[Federal Register Volume 89, Number 164 (Friday, August 23, 2024)]
[Notices]
[Pages 68217-68219]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-18985]



[[Page 68217]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100773; File No. PCAOB-2024-01]


Public Company Accounting Oversight Board; Order Granting 
Approval of Auditing Standard 1000, General Responsibilities of the 
Auditor in Conducting an Audit, and Amendments to PCAOB Standards

August 20, 2024.

I. Introduction

    On May 24, 2024, 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 (``SOX'') and Section 19(b) \2\ of the 
Securities Exchange Act of 1934 (the ``Exchange Act''), a proposal to 
adopt Auditing Standard (``AS'') 1000, General Responsibilities of the 
Auditor in Conducting an Audit; rescind AS 1001, Responsibilities and 
Functions of the Independent Auditor, AS 1005, Independence, AS 1010, 
Training and Proficiency of the Independent Auditor, AS 1015, Due 
Professional Care in the Performance of Work, and AS 2815, The Meaning 
of ``Present Fairly in Conformity with Generally Accepted Accounting 
Principles;'' and amend several other related existing PCAOB standards 
(collectively, the ``Amendments''). The Amendments were published for 
comment in the Federal Register on June 11, 2024.\3\ On July 1, 2024, 
the Commission extended the public comment period until July 16, 2024, 
and extended the date by which the Commission shall either approve or 
disapprove, or institute proceedings to determine whether to 
disapprove, the Amendments to August 25, 2024.\4\ We received eleven 
(11) comment letters in response to the Notice of Filing of Proposed 
Rules.\5\ This order approves the Amendments, which we find to be 
consistent with the requirements of Title I of SOX and the rules and 
regulations issued thereunder 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 General Responsibilities of the Auditor 
in Conducting an Audit and Amendments to PCAOB Standards, Release 
No. 34-100276 (June 5, 2024) [89 FR 49730 (June 11, 2024)] (``Notice 
of Filing of Proposed Rules''), available at https://www.sec.gov/files/rules/pcaob/2024/34-100276.pdf.
    \4\ See Public Company Accounting Oversight Board; Extension of 
Comment and Approval Periods for Proposed Rules on General 
Responsibilities of the Auditor in Conducting an Audit and 
Amendments to PCAOB Standards and A Firm's System of Quality Control 
and Related Amendments to PCAOB Standards, Release No. 34-100451 
(July 1, 2024) [89 FR 55993], available at https://www.sec.gov/files/rules/pcaob/2024/34-100451.pdf.
    \5\ We received comment letters from Stephen W. Hall, Legal 
Director and Securities Specialist and Brady Williams, Legal 
Counsel, Better Markets, Inc. (July 2, 2024) (``Better Markets''), 
Dennis McGowan, Vice President, Professional Practice, Center for 
Audit Quality (July 2, 2024) (``CAQ''), Jack T. Ciesielski, CPA, CFA 
(July 2, 2024) (``Ciesielski''), Brandon J. Rees, Deputy Director, 
Corporations and Capital Markets, American Federation of Labor and 
Congress of Industrial Organizations (July 1, 2024) (``AFLCIO''), 
Sandra J. Peters, CPA, CFA, Senior Head, Global Financial Reporting 
Policy Advocacy, and Matthew P. Winters, CPA, CFA, Senior Director, 
Global Financial Reporting Policy Advocacy, CFA Institute (July 1, 
2024) (``CFAI''), Micah Hauptman, Director of Investor Protection, 
Consumer Federation of America (July 1, 2024) (``Consumer Federation 
of America''), PricewaterhouseCoopers LLP (June 28, 2024) (``PwC''), 
Members of the Investor Advisory Group (June 28, 2024) (``MIAG''), 
Deloitte & Touche LLP (June 28, 2024) (``Deloitte''), Jeffrey P. 
Mahoney, General Counsel, Council of Institutional Investors (June 
27, 2024) (``CII''), and Robert A. Conway, CPA (June 26, 2024) 
(``Conway''). Comment letters received by the Commission on the 
Amendments are available on the Commission's website at https://www.sec.gov/comments/pcaob-2024-01/pcaob202401.htm.
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II. Description of the Amendments

    On May 13, 2024, the Board unanimously adopted the Amendments.\6\ 
The Amendments are intended to modernize, clarify, and streamline the 
general principles and responsibilities of the auditor and provide a 
more logical presentation, which should enhance the useability of the 
standards by making them easier to read, understand, and apply. This 
should promote investor protection by enhancing the quality of audits. 
The requirements contained within the Amendments are discussed further 
below.
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    \6\ See General Responsibilities of the Auditor in Conducting an 
Audit and Amendments to PCAOB Standards, PCAOB Release No. 2024-004 
(May 13, 2024) (``Adopting Release''), available at https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-049/2024-004-as1000.pdf?sfvrsn=3ba6358a_2.
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A. Changes to PCAOB Standards

    Among other things, the Amendments enhance the existing general 
principles and responsibilities of an auditor by:
     Including introductory language that reaffirms the 
auditor's fundamental obligation to protect investors through the 
preparation and issuance of independent auditor's reports; \7\
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    \7\ See AS 1000.01.
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     Including objectives related to the audit of the 
effectiveness of a company's internal control over financial reporting; 
\8\
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    \8\ See AS 1000.03.
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     Retaining and clarifying the general principles and 
responsibilities that are foundational for an audit, including 
reasonable assurance,\9\ due professional care,\10\ professional 
skepticism,\11\ and professional judgment; \12\
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    \9\ See AS 1000.13 and .14.
    \10\ See AS 1000.09 and .10.
    \11\ See AS 1000.11.
    \12\ See AS 1000.12.
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     Aligning the engagement partner's supervisory 
responsibilities under AS 1201, Supervision of the Audit Engagement, 
with due professional care; \13\
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    \13\ See AS 1000.10 and AS 1201.03 and .04, as amended.
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     Retaining the requirement for the auditor to be 
independent but expressing the obligation more directly by referring to 
PCAOB independence rules and standards and SEC independence rules and 
regulations; \14\
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    \14\ See AS 1000.04 and .05.
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     Describing the auditor's obligations to (i) comply with 
ethics requirements,\15\ (ii) obtain and maintain competence,\16\ and 
(iii) prepare audit documentation; \17\
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    \15\ See AS 1000.06.
    \16\ See AS 1000.07 and .08.
    \17\ See AS 1000.16.
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     Expressing the auditor's responsibilities by using the 
terms set forth in PCAOB Rule 3101, Certain Terms Used in Auditing and 
Related Professional Practice Standards; \18\ and
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    \18\ See AS 1000.17 through .20.
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     Removing language that is outdated, inconsistent, and not 
relevant to audits conducted under the standards of the PCAOB.
    The Amendments also improve other PCAOB auditing standards that 
address responsibilities fundamental to the conduct of an audit, 
including by:
     Clarifying the engagement partner's existing 
responsibilities for supervision and review by providing more 
specificity related to such activities; \19\
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    \19\ See AS 1201.05, AS 1215.02 and .15, and AS 2101.03, as 
amended.
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     Clarifying the requirements for audit documentation in AS 
1215 to identify who performed the work, who reviewed the work, and the 
date of such review; \20\
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    \20\ See AS 1215.06, as amended.
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     Accelerating the period in AS 1215 to assemble a complete 
and final set of audit documentation for retention from 45 days to 14 
days (``documentation completion date''); \21\ and
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    \21\ See AS 1215.15, as amended.

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     Updating \22\ and incorporating the underlying 
requirements of AS 2815 into AS 2810, Evaluating Audit Results, and 
rescinding AS 2815, while preserving the meaning of ``presents fairly'' 
and streamlining the requirements to provide a more logical 
presentation.\23\
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    \22\ See e.g., supra note 6 at 54 (``The requirements of the SEC 
for the company under audit are included in SEC Rule 4-01(a), which 
we reference in a new footnote to paragraph .30A, to remind auditors 
of the company's obligation regarding additional information that 
may need to be disclosed in the financial statements so that the 
financial statements are not misleading.'').
    \23\ See AS 2810.17 and .30 through .31, as amended.
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B. Applicability and Effective Date

    The Amendments will be effective for audits of financial statements 
for fiscal years beginning on or after December 15, 2024, except that, 
for registered public accounting firms that provide audit opinions for 
100 or fewer issuers during the calendar year ending December 31, 2024, 
the amendment relating to the documentation completion date will take 
effect for audits of financial statements for fiscal years beginning on 
or after December 15, 2025. The PCAOB has proposed application of the 
Amendments to include audits of emerging growth companies 
(``EGCs''),\24\ as discussed in Section IV below.
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    \24\ 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 under Titles I and III of the JOBS Act, 
Release No. 33-11098 (Sept. 9, 2022) [87 FR 57394 (Sept. 20, 2022)], 
available at https://www.sec.gov/files/rules/final/2022/33-11098.pdf.
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III. Comment Letters

    As noted above, to date the Commission has received eleven (11) 
comment letters on the Amendments.\25\ Commenters were generally 
supportive of the Amendments.\26\
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    \25\ See supra note 5.
    \26\ See, e.g., letters from Conway; Deloitte; CAQ; and MIAG.
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    Some commenters suggested that the Commission encourage the PCAOB 
to provide implementation support and to undertake a post-
implementation review of the Amendments to assess whether they have met 
their stated objectives. \27\ The Board has a historical practice of 
post-implementation review \28\ as well as issuing appropriate 
implementation guidance for new standard and rule amendments when 
needed. We acknowledge the importance of monitoring the implementation 
of the Amendments and the Commission staff works closely with the PCAOB 
as part of the Commission's general oversight mandate.\29\ As part of 
that oversight, Commission staff will keep itself apprised of the 
PCAOB's activities for monitoring and supporting the implementation of 
the Amendments and update the Commission, as necessary.
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    \27\ See, e.g., letters from CAQ (regarding implementation 
support) and MIAG and CII (regarding post-implementation review).
    \28\ See, e.g., Interim Analysis Report--Evidence of the Initial 
Impact of New Requirements for Auditing Accounting Estimates and the 
Auditor's Use of the Work of Specialists, Release No. 2022-008 (Dec. 
8, 2022), available at https://assets.pcaobus.org/pcaob-dev/docs/default-source/economicandriskanalysis/pir/documents/estimates-specialists-interim-analysis-report.pdf?sfvrsn=e1b0eb15_4.
    \29\ See Section 107 of SOX.
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    Some commenters stated that because the Amendments extend the 
concept of due professional care, specifically professional skepticism, 
beyond a critical assessment of audit evidence to a critical assessment 
of other information related to the audit, the Amendments will result 
in increased focus on the preparation of Form AP, Audit Participants, 
among other things.\30\ We acknowledge this comment and, because due 
professional care and professional skepticism are foundational elements 
of auditing, we agree with the Board's assessment that it is 
appropriate to apply the concept of due professional care to all 
aspects of the audit, including aspects of the audit that extend beyond 
the issuance of the auditor's report, such as the completion of audit 
documentation and the public reporting requirements in Form AP.\31\
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    \30\ See letters from PwC and CAQ.
    \31\ See Notice of Filing of Proposed Rules, at Section 
III.B.4.i.
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    The same commenters observed that the effective date of the 
Amendments related to the 14-day documentation completion date 
requirement does not reference interim reviews or stub periods and 
requested clarification.\32\ We note that existing AS 1215 applies to 
documentation completion and specifies that, for reviews of interim 
financial information, the standard takes effect beginning with the 
first quarter ending after the first financial statement audit covered 
by the standard. For audits, the application of the effective date is 
explicit in the Adopting Release. For audits of stub periods, we 
believe the effective date of the document completion requirement is 
clear. Nevertheless, we encourage the PCAOB staff to consider the need 
to provide additional guidance which could be useful to firms.
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    \32\ See letters from PwC and CAQ.
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    SOX requires us to determine whether the Amendments are consistent 
with the requirements of Title I of SOX and the rules and regulations 
thereunder or are necessary or appropriate in the public interest or 
for the protection of investors.\33\ 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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    \33\ See Section 107(b)(3) of SOX. SOX 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 SOX. Section 
19 of the Exchange Act covers the registration, responsibilities, 
and oversight of self-regulatory organizations. Under the procedures 
prescribed by SOX 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 Proposed Rules, the Board recommended 
that the Commission determine that the Amendments apply to audits of 
EGCs.\34\ Section 103(a)(3)(C) of SOX 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.
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    \34\ See Notice of Filing of Proposed Rules.
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    Section 103(a)(3)(C) further provides that ``[a]ny additional 
rules'' adopted by the PCAOB 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 explained why it 
believes the Amendments should apply to audits of EGCs. The Board 
sought public input on the application of the Amendments to the audits 
of EGCs, and those that responded to the Board generally agreed the 
Amendments should apply to the audits of EGCs.\35\
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    \35\ See Adopting Release, supra note 6 at 93 to 95.
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    We agree with the Board's assessment and believe that applying the

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Amendments to the audits of EGCs is necessary or appropriate in the 
public interest, after considering the protection of investors and 
whether the Amendments will promote efficiency, competition, and 
capital formation. Overall, the Amendments are expected to enhance 
audit quality and contribute to an increase in the credibility of 
financial reporting for all issuers, including EGCs, whose financial 
statements are audited by a registered public accounting firm. We also 
note the secondary benefits that flow from higher audit quality, 
including improved efficiency of capital allocation and lower cost of 
capital and enhanced capital formation with respect to EGCs and other 
issuers.
    The PCAOB explained how associated costs may be relatively higher 
for EGC audits in large part due to the amendment accelerating the 
documentation completion date.\36\ We acknowledge the potential for 
higher costs, but agree with the PCAOB's assessment that these costs 
may be mitigated based on certain characteristics of EGCs. For example, 
as the PCAOB observed in its analysis, to the extent EGCs are smaller 
than non-EGCs, EGC audits may be less complex, which potentially 
facilitates a more expeditious assembly of the final workpapers.\37\ 
Additionally, to the extent that EGCs are audited by firms that issued 
audit reports with respect to 100 or fewer issuers during the calendar 
year ending December 31, 2024, the extended effective date of the 
amendment to accelerate the documentation completion date will allow 
those firms more time to implement systems, processes, and procedures 
to meet the accelerated documentation completion date.\38\
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    \36\ See Adopting Release, supra note 6 at 94.
    \37\ Id.
    \38\ Id.
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    We also concur with the PCAOB's conclusion that while the costs to 
update references within firm methodologies and related guidance for 
the amendments made to the general principles and responsibilities of 
the auditor could also be relatively higher for firms which are more 
likely to serve as EGC auditors, in general, the alternative of not 
applying the same standard and related amendments to audits of EGCs and 
non-EGCs creates the potential for confusion, or even potential 
additional costs and inefficiencies to maintain separate 
methodologies.\39\
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    \39\ Id. at 95.
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    As the PCAOB explained in its analysis, the amendment to accelerate 
the documentation completion date could improve efficiency and capital 
formation for EGCs to the extent that the amendment reduces uncertainty 
about the reliability of an EGC's financial statements via enhanced 
audit quality.\40\ Investors who are uncertain about the reliability of 
an EGC's financial statements may require a larger risk premium that 
reduces the efficient allocation of capital or increases the cost of 
capital. Additionally, while the Amendments could impact the ability of 
EGCs to compete if the indirect costs to audited companies 
disproportionately impact EGCs relative to their competitors, as the 
costs associated with the Amendments are expected to be relatively 
modest, any impact on competition is likely to be relatively small.
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    \40\ Id.
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    Accordingly, 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 reviewed and considered the Amendments, the 
information submitted therewith by the PCAOB, and the comment letters 
received, and the recommendation of the Commission's staff. The 
Commission concludes that the determinations made by the PCAOB as 
described in the Adopting Release are reasonable. The Amendments will 
reaffirm and modernize the foundational audit standards, clarify 
engagement partner responsibilities, and accelerate the documentation 
completion date, which should improve audit quality. In particular, the 
Amendments make the following important changes, among others, to the 
existing standards, which will advance the Board's investor protection 
mandate under SOX: reaffirm the auditor's fundamental obligation to 
protect investors; \41\ extend the requirement of due professional care 
to other areas of audit practice, such as public reporting and 
documentation, which will help to ensure that auditors fulfill their 
professional responsibilities with appropriate rigor and diligence; 
clarify an auditor's responsibilities by focusing on affirmative 
responsibilities rather than discussing the limitations of an audit and 
the limits of an auditor's responsibility; and ensure consistency of 
the PCAOB standards with the requirements of Regulation S-X Rule 4-
01(a),\42\ which states that compliance with the applicable financial 
reporting framework is ``a minimum requirement to which shall be added 
such further material information as is necessary to make the required 
statements, in the light of the circumstances under which they are 
made, not misleading.'' Therefore, in connection with the PCAOB's 
filing and the Commission's review,
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    \41\ AS 1000 is consistent with United States v. Arthur Young & 
Co., 465 U.S. 805, 818 (1984) (``[t]he independent public accountant 
performing this special function [auditing] owes ultimate allegiance 
to the corporation's creditors and stockholders, as well as to 
investment public. This `public watchdog' function demands that the 
accountant maintain total independence from the client at all times 
and requires complete fidelity to the public trust.'').
    \42\ See Rule 4-01 under Regulation S-X, 17 CFR 210.4-01(a).
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    A. The Commission finds that the Amendments are consistent with the 
requirements of Title I of SOX and the rules and regulations thereunder 
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 SOX and Section 
19(b)(2) of the Exchange Act, that the Amendments (File No. PCAOB-2024-
01) be and hereby are approved.

    By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-18985 Filed 8-22-24; 8:45 am]
BILLING CODE 8011-01-P