[Federal Register Volume 89, Number 164 (Friday, August 23, 2024)]
[Notices]
[Pages 68219-68223]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-18986]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100774; File No. PCAOB-2024-03]


Public Company Accounting Oversight Board; Order Granting 
Approval of Amendments Related to Aspects of Designing and Performing 
Audit Procedures That Involve Technology-Assisted Analysis of 
Information in Electronic Form

August 20, 2024.

I. Introduction

    On June 20, 2024, the Public Company Accounting Oversight Board 
(the ``Board'' or the ``PCAOB'') filed

[[Page 68220]]

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 amendments to auditing 
standard (``AS'') 1105, Audit Evidence, and AS 2301, The Auditor's 
Responses to the Risks of Material Misstatement, and conforming 
amendments to AS 2501, Auditing Accounting Estimates, Including Fair 
Value Measurements (collectively, the ``Amendments''). The Amendments 
were published for comment in the Federal Register on July 2, 2024.\3\ 
We received six (6) comment letters in response to the Notice of Filing 
of Proposed Rules.\4\ 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 Amendments Related to Aspects of 
Designing and Performing Audit Procedures that Involve Technology-
Assisted Analysis of Information in Electronic Form, Release No. 34-
100430 (June 26, 2024) [89 FR 54922 (July 2, 2024)] (``Notice of 
Filing of Proposed Rules''), available at https://www.sec.gov/files/rules/pcaob/2024/34-100276.pdf.
    \4\ The Commission received comment letters from Deloitte & 
Touche LLP (July 18, 2024) (``Deloitte''); KPMG LLP (July 23, 2024) 
(``KPMG''); PricewaterhouseCoopers LLP (July 23, 2024) (``PWC''); 
RSM US LLP (July 23, 2024) (``RSM''); Center for Audit Quality (July 
23, 2024) (``CAQ''); and Ernst & Young LLP (Aug. 12, 2024) (``EY''). 
Comment letters received by the Commission on the Amendments are 
available on the Commission's website at https://www.sec.gov/comments/pcaob-2024-003/pcaob2024003.htm.
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II. Description of the Amendments

    On June 12, 2024, the Board unanimously adopted the Amendments.\5\ 
The Amendments are intended to more specifically address certain 
aspects of designing and performing audit procedures that involve 
analyzing information in electronic form with technology-based tools 
(i.e., technology-assisted analysis). The Amendments should promote 
investor protection by enhancing the quality of audits. The 
requirements contained within the Amendments are discussed further 
below.
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    \5\ See Amendments Related to Aspects of Designing and 
Performing Audit Procedures that Involve Technology-Assisted 
Analysis of Information in Electronic Form, PCAOB Release No. 2024-
007 (June 12, 2024) (``Adopting Release''), available at https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-052/2024-007-adoptingrelease.pdf?sfvrsn=28f44e9e_2.
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A. Changes to PCAOB Standards

    The Amendments are principles-based in how they further specify and 
clarify certain existing auditor responsibilities and are therefore 
intended to be adaptable to the evolving nature of the use of 
technology in the audit. In particular, the Amendments:
     Clarify the description of what constitutes a test of 
details; \6\
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    \6\ See AS 2301.48.
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     Specify auditor responsibilities when identifying items 
that require further investigation when performing tests of details; 
\7\
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    \7\ See AS 2301.10, .49 and .50.
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     Specify that if the auditor uses an audit procedure for 
more than one purpose (e.g., risk assessment, test of controls, or 
substantive procedure), the auditor should achieve each objective of 
the procedure; \8\
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    \8\ See AS 1105.14.
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     Specify auditor responsibilities for evaluating the 
reliability of external information provided by the company under 
audit; \9\
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    \9\ See AS 1105.10A.
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     Emphasize the importance of controls over information 
technology; \10\
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    \10\ See AS 1105.08, .10, and .15.
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     Emphasize the importance of appropriate disaggregation or 
detail of information to the relevance of audit evidence; \11\ and
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    \11\ See AS 1105.07.
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     Make conforming changes to AS 2501.\12\
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    \12\ See AS 2501.12 and footnote 14 to paragraph .13.
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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, 2025. The PCAOB has 
proposed application of the Amendments to include audits of emerging 
growth companies (``EGCs''),\13\ as discussed in section IV below.
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    \13\ 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 six (6) comment 
letters in response to the Notice of Filing of Proposed Rules.\14\ 
Commenters generally supported the Board's efforts to modernize the 
requirements related to certain aspects of designing and performing 
audit procedures that involve technology-assisted analysis to support 
the objective of improving audit quality. A number of commenters, while 
generally supportive of the Amendments, sought clarification of 
specific issues raised, which are detailed below.\15\
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    \14\ See supra note 4.
    \15\ See letters from KPMG; PWC; RSM; CAQ; and EY. PWC expressed 
support for the overall goal of the rulemaking but indicated that it 
could not support the Amendments ``without further amendment or 
contemporaneous interpretive guidance'' to address its concerns.
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    A number of commenters identified the requirements in new paragraph 
.10A(b) of AS 1105 as requiring further clarity or modification.\16\ 
Commenters stated their view that the requirements could be read as not 
allowing the auditor to apply a risk-based approach, but instead 
requiring the auditor, in all circumstances, to either test each piece 
of external information obtained from the company to determine if it 
was modified before it was provided to the auditor, or test controls 
over receiving, maintaining, and, if applicable, processing the 
information.\17\ Commenters stated that this reading of the 
requirements appeared to be in conflict with language included in the 
Adopting Release that indicated that a risk-based approach could be 
taken \18\ as well as with AS 1105.09, which states that the auditor is 
not expected to be an expert in documentation authentication.\19\ 
Commenters also stated that if the requirements were not risk-based, 
they would likely result in significant additional costs, without a 
commensurate benefit, that have not been accounted for in the Board's 
economic analysis.\20\ Commenters also stated that, in some cases, an 
entity may not have identified the risk of modification as one that 
represents a reasonable possibility of a material misstatement, and 
thus such controls would not likely be currently part of the entity's 
internal control over financial reporting.\21\ Some of these commenters 
stated that, in such circumstances, they

[[Page 68221]]

believe the Amendments may require the company to establish controls 
solely to satisfy the requirements of its auditors.\22\ Commenters 
raised concerns about auditors' ability to compare electronic 
information to source records as many companies do not have physical 
copies or original paper records because the information is obtained 
and maintained only in electronic form.\23\ According to these 
commenters, this potential limitation on the ability to compare 
electronic information to source records would result in the auditor 
being required to test management's controls over receiving, 
maintaining, and processing the electronic information, which would not 
be possible if the controls do not exist or were not operating 
effectively.\24\
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    \16\ See letters from KPMG; PWC; RSM; CAQ; and EY.
    \17\ See, e.g., letter from PWC.
    \18\ See letters from PWC; RSM; and CAQ.
    \19\ See letters from KPMG; PWC; CAQ; and EY (Expressing its 
concerns in the context of the interaction between AS 1105.10A(b) 
and the PCAOB's proposed paragraph AS 2301.40A, which is part of the 
Substantive Analytical Procedures Proposal. Infra note 25. We 
believe EY's concern with respect to the Amendments is addressed by 
the risk-based considerations discussed herein, and, with respect to 
concerns about the Substantive Analytical Procedures Proposal 
currently under consideration by the Board, we intend to encourage 
the Board to consider the comments in that proposal.).
    \20\ See letters from PWC and EY.
    \21\ See letters from KPMG; PWC; CAQ; and EY.
    \22\ See letters from KPMG; PWC; and CAQ.
    \23\ See letters from KPMG; PWC; RSM; CAQ; and EY.
    \24\ Id.
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    All commenters stated that either interpretive or other 
implementation guidance was warranted to facilitate implementation of 
the Amendments. One commenter recommended the Commission delay the 
effective date of the Amendments to align with the effective date of 
the recently proposed amendments to AS 2305.\25\
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    \25\ See letter from KPMG. See Proposed Auditing Standard--
Designing and Performing Substantive Analytical Procedures and 
Amendments to Other PCAOB Standards, PCAOB Release No. 2024-005 
(June 12, 2024) (``Substantive Analytical Procedures Proposal''), 
available at https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket-056/2024-006-as-2305-proposal.pdf?sfvrsn=d174cacf_2.
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    As discussed above, a number of commenters were of the view that 
new paragraph AS1105.10A(b) requires the auditor, in all circumstances, 
to test whether each piece of information provided to the auditor by 
the company, which the company received from external sources, has been 
modified by the company. Although we understand the concerns raised by 
such commenters, we believe these concerns may be misplaced, 
particularly in light of the guidance provided by the Board in the 
Adopting Release. For example, in the Adopting Release, the Board 
stated that ``[it was] not prescribing the nature, timing, or extent of 
the auditor's procedures to evaluate the reliability of the external 
information.'' \26\ Instead, as the Board explained, ``[a]n auditor 
would design the procedures considering the wide variety of types of 
external information received by companies and differences in the 
processes for receiving, maintaining and, where applicable, processing 
such information.'' \27\ Therefore, our understanding of the 
Amendments, when read in the overall context of the PCAOB auditing 
standards, is that they do not preclude a risk-based approach to 
testing external information. Nevertheless, given the concerns raised 
by commenters, we encourage the PCAOB to provide further implementation 
guidance on this point. Given our understanding of the risk-based 
nature of the standards, we believe the commenters' concern that the 
costs of this requirement were not appropriately considered in the 
Board's economic analysis reflects a misunderstanding of the nature of 
the requirement and that the Board adequately considered the costs 
related to the Amendments.\28\
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    \26\ Adopting Release, supra note 5 at 26-32.
    \27\ Id. See also AS 2110 Identifying and Assessing Risks of 
Material Misstatement; AS 1105.08; AS 1105.09; and new AS 
1105.10A(a).
    \28\ See letters from PWC and EY.
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    Regarding commenter concerns about the availability of source 
records, we do not believe that having source records only available in 
electronic form would inhibit procedures to compare information to 
source records. Source records are not defined in the PCAOB's auditing 
standards and may exist in many forms, including in electronic form. We 
note that, when considering the reliability of such a record, AS 
1105.10A and AS 1105.09 require the auditor to consider, among other 
things, the means by which it was obtained, including any processing by 
the company and whether there are indications that it may not be 
authentic.
    We also do not believe that the Amendments would require management 
to establish new controls solely for purposes of satisfying the 
requirements of the auditor as raised by commenters. The PCAOB 
addressed this concern in the Adopting Release by explicitly stating 
that the Amendments do not require testing of controls to establish 
reliability.\29\
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    \29\ See Adopting Release, supra note 5 at 30.
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    One commenter stated that aspects of revised AS 2301.48 ``impact 
auditors' ability to consistently determine whether a particular audit 
procedure qualifies as a test of details.'' \30\ This comment appears 
to be based on a misunderstanding of the amendment. AS 2301.48 provides 
examples of items in an account or disclosure for which audit 
procedures are performed, but does not specify at what level audit 
procedures should be applied. In the Adopting Release, the Board was 
explicit that the Amendments are not intended to define ``items 
included in an account or disclosure'' because a definition is 
impractical, and the Board explained that the auditor will determine 
the level of disaggregation or detail based on the facts and 
circumstances of the individual audit engagement.\31\ We believe the 
approach to allow the auditor to determine what level of disaggregation 
is most appropriate in light of the specific circumstances of the 
engagement is appropriate.
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    \30\ See letter from KPMG.
    \31\ See Adopting Release, supra note 5 at 18.
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    Regarding the comment recommending the Commission delay the 
effective date to align with the Substantive Analytical Procedures 
Proposal, the effective date was addressed by the Board in the Adopting 
Release, and the Board specifically highlighted that they considered 
``the effective dates for other Board rulemaking projects.'' \32\ We 
agree with the Board's assessment and support the conclusion reached.
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    \32\ See Adopting Release, supra note 5 at 61.
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    We acknowledge commenters' concerns about the need for 
implementation guidance and we note that the Board has a historical 
practice of performing a post-implementation review \33\ as well as 
issuing appropriate implementation guidance for new standards and rule 
amendments when needed.\34\ We encourage the Board to do the same with 
respect to the Amendments. We also 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.\35\ 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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    \33\ 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.
    \34\ See, e.g., Staff Guidance--Auditing Accounting Estimates 
(Aug. 22, 2019), available at https://assets.pcaobus.org/pcaob-dev/docs/default-source/standards/documents/staff-guidance-auditing-accounting-estimates.pdf?sfvrsn=80016a49_0.
    \35\ See section 107 of SOX.
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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.\36\

[[Page 68222]]

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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    \36\ 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 provided 
information, including data and analysis of EGCs that sets forth its 
views as to why it believes the Amendments should apply to audits of 
EGCs.\37\ In addition, the Board sought public input on the application 
of the Amendments to the audits of EGCs. Commenters who responded to 
the Board agreed the Amendments should apply to the audits of EGCs.\38\
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    \37\ See Adopting Release, supra note 5 at 58-61.
    \38\ Id.
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    The Board indicated in its assessment that for all audits performed 
pursuant to PCAOB standards, including audits of EGCs, the Amendments 
may lead to higher audit quality, more efficient audits, lower audit 
fees, or some combination of the three.\39\ These benefits may apply 
both to audit engagements where auditors currently incorporate 
technology-assisted analysis into their audit approach and engagements 
where auditors have been previously reluctant to use technology-
assisted analysis because of the risk of noncompliance.\40\ As the 
Board noted in its assessment, the use of technology-assisted analysis 
appears to be less prevalent among U.S. non-affiliated firms (``NAFs'') 
than U.S. global network firms (``GNFs'').\41\ Therefore, since EGCs 
are more likely than non-EGCs to be audited by NAFs,\42\ and to the 
extent NAFs are not more likely than other firms to newly implement 
technology-assisted analysis in response to the Amendments, the impacts 
of the Amendments on EGC audits may be less than on non-EGC audits.\43\ 
Nevertheless, the Board stated that it expects the Amendments to 
enhance the efficiency and quality of EGC audits that implement 
technology-assisted analysis and contribute to an increase in the 
credibility of financial reporting by those EGCs.\44\ An improvement in 
EGCs' financial reporting quality, may also improve the efficiency of 
capital allocation and enhance capital formation.\45\
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    \39\ Id. at 45.
    \40\ Id. at 46-47.
    \41\ See Adopting Release, supra note 5 at 36. The U.S. GNFs are 
BDO USA P.C., Deloitte & Touche LLP, Ernst & Young LLP, Grant 
Thornton LLP, KPMG LLP, and PricewaterhouseCoopers LLP. The U.S. NAF 
firms include registered public accounting firms that are not 
members of global network firms.
    \42\ See Adopting Release, supra note 5 at 60. PCAOB staff 
analysis indicates that, compared to exchange-listed non-EGCs, 
exchange-listed EGCs are approximately 2.6 times more likely to be 
audited by an NAF and approximately 1.3 times more likely to be 
audited by a triennially inspected firm.
    \43\ See Adopting Release, supra note 5 at 60.
    \44\ Id.
    \45\ Id.
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    The Board noted that the Amendments could impact the ability of 
EGCs to compete if the costs of the Amendments to audited companies (as 
a result of any increase in costs to their auditors) disproportionately 
impact EGCs relative to their competitors.\46\ However, as the direct 
costs associated with the Amendments are expected to be relatively 
modest, the Board concluded that the impact of the Amendments on 
competition, if any, is likewise expected to be limited.\47\
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    \46\ Id. at 54.
    \47\ Id. at 60.
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    We agree with the Board's findings and further emphasize the 
benefits of the Amendments for EGCs. The Amendments may promote higher 
audit quality for EGC audits employing technology-assisted analysis, 
and thus a higher reliability of financial reporting for the affected 
EGCs. An increased reliability of financial reporting may enhance 
investor protection and lead to an improved efficiency of capital 
allocation and enhanced capital formation with respect to EGCs. These 
benefits may be moderated relative to the effects on other issuers, 
because, for example, the auditors of EGCs are currently less likely to 
employ technology-assisted analysis. However, any potential costs 
passed down to EGCs may be similarly moderated.
    We note that the Amendments could also impact competition for 
capital or in product markets in which EGCs compete. For example, if 
non-EGCs are more likely to be the subject of audits using technology-
assisted analysis, these issuers may experience greater improvements in 
the reliability of their financial reporting and thereby attract more 
capital than EGCs. Alternatively, if any incremental costs or savings 
passed down to audited companies by auditors as a result of the 
Amendments are disproportionately directed to either EGCs or their 
competitors, competition may be affected. However, given that the 
direct benefits and costs of the rule (including effects on audit 
quality and audit fees) are expected to be relatively modest, any 
resulting impact on competition is likely to be relatively limited. 
While there may be additional effects if the Amendments result in a 
larger number of auditors newly incorporating or expanding the use of 
technology-assisted analysis in their audits, and it is difficult to 
predict which auditors and which engagements would most likely be the 
subject of such changes, it is not clear that such effects would 
disproportionately favor the competitors of EGCs. Further, many of the 
potential effects on competition are unlikely to be mitigated by 
applying the Amendments only to audits of non-EGCs.
    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, 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. In particular, the 
Amendments address challenges with the rapidly evolving use of 
technology-based analytical tools that may not be sufficiently 
addressed under current professional audit standards. Addressing these 
challenges will advance the Board's investor protection mandate under 
SOX given that (1) the use of technology-based analytical tools is 
substantially increasing and is expected to continue to do so; (2) 
technology-based analytical tools have the potential to enhance the 
effectiveness of audit procedures by, for example, increasing the 
amount of data an auditor is able to analyze or

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otherwise validate, allowing the auditor to perform more robust 
analysis or analyze more complex relationships, or by allowing the 
auditor to focus their procedures on the transactions with the most 
risk; and (3) PCAOB research indicates that some auditors may be 
reluctant to implement new technologies due to perceived regulatory 
uncertainty, which can be addressed through the clarity provided in the 
Amendments.\48\ Therefore, in connection with the PCAOB's filing and 
the Commission's review,
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    \48\ See Adopting Release, supra note 5 at 12. (``The [Data and 
Technology] research [project] further suggests that clarifications 
to PCAOB standards could more specifically address certain aspects 
of designing and performing audit procedures that involve 
technology-assisted analysis. The Board's Investor Advisory Group 
has also noted that auditors' use of technology-assisted analysis is 
an area of concern due to auditors' potential overreliance on 
company-produced information, and that addressing the use of such 
analysis in the standards could be beneficial.'').
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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-
03) be and hereby are approved.

    By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-18986 Filed 8-22-24; 8:45 am]
BILLING CODE 8011-01-P