[Federal Register Volume 84, Number 130 (Monday, July 8, 2019)]
[Notices]
[Pages 32502-32505]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-14414]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86270; File No. PCAOB-2019-006]


Public Company Accounting Oversight Board; Order Granting 
Approval of Amendments to Auditing Standards for Auditor's Use of the 
Work of Specialists

July 1, 2019.

I. Introduction

    On March 20, 2019, 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 amendments to auditing standards for 
auditor's use of the work of specialists (collectively, the ``Proposed 
Rules'').\3\ The Proposed Rules were published for comment in the 
Federal Register on April 4, 2019.\4\ At the time the notice was 
issued, the Commission extended to July 3, 2019 the date by which the 
Commission should take action on the Proposed Rules.\5\ We received 
four 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 PCAOB staff originally issued a staff consultation paper 
on this matter in 2015. See The Auditor's Use of the Work of 
Specialists, PCAOB Staff Consultation Paper No. 2015-01 (May 28, 
2015), available at https://pcaobus.org/Standards/Documents/SCP-2015-01_The_Auditor's_Use_of_the_Work_of_Specialists.pdf. In 2017, 
the Board issued a proposed rule. See Proposed Amendments to 
Auditing Standards for Auditor's Use of the Work of Specialists, 
PCAOB Release No. 2017-003 (June 1, 2017) (``PCAOB Proposal''), 
available at https://pcaobus.org/Rulemaking/Docket044/2017-003-specialists-proposed-rule.pdf.
    \4\ See Release No. 34-85435, Public Company Accounting 
Oversight Board; Notice of Filing of Proposed Rules on Amendments to 
Auditing Standards for Auditor's Use of the Work of Specialists, 
(Mar. 28, 2019), 84 FR 13442 (Apr. 4, 2019).
    \5\ See id.
    \6\ We received comment letters from Deloitte & Touche LLP, 
April 10, 2019 (``Deloitte Letter''); the Council of Institutional 
Investors, April 18, 2019 (``CII Letter''); PricewaterhouseCoopers 
LLP, April 25, 2019 (``PwC Letter''); and the Center for Capital 
Markets Competitiveness, U.S. Chamber of Commerce, April 25, 2019 
(``CCMC Letter''). Copies of the comment letters received on the 
Commission order noticing the Proposed Rules are available on the 
Commission's website at https://www.sec.gov/comments/pcaob-2019-03/pcaob201903.htm.
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II. Description of the Proposed Rules

    On December 20, 2018, the Board adopted amendments to auditing 
standards for using the work of specialists.\7\ The Proposed Rules are 
intended to strengthen the requirements that apply when auditors use 
the work of specialists in an audit.\8\ The Proposed Rules relate to an 
auditor's evaluation of the work of a company's specialist, whether 
employed or engaged by the company, and apply a supervisory approach to 
both auditor-employed and auditor-engaged specialists.
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    \7\ See Amendments to Auditing Standards for Auditor's Use of 
the Work of Specialists, PCAOB Release No. 2018-006 (Dec. 20, 2018) 
(``PCAOB Adopting Release''), available at https://pcaobus.org/Rulemaking/Docket044/2018-006-specialists-final-rule.pdf.
    \8\ In the Proposed Rules, a specialist is defined generally as 
a person (or firm) possessing special skill or knowledge in a 
particular field other than accounting or auditing.
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A. Changes to PCAOB Standards

    The Proposed Rules primarily amend two existing PCAOB auditing 
standards and retitle and replace a third auditing standard.\9\ The 
Proposed Rules will make the following changes to existing 
requirements:
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    \9\ The Proposed Rules: (1) Add an appendix to Auditing Standard 
(``AS'') 1105, Audit Evidence, with supplemental requirements for 
using the work of a company's specialist as audit evidence; (2) add 
an appendix to AS 1201, Supervision of the Audit Engagement, with 
supplemental requirements for supervising an auditor-employed 
specialist; and (3) replace existing AS 1210, Using the Work of a 
Specialist, with an updated standard titled, Using the Work of an 
Auditor-Engaged Specialist, for using the work of an auditor-engaged 
specialist.
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     Amend AS 1105
    [cir] Adds a new Appendix A that supplements the requirements in AS 
1105 for circumstances when the auditor uses the work of the company's 
specialist as audit evidence, related to:
     Obtaining an understanding of the work and report(s), or 
equivalent communication, of the company's specialist(s) and related 
company processes and controls;
     Obtaining an understanding of and assessing the knowledge, 
skill, and ability of a company's specialist and the entity that 
employs the specialist (if other than the company) and the relationship 
to the company of the specialist and the entity that employs the 
specialist (if other than the company); and

[[Page 32503]]

     Performing procedures to evaluate the work of a company's 
specialist, including evaluating: (i) The data, significant 
assumptions, and methods (which may include models) used by the 
specialist, and (ii) the relevance and reliability of the specialist's 
work and its relationship to the relevant assertion.
    o Aligns the requirements for using the work of a company's 
specialist with the risk assessment standards \10\ and the standard and 
related amendments adopted by the Board on auditing accounting 
estimates, including fair value measurements; and
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    \10\ The Board's ``risk assessment standards'' include AS 1101, 
Audit Risk; AS 1105; AS 1201; AS 2101, Audit Planning; AS 2105, 
Consideration of Materiality in Planning and Performing an Audit; AS 
2110, Identifying and Assessing Risks of Material Misstatement; AS 
2301, The Auditor's Responses to the Risks of Material Misstatement; 
and AS 2810, Evaluating Audit Results.
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    [cir] Sets forth factors for determining the necessary evidence to 
support the auditor's conclusion regarding a relevant assertion when 
using the work of a company's specialist.
     Amend AS 1201
    [cir] Adds a new Appendix C that supplements the requirements for 
applying the supervisory principles in AS 1201.05-.06 when using the 
work of an auditor-employed specialist to assist the auditor in 
obtaining or evaluating audit evidence, including requirements related 
to:
     Informing the auditor-employed specialist of the work to 
be performed;
     Coordinating the work of the auditor-employed specialists 
with the work of other engagement team members; and
     Reviewing and evaluating whether the work of the auditor-
employed specialist provides sufficient appropriate evidence. 
Evaluating the work of the specialist includes evaluating whether the 
work is in accordance with the auditor's understanding with the 
specialist and whether the specialist's findings and conclusions are 
consistent with, among other things, the work performed by the 
specialist.
    [cir] Sets forth factors for determining the necessary extent of 
supervision of the work of the auditor-employed specialist.
     Replace existing AS 1210
    [cir] Replaces the existing standard with AS 1210, as amended, 
which establishes requirements for using the work of an auditor-engaged 
specialist to assist the auditor in obtaining or evaluating audit 
evidence;
    [cir] Includes requirements for reaching an understanding with an 
auditor-engaged specialist on the work to be performed and reviewing 
and evaluating the specialist's work that parallel the final amendments 
to AS 1201 for auditor-employed specialists;
    [cir] Sets forth factors for determining the necessary extent of 
review of the work of the auditor-engaged specialist;
    [cir] Amends requirements related to assessing the knowledge, 
skill, ability, and objectivity of the auditor-engaged specialist; and
    [cir] Describes objectivity, for purposes of the standard, as the 
auditor-engaged specialist's ability to exercise impartial judgment on 
all issues encompassed by the specialist's work related to the audit; 
and specify the auditor's obligations when the specialist or the entity 
that employs the specialist has a relationship with the company that 
affects the specialist's objectivity.

B. Applicability and Effective Date

    The Proposed Rules would be effective for audits of financial 
statements for fiscal years ending on or after December 15, 2020. The 
PCAOB has proposed application of the Proposed Rules to include audits 
of emerging growth companies (``EGCs''),\11\ as discussed in Section IV 
below, and audits of brokers and dealers under Exchange Act Rule 17a-5.
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    \11\ 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 
Release No. 33-10332 Inflation Adjustments and Other Technical 
Amendments Under Titles I and III of the JOBS Act (Mar. 31, 2017), 
82 FR 17545 (Apr. 12, 2017).
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III. Comment Letters

    The comment period on the Proposed Rules ended on April 25, 2019. 
We received four comment letters from accounting firms, an investor 
association, and an issuer organization.\12\ Commenters generally 
supported the Proposed Rules.\13\ Most commenters encouraged us to 
support the PCAOB's plans to monitor implementation, conduct post 
implementation review, or monitor advancements in technology that may 
affect application of the Proposed Rules.\14\ One commenter also raised 
concerns regarding the effective date due to other financial reporting 
activities that need to be implemented and the potential impact on 
smaller audit firms.\15\
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    \12\ See Deloitte Letter, PwC Letter, CII Letter, and CCMC 
Letter.
    \13\ See Deloitte Letter, PwC Letter, CII Letter, and CCMC 
Letter.
    \14\ See e.g., Deloitte Letter, PwC Letter, and CCMC Letter.
    \15\ See CCMC Letter.
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    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.\16\ In making 
this determination, we have considered the comments we received, 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 we received.
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    \16\ 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. General Support for the Proposed Rules

    Commenters generally supported the Proposed Rules, including the 
objective to strengthen the requirements that apply when auditors use 
the work of specialists in an audit.\17\ One commenter noted that the 
proposed amendments address the need to differentiate, define, and 
provide scalability of the requirements based on the nature of a 
specialist's involvement in the context of an audit as well as the 
identified risk of material misstatement to which the specialist's work 
relates, which the commenter indicated will achieve greater consistency 
in practice.\18\ Another commenter agreed with the Board that the 
Proposed Rules will benefit investors ``because the application of the 
requirements should result in more consistently rigorous practices 
among auditors when using the work of a company's specialist in their 
audits, as well as a more consistent approach to the supervision of 
auditor-employed and auditor-engaged specialists.'' \19\
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    \17\ See Deloitte Letter, CII Letter, PwC Letter, and CCMC 
Letter.
    \18\ See Deloitte Letter.
    \19\ See CII Letter.
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B. Implementation Efforts

    Most commenters noted their desire for ongoing monitoring by the 
PCAOB if the Proposed Rules are approved.\20\ Two commenters 
specifically supported the PCAOB's plan \21\ to monitor

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implementation, including advances in technology and any related 
effects on the application of the proposed amendments.\22\ Another 
commenter recommended that the Commission, as part of its oversight of 
the PCAOB, should request that the PCAOB periodically update the 
Commission on the PCAOB's activities for monitoring the implementation 
of the Proposed Rules along with the PCAOB's findings and responses to 
these activities, including the PCAOB's plans for a post-implementation 
review.\23\
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    \20\ See e.g., Deloitte Letter, PwC Letter, and CCMC Letter.
    \21\ See PCAOB Adopting Release at 5 and 60.
    \22\ See Deloitte Letter and CCMC Letter.
    \23\ See CCMC Letter.
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    In the PCAOB Adopting Release, the Board stated it would monitor 
implementation to determine whether additional interpretive guidance is 
necessary, including monitoring the advancement of technology.\24\ In 
addition, the PCAOB has an established program to conduct post-
implementation reviews of its rules and standards to evaluate the 
overall effect of significant rulemakings.\25\
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    \24\ See PCAOB Adopting Release at 5 and 60.
    \25\ See PCAOB website at https://pcaobus.org/EconomicAndRiskAnalysis/pir/Pages/default.aspx.
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    We acknowledge the importance of monitoring the implementation of 
the Proposed Rules. The Commission staff works closely with the PCAOB 
as part of our general oversight mandate.\26\ As part of that 
oversight, Commission staff will keep itself apprised of the PCAOB's 
activities for monitoring the implementation of the Proposed Rules and 
update the Commission, as necessary.
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    \26\ See Section 107 of the Sarbanes-Oxley Act.
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A. The Effective Date of the Proposed Rules

    As noted above, the Proposed Rules would be effective for audits of 
financial statements for fiscal years ending on or after December 15, 
2020. One commenter expressed concerns related to the effective date as 
a result of other financial reporting activities, including upcoming 
effective dates of certain Financial Accounting Standards Board 
(``FASB'') projects, other PCAOB standards, and a view that smaller 
audit firms may be disproportionately impacted.\27\ The commenter 
suggested a phased implementation of the Proposed Rules. Specifically, 
the commenter recommended, as an example, that the Commission allow 
triennially inspected audit firms \28\ to elect an effective date of 
audits for fiscal years ending on or after December 15, 2021, while 
also permitting earlier implementation since smaller audit firms may be 
disproportionally impacted.\29\ The commenter further expressed the 
belief that a phased implementation may facilitate post-implementation 
reviews of the Proposed Rules.\30\
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    \27\ See CCMC Letter.
    \28\ ``Triennially inspected audit firms'' are audit firms that, 
in accordance with PCAOB Rule 4003(b), are required to be inspected 
at least once in every three calendar years if during that time, the 
audit firm issued an audit report for at least one issuer but no 
more than 100 issuers. An audit firm is required to be inspected on 
an annual basis if during the prior calendar year, it issued audit 
reports for more than 100 issuers (``annually inspected audit 
firms). See PCAOB Rule 4003, Frequency of Inspections, available at 
https://pcaobus.org/Rules/Pages/Section_4.aspx.
    \29\ See CCMC letter.
    \30\ See id.
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    In the PCAOB Adopting Release, the Board recognized the effort 
required for other implementation efforts, but stated the effective 
date determined by the Board was designed to provide auditors with a 
reasonable period of time to implement the Proposed Rules, without 
unduly delaying the intended benefits of the Proposed Rules.\31\
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    \31\ See PCAOB Adopting Release at 71.
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    We believe the Board has appropriately balanced the amount of time 
needed by audit firms to implement the Proposed Rules with the 
objectives of, and benefits obtained from, the Proposed Rules. In this 
regard, we note that, aside from the commenter who suggested that the 
Commission consider a phased implementation approach, we received no 
other comments from audit firms, including triennially inspected audit 
firms, requesting a phased implementation.
    In addition, there could be practical implications of allowing for 
a phased implementation approach related to an auditor performance 
standard.\32\ For example, audits of multi-national companies often 
involve the work of more than one auditor conducted in accordance with 
AS 1205, Part of the Audit Performed by Other Independent Auditors 
(``AS 1205''), wherein a principal auditor may provide instructions to 
the other auditors. Under a phased implementation approach, an annually 
inspected audit firm serving as the principal auditor may instruct a 
triennially inspected audit firm to follow the Proposed Rules before 
the triennially inspected audit firm has implemented the Proposed 
Rules. This approach could create challenges for the triennially 
inspected audit firm as it would be instructed to implement the 
Proposed Rules on individual engagements even though it may not have 
updated its methodologies or trained its professionals on the Proposed 
Rules, which could have a negative effect on audit quality.
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    \32\ The CCMC Letter references differences in considering a 
phased implementation approach for auditor performance standard as 
compared to an auditor reporting standard, which is why it did not 
suggest a phased implementation approach based on issuer size 
similar to the auditor communicating critical audit matters in 
accordance with AS 3101, The Auditor's Report on an Audit of 
Financial Statements When the Auditor Expresses an Unqualified 
Opinion.
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    Further, within the Global Networks of accounting firms,\33\ many 
of the affiliated accounting firms outside the United States are 
triennially inspected audit firms. Many of these affiliated firms 
participate in the multi-national audits discussed above. Our 
understanding is that these arrangements make it more practical for the 
Global Network Firms to adopt the Proposed Rules simultaneously across 
their respective networks. As a result, the Global Network Firms may 
not delay implementation for the triennially inspected audit firms 
within their network.
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    \33\ See PCAOB website for a listing of ``Global Networks'' and 
further discussion, available at https://pcaobus.org/Registration/Firms/Pages/GlobalNetworkFirms.aspx.
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    Based on these considerations, we do not believe a phased 
implementation approach for the Proposed Rules, including providing 
triennially inspected audit firms with the option to delay 
implementation, is necessary or appropriate in the public interest or 
for the protection of investors.

IV. Effect on Emerging Growth Companies

    In the PCAOB Adopting Release, the Board recommended that the 
Commission determine that the Proposed Rules apply to audits of 
EGCs.\34\ Section 103(a)(3)(C) of the Sarbanes-Oxley Act, as amended by 
Section 104 of the Jumpstart Our Business Startups Act of 2012, 
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 do not fall into these categories.
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    \34\ See PCAOB Adopting Release at 69.
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    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.''

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The Proposed Rules fall within this category. Having considered those 
statutory factors, we find that applying the Proposed Rules to the 
audits of EGCs is necessary or appropriate in the public interest.
    The PCAOB provided information identified by the Board's staff from 
public sources, including data and analysis of EGCs that set forth its 
views as to why it believes 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 published a white paper 
that provides general information about characteristics of EGCs (``EGC 
White Paper'').\35\ In addition, the Board sought public input on the 
application of the Proposed Rules to the audits of EGCs.\36\ Commenters 
who addressed this question generally supported applying the Proposed 
Rules to audits of EGCs, citing that consistent requirements should 
apply for similar situations encountered in any audit of a company, 
whether the company is an EGC or not, as well as that the benefits 
described in the Proposal would be applicable to EGCs.\37\
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    \35\ See Characteristics of Emerging Growth Companies as of 
November 15, 2017 (Oct. 11, 2018), available at https://pcaobus.org/EconomicAndRiskAnalysis/Documents/White-Paper-Characteristics-Emerging-Growth-Companies-November-2017.pdf.
    \36\ See PCAOB Proposal; see also comment letters provided to 
the PCAOB related to this matter, available at https://pcaobus.org/Rulemaking/Pages/docket-044-comments-auditors-use-work-specialists.aspx.
    \37\ See PCAOB Adopting Release at 64.
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    As the Board observed in the PCAOB Adopting Release, ``an analysis 
by the PCAOB staff . . . suggests that the prevalence and significance 
of the use of the work of specialists in audits of EGCs is comparable 
to the prevalence and significance of the use of the work of 
specialists in audits of non-EGCs, for audit engagements by both 
smaller audit firms and larger audit firms.'' \38\ Additionally, the 
PCAOB Adopting Release noted that ``any new PCAOB standards and 
amendments to existing standards determined not to apply to the audits 
of EGCs would require auditors to address the differing requirements 
within their methodologies, which would also create the potential for 
confusion.'' \39\ In the EGC White Paper, the PCAOB staff stated that 
``[a]pproximately 99% of EGC filers were audited by accounting firms 
that also audit issuers that are not EGC filers.'' \40\ As a result, 
there is a potential for confusion and complexity to have auditors 
maintain two sets of methodologies related to using work of 
specialists.
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    \38\ See id at 66.
    \39\ See id at 64.
    \40\ See EGC White Paper at 20.
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    The Board recognized that even a small increase in audit fees could 
negatively affect the profitability and competitiveness of EGCs. 
However, the PCAOB Adopting Release notes that many EGCs are expected 
to experience minimal impact from the Proposed Rules. For example, for 
those EGCs that use a company specialist,\41\ the Proposed Rules 
relating to the auditor's use of the work of such specialists are risk-
based and designed to be scalable to companies of varying size and 
complexity.\42\
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    \41\ See PCAOB Adopting Release at 50, which discusses that the 
most significant impact on the final amendments related to costs for 
auditors is expected to result from the requirements to evaluate the 
work of a company's specialist.
    \42\ See id at 68.
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    The PCAOB Adopting Release also noted EGCs generally tend to have 
shorter financial reporting histories and as a result, there is less 
information available to investors regarding such companies relative to 
the broader population of public companies.\43\ As such, the Proposed 
Rules, which are intended to enhance audit quality, could increase the 
credibility of financial statement disclosures by EGCs.\44\
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    \43\ See id at 65.
    \44\ See id at 66.
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    We agree with the Board's analysis. We believe the Proposed Rules 
will benefit EGCs at least as much as non-EGCs, in part, because the 
prevalence and significance of the use of the work of specialists in 
audits of EGCs is comparable to the prevalence and significance of the 
use of the work of specialists in audits of non-EGCs. In addition, we 
agree with the Board that, given the scalability and risk-based nature 
of the new audit requirements, EGCs likely will experience only minimal 
cost impacts from the Proposed Rules. Finally, we also agree with the 
Board the Proposed Rules could increase the credibility of financial 
statement disclosures by EGCs.
    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 to determine that applying the 
Proposed Rules 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 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-2019-006) be and hereby are approved.

    By the Commission.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-14414 Filed 7-5-19; 8:45 am]
BILLING CODE 8011-01-P