors will be dealing with the implementation of significant new 
GAAP standards, including those related to revenue, leases, and credit 
losses.\88\ In the release accompanying the Proposed Rules, the Board 
took into consideration commenters' feedback and phased effective dates 
for CAMs, indicating this ``may facilitate any post-implementation 
review of the impact of the final standard.''
---------------------------------------------------------------------------

    \87\ See e.g., CCMC Letter; FEI Letter; Eli Lilly Letter.
    \88\ See e.g., CCMC Letter.
---------------------------------------------------------------------------

    We believe the Board took a balanced approach to effective dates by 
adopting a reasonable phase-in schedule. For certain entities listed 
internationally, audit firms are already required to communicate 
information similar to CAMs. Given that the effective date for 
communication of CAMs for large accelerated filers is phased in first, 
larger firms will likely be able to observe practices developed by 
other firms within their global network in considering implementation 
questions.

[[Page 49898]]

    As the Board discussed, the staggered approach to implementation 
may allow the Board to evaluate implementation by the first cohort of 
companies before applying the Proposed Rules to other companies. Also, 
the second cohort of auditors and companies will have more time to 
prepare, and will have the benefit of observing how the Proposed Rules 
have been implemented by the first cohort. The Commission itself, for 
many similar reasons, has used, at times, staggered implementation 
dates for new regulatory requirements.\89\ With respect to the other 
changes to the auditor's report in the Proposed Rules that are not 
subject to a phase-in approach, those changes should not be a 
significant burden to implement as they involve relatively 
straightforward changes to the existing auditor's report. Accordingly, 
we believe the effective dates in the Proposed Rules are reasonable.
---------------------------------------------------------------------------

    \89\ See e.g., Shareholder Approval of Executive Compensation 
and Golden Parachute Compensation, Release No. 33-9178 (Jan. 25, 
2011), 76 FR 6010 (Feb. 2, 2011) available at https://www.sec.gov/rules/final/2011/33-9178.pdf.
---------------------------------------------------------------------------

I. Implementation Efforts

    Several commenters, including most notably audit firms, generally 
expressed support for the Proposed Rules while simultaneously 
expressing concern that unintended consequences may arise during 
implementation. These commenters stated that uncertainty surrounding 
the effects of the Proposed Rules would necessitate a post-
implementation review.\90\ Commenters called on the Commission and 
PCAOB to assist with implementation efforts should the Commission 
approve the Proposed Rules and encouraged the Board to take advantage 
of the proposed phased effective dates to undertake a post-
implementation review of the impact of the final standard.\91\ Some 
accounting firms have also stated their willingness to work with both 
the Commission and PCAOB to provide feedback on implementation 
experiences.\92\ In the release accompanying the Proposed Rules, the 
Board stated that it ``intends to monitor the results of 
implementation, including consideration of any unintended 
consequences.''
---------------------------------------------------------------------------

    \90\ See e.g., BDO Letter; Letter from the Center for Audit 
Quality, August 18, 2017 (``CAQ Letter''); Deloitte Letter; EY 
Letter; PwC Letter.
    \91\ See id.
    \92\ See e.g., CAQ Letter; EY Letter; PwC Letter.
---------------------------------------------------------------------------

    The Commission acknowledges that the communication required of 
auditors by the Proposed Rules is a significant change in practice for 
auditors, companies, and audit committees. Accordingly, it will be 
important to closely monitor the implementation of the Proposed Rules, 
including potentially issuing incremental implementation guidance (if 
needed), providing PCAOB staff to be available to respond to questions 
and challenges as they arise, and completing a post-implementation 
review as soon as reasonably possible, including some analysis between 
effective dates for CAMs. The Commission expects the PCAOB to take such 
steps.

IV. Effect on Emerging Growth Companies

    Under the Proposed Rules, the requirement to communicate CAMs would 
not apply to the audits of EGCs, but all other provisions within the 
Proposed Rules would apply to such audits.\93\ As described in section 
II.A, these include a number of changes to the auditor's report that 
are primarily intended to clarify the auditor's role and 
responsibilities related to the audit of the financial statements, 
provide additional information about the auditor's tenure, and make the 
auditor's report easier to read.
---------------------------------------------------------------------------

    \93\ See Paragraph .05b of AS 3101 within the Proposed Rules.
---------------------------------------------------------------------------

    Section 103(a)(3)(C) of the Sarbanes-Oxley Act, as amended by 
Section 104 of the Jumpstart Our Business Startups Act, requires that 
any rules of the Board ``requiring mandatory audit firm rotation or a 
supplement to the auditor's report in which the auditor would be 
required to provide additional information about the audit and the 
financial statements of the issuer (auditor discussion and analysis)'' 
shall not apply to an audit of an EGC. The provisions of the Proposed 
Rules applicable to the audits of EGCs do not fall into this 
category.\94\ Section 103(a)(3)(C) further provides that ``[a]ny 
additional rules'' adopted by the PCAOB after April 5, 2012, do not 
apply to audits of EGCs ``unless the Commission determines that the 
application of such additional requirements is necessary or appropriate 
in the public interest, after considering the protection of investors 
and whether the action will promote efficiency, competition, and 
capital formation.'' The provisions of the Proposed Rules applicable to 
the audits of EGCs fall within this category, and thus the Commission 
must make a determination under the statute about the applicability of 
these provisions to EGCs. Having considered those statutory factors, 
the Commission finds that applying these provisions to the audits of 
EGCs is necessary or appropriate in the public interest.
---------------------------------------------------------------------------

    \94\ While the precise scope of this category of rules under 
Section 103(a)(3)(C) is not entirely clear, we do not interpret this 
statutory language as precluding the application of Board rules 
requiring a certain format for the auditor's report or inclusion of 
additional factual information about auditor tenure, auditor 
independence and other requirements related to the audits of EGCs. 
In our view, this approach reflects an appropriate interpretation of 
the statutory language and is consistent with our understanding of 
the congressional purpose underlying this provision.
---------------------------------------------------------------------------

    In proposing application of certain of the Proposed Rules to audits 
of all issuers, including EGCs, the PCAOB requested that the Commission 
make the determination required by Section 103(a)(3)(C). To facilitate 
the Commission's determination, the Board provided information 
identified by the Board's staff from public sources, including data and 
analysis of EGCs that sets forth its views as to why it believes 
certain of the Proposed Rules should apply to audits of EGCs.
    To inform consideration of the application of auditing standards to 
audits of EGCs, the PCAOB staff has also published a white paper that 
provides general information about characteristics of EGCs.\95\ The 
data on EGCs outlined in the white paper indicates that a majority of 
EGCs are smaller public companies that are generally new to the SEC 
reporting process. This suggests that there is less information 
available to investors regarding such companies relative to the broader 
population of public companies because, in general, investors are less 
informed about companies that are smaller and newer.
---------------------------------------------------------------------------

    \95\ See White Paper on Characteristics of Emerging Growth 
Companies (Nov. 15, 2016), available at https://pcaobus.org/EconomicAndRiskAnalysis/ORA/Documents/White-Paper-Characteristics-Emerging-Growth-Companies-November-2016.pdf.
---------------------------------------------------------------------------

    We expect that the changes to the auditor's report that would be 
applied to the audits of EGCs under the Proposed Rules, will: (1) 
Provide a consistent location and decrease search costs with respect to 
information about auditor tenure; (2) enhance users' understanding of 
the auditor's role; and (3) make the auditor's report easier to read 
and facilitate comparison across companies by making the format of the 
report more uniform. Given the relatively straightforward nature of the 
additional changes to the auditor's report, we expect that the costs 
associated with these changes will not be significant and will be 
primarily one-time, rather than recurring, costs. Overall, we expect 
the changes to increase the efficiency with which users are able to 
locate and understand the information presented in the auditor's 
report. We do not expect the changes to

[[Page 49899]]

significantly impact competition or capital formation. As such, after 
considering the protection of investors and whether the action will 
promote efficiency, competition, and capital formation, we believe 
there is a sufficient basis for the Commission to determine that 
applying the Proposed Rules, other than the provisions related to CAMs, 
to the audits of EGCs is necessary or appropriate in the public 
interest.

V. Conclusion

    The Commission has carefully reviewed and considered the Proposed 
Rules, the information submitted therewith by the PCAOB, and the 
comment letters received. In connection with the PCAOB's filing and the 
Commission's review,
    A. The Commission finds that the Proposed Rules are consistent with 
the requirements of the Sarbanes-Oxley Act and the securities laws and 
are necessary or appropriate in the public interest or for the 
protection of investors; and
    B. Separately, the Commission finds that the application of the 
Proposed Rules to the audits of EGCs, which do not have a requirement 
to communicate CAMs, is necessary or appropriate in the public 
interest, after considering the protection of investors and whether the 
action will promote efficiency, competition, and capital formation.
    It is therefore ordered, pursuant to Section 107 of the Sarbanes-
Oxley Act and Section 19(b)(2) of the Exchange Act, that the Proposed 
Rules (File No. PCAOB-2017-01) be and hereby are approved.

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-23379 Filed 10-26-17; 8:45 am]
BILLING CODE 8011-01-P