[Federal Register Volume 84, Number 130 (Monday, July 8, 2019)]
[Notices]
[Pages 32498-32502]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-14411]



[[Page 32498]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86269 File No. PCAOB-2019-005]


Public Company Accounting Oversight Board; Order Granting 
Approval of Auditing Standard 2501, Auditing Accounting Estimates, 
Including Fair Value Measurements, and Related Amendments to PCAOB 
Auditing Standards

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 Auditing Standard 2501, Auditing Accounting 
Estimates, Including Fair Value Measurements and related amendments to 
PCAOB auditing standards (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 2014. See Auditing Accounting Estimates and Fair 
Value Measurements (Aug. 19, 2014), available at https://pcaobus.org/Standards/Documents/SCP_Auditing_Accounting_Estimates_Fair_Value_Measurements.pdf. In 
2017, the Board issued a proposed rule. See Proposed Auditing 
Standard--Auditing Accounting Estimates, Including Fair Value 
Measurements and Proposed Amendments to PCAOB Auditing Standards, 
PCAOB Release No. 2017-002 (June 1, 2017) (``PCAOB Proposal''), 
available at https://pcaobus.org/Rulemaking/Docket043/2017-002-auditing-accounting-estimates-proposed-rule.pdf.
    \4\ See Release No. 34-85434 Public Company Accounting Oversight 
Board; Notice of Filing of Proposed Rules on Auditing Accounting 
Estimates, Including Fair Value Measurements, and Amendments to 
PCAOB Auditing Standards (Mar. 28, 2019), 84 FR 13396 (Apr. 4, 2019) 
available at https://www.sec.gov/rules/pcaob/2019/34-85434.pdf.
    \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-2019-02/pcaob201902.htm.
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II. Description of the Proposed Rules

    On December 20, 2018, the Board adopted AS 2501, Auditing 
Accounting Estimates, Including Fair Value Measurements and related 
amendments to PCAOB auditing standards.\7\ The Proposed Rules are 
intended to strengthen and enhance the requirements for auditing 
accounting estimates, including fair value measurements, by replacing 
the existing three standards \8\ with a single standard that sets forth 
a uniform, risk-based approach. The requirements contained within the 
Proposed Rules are discussed further below.
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    \7\ See Auditing Accounting Estimates, Including Fair Value 
Measurements and Amendments to PCAOB Auditing Standards, PCAOB 
Release No. 2018-005 (Dec. 20, 2018) (``PCAOB Adopting Release''), 
available at https://pcaobus.org/Rulemaking/Docket043/2018-005-estimates-final-rule.pdf.
    \8\ See Auditing Standard (``AS'') 2501, Auditing Accounting 
Estimates (originally issued in April 1988), which applies to 
auditing accounting estimates in general (``accounting estimates 
standard''); AS 2502, Auditing Fair Value Measurements and 
Disclosures (originally issued January 2003), which applies to 
auditing the measurement and disclosure of assets, liabilities, and 
specific components of equity presented or disclosed at fair value 
in financial statements (``fair value standard''); and AS 2503, 
Auditing Derivative Instruments, Hedging Activities, and Investments 
in Securities (originally issued in September 2000), which applies 
to auditing financial statement assertions for derivative 
instruments, hedging activities, and investments in securities 
(``derivatives standard'').
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A. Changes to PCAOB Standards

    The Proposed Rules include a single standard that replaces the 
accounting estimates standard, the fair value standard, and the 
derivatives standard.\9\ The Proposed Rules also include a special 
topics appendix that addresses certain matters relevant to auditing the 
fair value of financial instruments. In addition, the Proposed Rules 
include amendments to several other PCAOB auditing standards to align 
them with the new standard on auditing accounting estimates. The 
Proposed Rules will make the following changes to existing 
requirements:
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    \9\ See id.
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     Provide direction to prompt auditors to devote greater 
attention to addressing potential management bias in accounting 
estimates, as part of applying professional skepticism. In this regard, 
the Proposed Rules:
    [cir] Amend AS 2110, Identifying and Assessing Risks of Material 
Misstatement to require a discussion among the key engagement team 
members of how the financial statements could be manipulated through 
management bias in accounting estimates in significant accounts and 
disclosures;
    [cir] Emphasize certain key requirements to focus auditors on their 
obligations, when evaluating audit results, to exercise professional 
skepticism, including evaluating whether management bias exists;
    [cir] Remind auditors that audit evidence includes both information 
that supports and corroborates the company's assertions regarding the 
financial statements and information that contradicts such assertions;
    [cir] Require the auditor to identify significant assumptions used 
by the company and describe matters the auditor should take into 
account when identifying those assumptions;
    [cir] Provide examples of significant assumptions (important to the 
recognition or measurement of the accounting estimate), such as 
assumptions that are susceptible to manipulation or bias;
    [cir] Emphasize requirements for the auditor to evaluate whether 
the company has a reasonable basis for the significant assumptions used 
and, when applicable, for its selection of assumptions from a range of 
potential assumptions;
    [cir] Explicitly require the auditor, when developing an 
independent expectation of an accounting estimate, to have a reasonable 
basis for the assumptions and method he or she uses;
    [cir] Require that the auditor obtain an understanding of 
management's analysis of critical accounting estimates and take that 
understanding into account when evaluating the reasonableness of 
significant assumptions and potential management bias;
    [cir] Recast certain existing requirements using terminology that 
encourages maintaining a skeptical mindset, such as ``evaluate'' and 
``compare'' instead of ``corroborate;''
    [cir] Strengthen requirements for evaluating whether data was 
appropriately used by a company that build on requirements in the fair 
value standard, and include a new requirement for evaluating whether a 
company's change in the source of data is appropriate;
    [cir] Clarify the auditor's responsibilities for evaluating data 
that build on the

[[Page 32499]]

existing requirements in AS 1105, Audit Evidence; and
    [cir] Amend AS 2401, Consideration of Fraud in a Financial 
Statement Audit, to clarify the auditor's responsibilities when 
performing a retrospective review of accounting estimates and align 
them with the requirements in the new standard.
     Extend certain key requirements in the fair value standard 
to other accounting estimates in significant accounts and disclosures 
to reflect a more uniform approach to substantive testing. For 
estimates not currently subject to the fair value standard, this will:
    [cir] Refine the three substantive approaches common to the 
accounting estimates standard to include more specificity, similar to 
the fair value standard;
    [cir] Describe the auditor's responsibilities for testing the 
individual elements of the company's process used to develop the 
estimate (i.e., methods, data, and significant assumptions);
    [cir] Set forth express requirements for the auditor to evaluate 
the company's methods for developing the estimate, including whether 
the methods are:
    [ssquf] In conformity with the requirements of the applicable 
financial reporting framework; and
    [ssquf] Appropriate for the nature of the related account or 
disclosure, taking into account the auditor's understanding of the 
company and its environment; and
    [cir] Require the auditor to take into account certain factors in 
determining whether significant assumptions that are based on the 
company's intent and ability to carry out a particular course of action 
are reasonable.
     Further integrate requirements with the Board's risk 
assessment standards \10\ to focus auditors on estimates with greater 
risk of material misstatement. The Proposed Rules incorporate specific 
requirements relating to accounting estimates in AS 2110 and AS 2301 to 
inform the necessary procedures for auditing accounting estimates. 
Specifically, the Proposed Rules will:
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    \10\ The Board's ``risk assessment standards'' include AS 1101, 
Audit Risk; AS 1105; AS 1201, Supervision of the Audit Engagement; 
AS 2101, Audit Planning; AS 2105, Consideration of Materiality in 
Planning and Performing an Audit; AS 2110; AS 2301, The Auditor's 
Responses to the Risks of Material Misstatement; and AS 2810, 
Evaluating Audit Results.
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    [cir] Amend AS 2110 to include risk factors specific to identifying 
significant accounts and disclosures involving accounting estimates;
    [cir] Align the scope of the Proposed Rules with AS 2110 to apply 
to accounting estimates in significant accounts and disclosures;
    [cir] Amend AS 2110 to set forth requirements for obtaining an 
understanding of the company's process for determining accounting 
estimates;
    [cir] Require auditors to respond to significantly differing risks 
of material misstatement in the components of accounting estimates, 
consistent with AS 2110;
    [cir] Remind auditors of their responsibility to evaluate 
conformity with the applicable financial reporting framework, 
reasonableness, and potential management bias and its effect on the 
financial statements when responding to the risks of material 
misstatement in accounting estimates in significant accounts and 
disclosures;
    [cir] Require the auditor, when identifying significant 
assumptions, to take into account the nature of the accounting 
estimate, including related risk factors, the applicable financial 
reporting framework, and the auditor's understanding of the company's 
process for developing the estimate;
    [cir] Include matters relevant to identifying and assessing risks 
of material misstatement related to the fair value of financial 
instruments;
    [cir] Add a note in AS 2301 to emphasize that performing 
substantive procedures for the relevant assertions of significant 
accounts and disclosures involves testing whether the significant 
accounts and disclosures are in conformity with the applicable 
financial reporting framework; and
    [cir] Add a note to AS 2301 providing that for certain estimates 
involving complex models or processes, it might be impossible to design 
effective substantive tests that, by themselves, would provide 
sufficient appropriate evidence regarding the assertions.
     Make other updates to the requirements for auditing 
accounting estimates, including:
    [cir] Update the description of what constitutes an accounting 
estimate to encompass the general characteristics of the variety of 
accounting estimates, including fair value measurements, in financial 
statements;
    [cir] Set forth specific requirements for evaluating data and 
pricing information used by the company or the auditor that build on 
the existing requirements in AS 1105;
    [cir] Establish more specific requirements for developing an 
independent expectation that vary depending on the source of data, 
assumptions or methods used by the auditor and build on AS 2810 to 
provide a requirement when developing an independent expectation as a 
range; and
    [cir] Relocate requirements in the derivatives standard for 
obtaining audit evidence when the valuation of investments is based on 
investee results as an appendix to AS 1105.
     Provide specific requirements and direction to address 
auditing the fair value of financial instruments, including:
    [cir] Establish requirements to determine whether pricing 
information obtained from third parties, such as pricing services and 
brokers or dealers, provides sufficient appropriate audit evidence, 
including:
    [ssquf] Focus auditors on the relevance and reliability of pricing 
information from third-party sources,\11\ regardless of whether the 
pricing information was obtained by the company or the auditor;
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    \11\ The requirements in this area focus primarily on pricing 
information from pricing services and brokers or dealers, but also 
cover pricing information obtained from other third-party pricing 
sources, such as exchanges and publishers of exchange prices.
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    [ssquf] Establish factors that affect relevance and reliability of 
pricing information obtained from a pricing service;
    [ssquf] Require the auditor to perform additional audit procedures 
to evaluate the process used by the pricing service when fair values 
are based on transactions of similar financial instruments;
    [ssquf] Require the auditor to perform additional procedures on 
pricing information obtained from a pricing service when no recent 
transactions have occurred for either the financial instrument being 
valued or similar financial instruments;
    [ssquf] Establish conditions under which less information is needed 
about particular methods and inputs of individual pricing services in 
circumstances where prices are obtained from multiple pricing services; 
and
    [ssquf] Establish factors that affect the relevance and reliability 
of quotes from brokers or dealers.
    [cir] Require the auditor to understand, if applicable, how 
unobservable inputs were determined and evaluate the reasonableness of 
unobservable inputs.

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''),\12\

[[Page 32500]]

as discussed in Section IV below, and audits of brokers and dealers 
under Exchange Act Rule 17a-5.
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    \12\ 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.\13\ Commenters generally 
supported the Proposed Rules.\14\ 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.\15\ One commenter 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.\16\
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    \13\ See Deloitte Letter, PwC Letter, CII Letter, and CCMC 
Letter.
    \14\ See Deloitte Letter, PwC Letter, CII Letter, and CCMC 
Letter.
    \15\ See e.g., Deloitte Letter; PwC Letter, and CCMC Letter.
    \16\ 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.\17\ 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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    \17\ 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 
strengthening the audit requirements by applying a more uniform, risk-
based approach to the audit of accounting estimates, including fair 
value measurements.\18\ One commenter agreed with the Board's view that 
the evolution of financial reporting frameworks has resulted in the 
expanded use of estimates and expressed support for a single, more 
uniform principles-based standard to address the auditing of accounting 
estimates, including fair value measurements, that is aligned with the 
Board's risk assessment standards.\19\ Another commenter stressed the 
need for the Proposed Rules because accounting estimates, and 
particularly fair value measurements and related disclosures, provide 
investors with ``more useful information than amounts that would be 
reported under amortized cost or other existing alternative accounting 
approaches'' and because the PCAOB has observed numerous deficiencies 
in auditing accounting estimates.\20\ The commenter also indicated that 
the Proposed Rules will strengthen auditor responsibilities, improve 
audit quality, and further investor protection.\21\
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    \18\ See Deloitte Letter, CII Letter, PwC Letter, and CCMC 
Letter.
    \19\ See PwC Letter.
    \20\ See CII Letter.
    \21\ See id.
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B. Implementation Efforts

    Most commenters noted their desire for ongoing monitoring by the 
PCAOB if the Proposed Rules are approved.\22\ Two commenters 
specifically supported the PCAOB's plan \23\ to monitor implementation, 
including advances in technology and any related effects on the 
application of the proposed amendments.\24\ 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.\25\
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    \22\ See e.g., Deloitte Letter, PwC Letter, and CCMC Letter.
    \23\ See PCAOB Adopting Release at 3, 21, and 46.
    \24\ See Deloitte Letter and CCMC Letter.
    \25\ 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.\26\ 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.\27\
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    \26\ See PCAOB Adopting Release at 3, 21, and 46.
    \27\ 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.\28\ 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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    \28\ See Section 107 of the Sarbanes-Oxley Act.
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C. 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.\29\ 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 \30\ 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.\31\ The commenter further expressed the 
belief that a phased implementation may facilitate post-implementation 
reviews of the Proposed Rules.\32\
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    \29\ See CCMC Letter.
    \30\ ``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.
    \31\ See CCMC Letter.
    \32\ 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.\33\
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    \33\ See PCAOB Adopting Release at 58.

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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.\34\ 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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    \34\ The CCMC Letter references differences in considering a 
phased implementation approach for an 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,\35\ 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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    \35\ 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.\36\ 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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    \36\ See PCAOB Adopting Release at 56.
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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 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 sets 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 has also published a white 
paper that provides general information about characteristics of EGCs 
(``EGC White Paper'').\37\ In addition, the Board sought public input 
on the application of the Proposed Rules to the audits of EGCs.\38\ 
Commenters who addressed this question supported applying the proposed 
requirements to audits of EGCs, citing benefits to the users of EGC 
financial statements and the risk of confusion and inconsistency if 
different methodologies were required for EGC and non-EGC audits.\39\
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    \37\ 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.
    \38\ See PCAOB Proposal; see also, comment letters provided to 
the PCAOB related to this matter, available at https://pcaobus.org/Rulemaking/Pages/docket-043-comments-auditing-accounting-estimates-fair-value-measurements.aspx.
    \39\ See PCAOB Adopting Release at 53.
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    In the PCAOB Adopting Release, the Board expressed its belief that 
accounting estimates are common in the financial statements of many 
EGCs.\40\ The Board also noted that data from 2012-2016 reported 
inspection findings for audits of EGCs indicated a relatively high 
number of deficiencies (i.e., 45%-60% of Part I findings on audits of 
EGCs) related to the accounting estimates standard and the fair value 
standard.\41\ The PCAOB further observed that ``[s]ince EGCs tend to be 
smaller public companies, their accounting estimates may be less likely 
to involve complex processes, although those estimates may constitute 
some of the largest accounts in EGCs' financial statements.'' \42\ The 
Board noted that the Proposed Rules are ``risk-based and scalable for 
firms of all sizes,'' and expressed the view that ``any related cost 
increases are justified by expected improvements in audit quality.'' 
\43\
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    \40\ See id at 53. The five Standard Industrial Classification 
(SIC) codes with the highest total assets as a percentage of the 
total assets for the EGC population are: (i) Real estate investment 
trusts; (ii) state commercial banks; (iii) national commercial 
banks; (iv) crude petroleum and natural gas; and (v) pharmaceutical 
preparations. See EGC White Paper at 14-15. In the PCAOB Adopting 
Release, the Board noted that financial statements of companies 
operating in these industries would likely have accounting estimates 
that include, for example, asset impairments and allowances for loan 
losses.
    \41\ See PCAOB Adopting Release at 55-56.
    \42\ See id at 54.
    \43\ See id at 45.
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    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 create the 
potential for confusion.'' \44\ 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.'' 
\45\
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    \44\ See id at 53.
    \45\ See EGC White Paper at 20.
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    The PCAOB Adopting Release also noted EGCs generally tend to have

[[Page 32502]]

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.\46\ As such, the Proposed 
Rules, which are intended to enhance audit quality, could increase the 
credibility of financial statement disclosures by EGCs.\47\
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    \46\ See PCAOB Adopting Release at 54.
    \47\ See id at 54.
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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 of the 
prevalence of accounting estimates in financial statements of many 
EGCs. Specifically, we agree with the Board applying the Proposed Rules 
to EGCs would be consistent with the objective of the Proposed Rules to 
provide a more uniform, risk-based approach to auditing accounting 
estimates but also provide a scalable approach for firms of all sizes. 
Additionally, we also agree with the Board that Proposed Rules could 
increase the credibility of the 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-2019-005) be and hereby are approved.

    By the Commission.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-14411 Filed 7-5-19; 8:45 am]
 BILLING CODE 8011-01-P


