
[Federal Register: September 22, 2008 (Volume 73, Number 184)]
[Notices]               
[Page 54644-54646]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22se08-91]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58555; File No. PCAOB-2008-01]

 
Public Company Accounting Oversight Board; Order Approving 
Proposed Rule on Auditing Standard No. 6, Evaluating Consistency of 
Financial Statements, and Conforming Amendments

September 16, 2008.

I. Introduction

    On February 1, 2008, the Public Company Accounting Oversight Board 
(the ``Board'' or the ``PCAOB'') filed with the Securities and Exchange 
Commission (the ``Commission'') Proposed Auditing Standard No. 6, 
Evaluating Consistency of Financial Statements, (``Auditing Standard 
No.

[[Page 54645]]

6''), and Conforming Amendments, pursuant to Section 107 of the 
Sarbanes-Oxley Act of 2002 (the ``Act'') and Section 19(b) of the 
Securities Exchange Act of 1934 (the ``Exchange Act'').
    Auditing Standard No. 6 will supersede the PCAOB's interim auditing 
standard on evaluating consistency, AU section 420, Consistency of 
Application of Generally Accepted Accounting Principles. Auditing 
Standard No. 6 will establish requirements and provide direction for an 
auditor's evaluation of the consistency of financial statements, 
including changes to previously issued financial statements, and the 
effect of that evaluation on the auditor's report on financial 
statements.
    The Board's proposed conforming amendments affect several of the 
Board's interim auditing standards. Those standards are: AU section 
328, Auditing Fair Value Measurements and Disclosures, AU section 410, 
Adherence to Generally Accepted Accounting Principles, AU section 411, 
The Meaning of Present Fairly in Conformity With Generally Accepted 
Accounting Principles, AU section 431, Adequacy of Disclosure in 
Financial Statements, AU section 508, Reports on Audited Financial 
Statements, and AU section 561, Subsequent Discovery of Facts Existing 
at the Date of the Auditor's Report. With the exception of the proposed 
amendment to AU section 411, the Commission believes the aforementioned 
amendments are generally technical or conforming in nature, such as 
updating references in the interim standards to the proposed new 
standard's paragraph numbers and definitions.
    The proposed amendment to AU section 411 will have the effect of 
removing the hierarchy for accounting principles generally accepted in 
the United States (the ``U.S. GAAP hierarchy'') from the PCAOB's 
auditing standards. The Financial Accounting Standards Board (the 
``FASB'') recently issued Statement of Financial Accounting Standards 
(``SFAS'') No. 162, The Hierarchy of Generally Accepted Accounting 
Principles, which will include the current U.S. GAAP hierarchy going 
forward.\1\
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    \1\ The FASB issued SFAS No. 162 on May 9, 2008. SFAS No. 162 
becomes effective 60 days after the date of this approval order.
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    Notice of the proposed standard and the conforming amendments was 
published in the Federal Register on August 5, 2008.\2\ The Commission 
received three comment letters on the proposed rules and amendments. 
For the reasons discussed below, the Commission is granting approval of 
the proposed standard and conforming amendments.
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    \2\ Release No. 34-58259 (July 30, 2008).
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II. Description

    The Act established the PCAOB to oversee the audits of public 
companies and related matters, in order to protect the interests of 
investors and further the public interest in preparation of 
informative, accurate and independent audit reports. Section 103(a) of 
the Act directs the PCAOB to establish auditing and related attestation 
standards, quality control standards, and ethics standards to be used 
by registered public accounting firms in the preparation and issuance 
of audit reports as required by the Act or the rules of the Commission.
    On January 29, 2008, the Board adopted Auditing Standard No. 6, 
Evaluating Consistency of Financial Statements, and amendments to the 
Board's interim auditing standards. The Board proposed these changes to 
its auditing standards in response to two actions of the FASB.
    First, in May 2005, the FASB issued SFAS No. 154, Accounting 
Changes and Error Corrections, which superseded Accounting Principles 
Board (``APB'') Opinion No. 20, Accounting Changes. SFAS No. 154 
establishes, unless impracticable, retrospective application as the 
required method for reporting a change in accounting principle in the 
absence of explicit transition requirements specific to a newly adopted 
accounting principle. SFAS No. 154 also redefines the term 
``restatement'' to refer only to ``the process of revising previously 
issued financial statements to reflect the correction of an error in 
those financial statements.'' \3\ Under SFAS No. 154, therefore, the 
term ``restatement'' does not refer to changes made to previously 
issued financial statements to reflect a change in accounting 
principle.
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    \3\ See SFAS No. 154, paragraph 2j.
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    AU section 420, Consistency of Application of Generally Accepted 
Accounting Principles, the Board's interim standard on the auditor's 
responsibilities for evaluating the consistency of the application of 
generally accepted accounting principles (``GAAP''), generally 
reflected the provisions of APB Opinion No. 20, which was superseded by 
SFAS No. 154. To better align the Board's standards with the new 
accounting standard, the Board adopted a new auditing standard on 
evaluating consistency, which will supersede AU section 420, and 
conforming amendments to AU section 508, Reports on Audited Financial 
Statements, of its interim auditing standards.
    Second, in 2005, the FASB issued an exposure draft of a proposed 
Statement of Financial Accounting Standards, The Hierarchy of Generally 
Accepted Accounting Principles. The FASB proposed that this standard 
incorporate the hierarchy found in the current auditing standards into 
the accounting standards. Historically, a description of the U.S. GAAP 
hierarchy has resided only in the auditing standards. However, because 
the current U.S. GAAP hierarchy identifies the sources of accounting 
principles and the framework for selecting principles to be used in 
preparing financial statements, the PCAOB and the FASB believed that 
these requirements are more appropriately located in the FASB's 
accounting standards. Accordingly, the PCAOB adopted amendments to its 
auditing standards to remove the U.S. GAAP hierarchy.
    In May 2008, the FASB issued in final form, SFAS No. 162, The 
Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 
will become effective 60 days from the date of this order approving 
Auditing Standard No. 6 and conforming amendments.
    In addition to proposing Auditing Standard No. 6 and the amendment 
to AU section 411, the PCAOB proposed amendments to other interim 
auditing standards and related interpretations. The Commission believes 
the amendments to AU section 328, Auditing Fair Value Measurements and 
Disclosures, AU section 410, Adherence to Generally Accepted Accounting 
Principles, AU section 431, Adequacy of Disclosure in Financial 
Statements, AU section 508, Reports on Audited Financial Statements, 
and AU section 561, Subsequent Discovery of Facts Existing at the Date 
of the Auditor's Report, are technical or conforming in nature.
    As discussed further below, one of the proposed amendments to AU 
section 431, Adequacy of Disclosure in Financial Statements, proposes 
to delete footnote 1 to paragraph 4 of AU section 431, which is an 
application of the AICPA's Code of Professional Conduct regarding the 
disclosure of confidential client information. In 2003, when the Board 
adopted certain AICPA rules and ASB standards as interim Board 
standards, the Board did not adopt Rule 301. Consistent with that 
action, the proposed amendments would eliminate the reference to Rule 
301 that is included in paragraph 4 of AU section Sec. 431.
    The proposed Auditing Standard No. 6 and amendments to the Board's

[[Page 54646]]

interim standards are intended to update and clarify the auditing 
standards in light of SFAS No. 154 and SFAS No. 162. In particular, 
these updates and clarifications are intended to enhance the clarity of 
auditor reporting on accounting changes and corrections of 
misstatements by distinguishing between these events.

III. Discussion

    The Commission received three comment letters in response to its 
request for comments on Auditing Standard No. 6 and conforming 
amendments. The comment letters came from three registered public 
accounting firms.\4\ All three commenters expressed support for the 
Commission's approval of the proposed standard.
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    \4\ Deloitte and Touche LLP, Grant Thornton LLP, and 
PricewaterhouseCoopers LLP.
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    As noted above, the PCAOB's proposed amendment to AU section 431 
deletes a reference to Rule 301 of the AICPA's Code of Professional 
Conduct--a rule the PCAOB did not adopt as part of its original interim 
standards. Similar to comments made to the PCAOB during its comment 
period, one commenter believed concerns exist that the Board's action 
in removing a reference to a rule the PCAOB did not adopt might be 
construed as minimizing the auditor's responsibilities for maintaining 
the confidentiality of client information. The commenter requested that 
the Commission encourage the PCAOB to adopt a rule establishing the 
auditor's responsibility with respect to maintaining the 
confidentiality of client information.
    In its adopting release, the PCAOB discussed the concerns the 
comments raised about client confidentiality and noted its awareness of 
many auditors' legal or professional obligations to maintain the 
confidentiality of client information, and made reference to the 
confidentiality requirements included in the provisions of the Uniform 
Accountancy Act and the provisions of the International Federation of 
Accountants' Code of Ethics for Professional Accountants. The PCAOB 
also noted that its decision to omit Rule 301 from its interim 
standards was based on a determination that incorporation of that rule 
was not necessary to fulfill the Board's mandate under Section 
103(a)(1) and (3) of the Act at that time, and that it did not reflect 
a decision that auditor confidentiality requirements imposed by other 
authorities were inappropriate. Similarly, in amending AU section 431, 
the PCAOB noted that it seeks neither to modify nor detract from 
existing confidentiality requirements.
    The Commission agrees with the Board's proposed action to remove 
from its interim standards a reference to a rule it did not adopt. 
However, the Commission encourages the PCAOB to develop and adopt a 
rule addressing the auditor's responsibility with respect to 
maintaining the confidentiality of client information.\5\
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    \5\ One commenter also noted that the adoption of Auditing 
Standard No. 6 would cause existing published PCAOB Staff Questions 
and Answers to require updating. The Commission encourages the PCAOB 
to ensure that its guidance is up to date with its current standards 
and presumes the PCAOB will update these Questions and Answers once 
these amendments are approved.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that proposed 
Auditing Standard No. 6 and the Conforming Amendments are consistent 
with the requirements of the Act and the securities laws and are 
necessary and appropriate in the public interest and for the protection 
of investors.
    It is therefore ordered, pursuant to Section 107 of the Act and 
Section 19(b)(2) of the Exchange Act, that proposed Auditing Standard 
No. 6, Evaluating Consistency of Financial Statements, and Conforming 
Amendments (File No. PCAOB-2008-01) be and hereby are approved.

    By the Commission.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-22015 Filed 9-19-08; 8:45 am]

BILLING CODE 8010-01-P
