[Federal Register Volume 87, Number 159 (Thursday, August 18, 2022)]
[Notices]
[Pages 50891-50894]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-17723]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95488; File No. PCAOB-2022-001]


Public Company Accounting Oversight Board; Order Granting 
Approval of Amendments to Auditing Standards Governing the Planning and 
Supervision of Audits Involving Other Auditors and Dividing 
Responsibility for the Audit With Another Accounting Firm

August 12, 2022.

I. Introduction

    On June 24, 2022, 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 Auditing Standard (``AS'') 1206, Dividing 
Responsibility for the Audit with Another Accounting Firm (AS 1206); 
rescind AS 1205, Part of the Audit Performed by Other Independent 
Auditors (AS 1205), and AI 10, Part of the Audit Performed by Other 
Independent Auditors: Auditing Interpretations of AS 1205 (AI 10); and 
amend several other existing auditing standards, interpretations, 
rules, and forms (collectively, the ``Amendments''). The Amendments 
were published for comment in the Federal Register on July 1, 2022.\3\ 
We received three comment letters in response to the notice.\4\ This 
order approves the Amendments, 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\ See Public Company Accounting Oversight Board; Notice of 
Filing of Proposed Rules on Planning and Supervision of Audits 
Involving Other Auditors and Dividing Responsibility for the Audit 
with Another Accounting Firm, Release No. 34-95159 (June 24, 2022) 
[87 FR 39680 (July 1, 2022)] (the ``Notice of Filing of Proposed 
Rules''), available at https://www.sec.gov/rules/pcaob/2022/34-95159.pdf.
    \4\ We received comment letters from Deloitte & Touche LLP (July 
21, 2022); PricewaterhouseCoopers LLP (July 22, 2022); and KPMG LLP 
(July 22, 2022). 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-2022-01/pcaob202201.htm.
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II. Description of the Amendments

    On June 21, 2022, the Board adopted the Amendments.\5\ The 
Amendments would (i) strengthen requirements for audits involving 
accounting firms and individual accountants other than the accounting 
firm that issues the auditor's report (``other auditors'' and the 
``lead auditor,'' respectively), and (ii) update requirements to 
address relatively uncommon situations in which the lead auditor 
divides responsibility for the audit with another accounting firm (the 
``referred-to auditor''). The Amendments are intended to increase and 
improve the lead auditor's involvement in,

[[Page 50892]]

supervision of, and evaluation of the other auditors' work, which will 
improve communication among auditors and the lead auditor's ability to 
prevent or detect deficiencies in that work. This should promote 
investor protection by enhancing the quality of audits involving other 
auditors. The requirements contained within the Amendments are 
discussed further below.
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    \5\ See Planning and Supervision of Audits Involving Other 
Auditors and Dividing Responsibility for the Audit with Another 
Accounting Firm, PCAOB Release No. 2022-002 (June 21, 2022) (``PCAOB 
Adopting Release''), available at https://pcaob-assets.azureedge.net/pcaob-dev/docs/default-source/rulemaking/docket042/pcaob-other-auditors-adopting-release-6-21-2022.pdf?sfvrsn=c3712668_4.
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A. Changes to PCAOB Standards

    The Amendments are intended to improve the PCAOB's standards 
principally by (i) applying a risk-based supervisory approach to the 
lead auditor's oversight of other auditors whose work the lead auditor 
assumes responsibility for, and (ii) requiring that the lead auditor 
perform certain procedures when planning and supervising an audit that 
involves other auditors. The Amendments take into account recent 
professional practice developments in the lead auditor's oversight of 
other auditors' work, including the greater use of communication 
technology. The Amendments build on existing communication requirements 
and increase those communication requirements between the lead auditor 
and other auditor. Whether or not the lead auditor is leveraging 
technology for those communications, audit documentation supporting the 
lead auditor's conclusions will need to contain a record that the lead 
auditor fulfilled its responsibilities under PCAOB standards, including 
regarding matters such as determinations related to other auditors' 
work \6\ and audit documentation.\7\
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    \6\ See, e.g., AS 1201, Supervision of the Audit Engagement, 
paragraph .13 (requiring the lead auditor to make certain 
determinations based on a review of the documentation provided by 
the other auditor, discussions with the other auditor, and other 
information obtained by the lead auditor).
    \7\ See, e.g., AS 1215, Audit Documentation, paragraphs .06 and 
.18, as amended.
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    In summary, the Amendments:
     Require that the engagement partner \8\ determine whether 
their firm's participation in the audit is sufficient for the firm to 
carry out the responsibilities of a lead auditor and report as such.\9\ 
The Amendments include considerations for the engagement partner to use 
in making this determination \10\ and require that the audit's 
engagement quality reviewer review the determination.\11\
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    \8\ The term ``engagement partner'' means the member of the 
engagement team with primary responsibility for the audit. See AS 
1201, Appendix A, as amended.
    \9\ See AS 2101, Audit Planning, paragraph .06A, as amended.
    \10\ See id.
    \11\ See AS 1220, Engagement Quality Review, paragraph .10a, as 
amended.
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     Require that the lead auditor, when determining the 
engagement's compliance with independence and ethics requirements, 
understand the other auditor's knowledge of those requirements and 
experience in applying them.\12\ The lead auditor is required to obtain 
and review written affirmations regarding the other auditor's policies 
and procedures related to those requirements and regarding its 
compliance with the requirements, and a description of certain auditor-
client relationships related to independence.\13\ In addition, the 
Amendments require the sharing of information about changes in 
circumstances and the updating of affirmations and descriptions in 
light of those changes.\14\
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    \12\ See AS 2101.06Da, as amended.
    \13\ See AS 2101.06Db, as amended.
    \14\ See AS 2101.06Dc(1) and .06Dc(2), as amended.
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     Require that the lead auditor understand the knowledge, 
skill, and ability of other auditors' engagement team members who 
assist the lead auditor with planning and supervision,\15\ and obtain a 
written affirmation from the other auditor that its engagement team 
members possess the knowledge, skill, and ability to perform assigned 
tasks.\16\
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    \15\ See AS 2101.06Ha, as amended.
    \16\ See AS 2101.06Hb, as amended.
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     Require that the lead auditor supervise other auditors 
under the Board's standard on audit supervision and inform other 
auditors about the scope of their work, identified risks of material 
misstatement, and certain other key matters.\17\ The Amendments also 
require that the lead auditor and other auditors communicate about the 
audit procedures to be performed, and any changes needed to the 
procedures.\18\ In addition, the lead auditor is required to obtain and 
review a written affirmation from the other auditor about its 
performance of work in accordance with the lead auditor's instructions, 
and to direct other auditors to provide certain documentation about 
their work.\19\
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    \17\ See AS 1201.08, as amended.
    \18\ See AS 1201.09 and .10, as amended.
    \19\ See AS 1201.11 and .12, as amended.
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     Provide that, in multi-tiered audits, a first other 
auditor may assist the lead auditor in performing certain required 
procedures with respect to second other auditors.\20\
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    \20\ See AS 1201.14, and AS 2101.06E and .06I, as amended.
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    In addition, this rulemaking rescinds AS 1205 and AI 10 but carries 
forward and strengthens certain existing requirements in new AS 1206 
that apply to infrequent situations where the lead auditor divides 
responsibility for a portion of the audit with the referred-to auditor 
and therefore does not supervise the work performed by that firm. In 
those situations, the lead auditor refers to the work of that auditor 
in the audit report.\21\
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    \21\ Rule 2-05 of Regulation S-X, 17 CFR 210.2-05, requires that 
the auditor's report of the referred-to auditor be filed with the 
SEC. See also AS 1206.08.
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    AS 1206 requires that in these situations the lead auditor 
determine that audit procedures were performed regarding the 
consolidation or combination of financial statements of the business 
units audited by the referred-to auditor into the company's financial 
statements. The standard also requires that the lead auditor obtain the 
referred-to auditor's written representation that it is independent and 
duly licensed to practice, and that the lead auditor disclose in the 
audit report the magnitude of the portion of the financial statements, 
and, if applicable, of internal controls audited by the referred-to 
auditor.

B. Applicability and Effective Date

    The Amendments would be effective for audits of financial 
statements for fiscal years ending on or after December 15, 2024. The 
PCAOB has proposed application of the Amendments to include audits of 
emerging growth companies (``EGCs''),\22\ as discussed in Section IV 
below, and audits of brokers and dealers under Exchange Act Rule 17a-5.
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    \22\ 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, Release No. 33-10332 (Mar. 31, 2017) [82 FR 
17545 (Apr. 12, 2017)], available at https://www.sec.gov/rules/final/2017/33-10332.pdf.
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III. Comment Letters

    The comment period on the Amendments ended on July 22, 2022. We 
received three comment letters from accounting firms.\23\ The 
commenters generally supported the Amendments and encouraged us to 
support the PCAOB's plans to monitor implementation, conduct post-
implementation review, and monitor advancements in technology that may 
affect application of the Amendments.\24\

[[Page 50893]]

Additionally, one commenter encouraged the PCAOB to consider the 
intersection of a firm's system of quality control with the 
requirements in the PCAOB standards and that questions may arise about 
compliance with the principles-based requirements, to actively engage 
with stakeholders to promote an understanding of the Amendments, and to 
be available for consultation.\25\ We agree with the Board that the 
Amendments are sufficiently principles-based to accommodate a variety 
of scenarios in practice and to allow the lead auditor to adjust its 
procedures according to the circumstances of the audit.\26\ We 
acknowledge the importance of monitoring the implementation of the 
Amendments and the Commission staff works closely with the PCAOB as 
part of our general oversight mandate.\27\ As part of that oversight, 
Commission staff will keep itself apprised of the PCAOB's activities 
for monitoring the implementation of the Amendments and update the 
Commission, as necessary.
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    \23\ We received comment letters from Deloitte & Touche LLP 
(July 21, 2022); PricewaterhouseCoopers LLP (July 22, 2022) (``PWC 
Letter''); and KPMG LLP (July 22, 2022). Copies of the comment 
letters are available on the Commission's website at https://www.sec.gov/comments/pcaob-2022-01/pcaob202201.htm.
    \24\ See id.
    \25\ See PWC Letter available at https://www.sec.gov/comments/pcaob-2022-01/pcaob202201-20134692-305861.pdf.
    \26\ See, e.g., PCAOB Adopting Release, at A4-22, A4-28.
    \27\ See Section 107 of the Sarbanes-Oxley Act.
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    The Sarbanes-Oxley Act requires us to determine whether the 
Amendments 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.\28\ 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.
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    \28\ 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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IV. Effect on Emerging Growth Companies

    In the notice of filing of the Amendments, the Board recommended 
that the Commission determine that the Amendments apply to audits of 
EGCs.\29\ 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 
Amendments do not fall into these categories.\30\
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    \29\ See the Notice of Filing of Proposed Rules, supra note 3, 
at 191.
    \30\ 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 inclusion of additional factual information about 
referred-to auditors and the scope of their work in connection with 
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.
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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.'' 
The Amendments fall within this category. Having considered those 
statutory factors, we find that applying the Amendments to the audits 
of EGCs is necessary or appropriate in the public interest.
    With respect to the Commission's determination of whether the 
Amendments will apply to audits of EGCs, the PCAOB provided data and 
analysis of EGCs identified by the Board's staff from public sources 
that sets forth its views as to why the Amendments should apply to 
audits of EGCs. Analysis of Form AP filings in 2021 suggests that, when 
compared to issuer audits overall, audits of EGCs are less likely to 
involve the use of other firms and, even when they do, they typically 
involve fewer other firms and those other firms account for a smaller 
share of total audit hours.\31\ Thus, because the use of other firms is 
less prevalent in audits of EGCs than in audits of non-EGCs, audits of 
EGCs generally are less likely than those of non-EGCs to be affected by 
the amendments.\32\ EGCs are also likely to be newer companies, which 
may increase the importance to investors of the external audit to 
enhance the credibility of management disclosures.\33\ Investors in 
newer companies may require a larger risk premium that increases the 
cost of capital for those companies. Therefore, the improved audit 
quality resulting from applying the Amendments to EGC audits could 
reduce the cost of capital to those EGCs.\34\ When considering these 
and other factors addressed in the PCAOB's analysis, the benefits of 
the higher audit quality resulting from the amendment may be greater 
for EGCs than for non-EGCs.
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    \31\ For example, only 14 percent of audits of EGCs involved 
other firms compared to 27 percent of issuer audit overall; in 
audits involving other firms, EGC audits involve two or more other 
firms in about 35 percent of audits compared to about 61 percent in 
audits of issuers overall; and other accounting firms perform 10 
percent or more of the audit hours in about 40 percent of audits of 
EGCs compared to about 52 percent of audits of issues overall. See 
PCAOB Adopting Release, at 54, Figure 6.
    \32\ See PCAOB Adopting Release, at 54.
    \33\ See PCAOB Adopting Release, at 55, footnote 115.
    \34\ See PCAOB Adopting Release, at 55.
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    In addition, the Board sought public input on the application of 
the Amendments to the audits of EGCs. Commenters on the Board's 
proposal generally supported applying the Amendments to audits of EGCs, 
citing benefits to the users of EGC financial statements and the 
importance of consistent audit requirements for all audits. In the 
Board's filing of the Amendments, the Board expressed the view that the 
benefits of the higher audit quality resulting from the amendments may 
be larger for EGCs than for non-EGCs and that, overall, the Amendments 
are expected to enhance audit quality and contribute to an increase in 
the credibility of financial reporting by EGCs.
    We agree with the Board's analysis and note that the potential 
increase in audit quality from the Amendments would strengthen investor 
protection and increase informational efficiency of the capital 
markets, thus enhancing capital formation. Additionally, improvements 
in the quality of the audit may also increase price efficiency by 
providing investors with more accurate information. Price efficiency 
helps investors make more informed investment decisions facilitative 
issuers', including EGCs', access to capital thus enhancing capital 
formation. With respect to competition, we note that due to the 
additional supervisory requirements, smaller firms may be less able to 
compete with larger firms in the audit market for audit involving other 
auditors. However, Form AP data shows that smaller firms perform 
relatively fewer audits that involve other accounting firms, and, as 
noted above, that audits of EGCs are less likely to involve the use of 
other firms. Therefore, any impact on competition in

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the overall audit market and for audits of EGCs is likely to be 
relatively small. 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 Amendments to the audits of EGCs is 
necessary or appropriate in the public interest.

V. Conclusion

    The Commission has carefully reviewed and considered the 
Amendments, 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 Amendments 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 
Amendments 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 Amendments 
(File No. PCAOB-2022-002) be and hereby are approved.

    By the Commission.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-17723 Filed 8-17-22; 8:45 am]
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