
[Federal Register Volume 88, Number 233 (Wednesday, December 6, 2023)]
[Notices]
[Pages 84837-84839]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-26773]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99060; File No. PCAOB-2023-02]


Public Company Accounting Oversight Board; Order Granting 
Approval of Auditing Standard Governing the Auditor's Use of 
Confirmation

I. Introduction

    On October 4, 2023, 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'') 2310, The Auditor's Use of 
Confirmation (AS 2310); rescind AS 2310, The Confirmation Process (AS 
2310); and amend several other existing auditing standards 
(collectively, the ``Amendments''). The Amendments were published for 
comment in the Federal Register on October 17, 2023.\3\ We received 
three (3) comment letters in response to the notice.\4\ This order 
approves the Amendments, which we find to be consistent with the 
requirements of SOX and the securities laws and necessary or 
appropriate in the public interest or for the protection of investors.
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    \1\ 15 U.S.C. 7217(b).
    \2\ 15 U.S.C. 78s(b).
    \3\ See Public Company Accounting Oversight Board; Notice of 
Filing of Proposed Rules on The Auditor's Use of Confirmation, and 
Other Amendments to PCAOB Standards, Release No. 34-98689 (Oct. 5, 
2023) [88 FR 71684 (Oct. 17, 2023)], available at https://www.sec.gov/rules/pcaob/2023/34-98689.pdf.
    \4\ We received comment letters from Deloitte & Touche LLP (Nov. 
2, 2023), PricewaterhouseCoopers LLP (Nov. 6, 2023), and Gopal 
Krushna Panda (Nov. 6, 2023). Copies of the comment letters received 
on the Commission notice of the Amendments are available on the 
Commission's website at https://www.sec.gov/comments/pcaob-2023-02/pcaob202302.htm.
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II. Description of the Amendments

    On September 28, 2023, the Board unanimously adopted the 
Amendments.\5\ The Amendments are intended to strengthen and modernize 
the requirements for the confirmation process by describing principles-
based requirements for all methods of confirmation, including paper-
based and electronic means of communications. In addition, the new 
standard is more directly integrated with the PCAOB's risk assessment 
standards by incorporating certain risk-based considerations and 
emphasizing the auditor's responsibilities for obtaining relevant and 
reliable audit evidence through the confirmation process. 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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    \5\ See The Auditor's Use of Confirmation, and Other Amendments 
to PCAOB Standards, PCAOB Release No. 2023-008 (Sept. 28, 2023), 
available at https://assets.pcaobus.org/pcaob-dev/docs/default-source/rulemaking/docket_028/2023-008_confirmation-adopting-release.pdf?sfvrsn=e18cef74_4.
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A. Changes to PCAOB Standards

    Among other things, the Amendments enhance the existing 
confirmation requirements by:
     Including principles-based requirements that are designed 
to apply to all methods of confirmation. These methods include 
longstanding practices, such as the use of paper-based confirmation 
requests and responses sent via regular mail; methods that involve 
electronic means of communications, such as the use of email or an 
intermediary to facilitate direct electronic transmission of 
confirmation requests and responses; and methods that have yet to 
develop.
     Expressly aligning the requirements for the auditor's use 
of confirmation with the requirements of the Board's risk assessment 
standards, including AS 1105. The Amendments specify certain risk-based 
considerations and emphasize the auditor's responsibility to obtain 
relevant and reliable audit evidence when performing confirmation 
procedures.\6\
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    \6\ See AS 2310.03, as amended.
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     Strengthening the requirements for the use of confirmation 
procedures in certain situations. The Amendments add a requirement that 
the auditor should perform confirmation procedures for cash held by 
third parties, carry forward the existing requirement that the auditor 
normally should perform confirmation procedures for accounts 
receivable, and include a new provision that the auditor may otherwise 
obtain audit evidence by directly accessing information maintained by a 
knowledgeable external source for cash and accounts receivable.\7\ In 
addition, the Amendments carry forward the existing requirement that 
the auditor consider confirming the terms of certain other 
transactions.\8\
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    \7\ See AS 2310.24 through .27, as amended.
    \8\ See AS 2310.30, as amended.
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     Addressing situations in which it would not be feasible 
for the auditor to obtain information directly from a knowledgeable 
external source. The Amendments provide that if it would not be 
feasible for the auditor to obtain audit evidence directly from a 
knowledgeable external source for accounts receivable, the auditor 
should perform other substantive procedures, including tests of 
details, that involve obtaining audit evidence from external sources 
indirectly.\9\
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    \9\ See AS 2310.25, as amended.
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     Mandatory communications with the audit committee 
regarding certain audit responses to significant risks. Under the 
Amendments, for significant risks associated with cash or accounts 
receivable, the auditor is required to communicate with the audit 
committee when the auditor either did not perform confirmation 
procedures or otherwise obtained audit evidence by directly accessing 
information maintained by a knowledgeable external source.\10\
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    \10\ See AS 2310.28, as amended.
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     Reflecting the relatively insignificant amount of audit 
evidence obtained when using negative confirmation requests. Under the 
Amendments, the use of negative confirmation requests may provide 
sufficient appropriate audit evidence only when combined with other 
substantive procedures. The Amendments include examples of situations 
in which the use of negative confirmation requests in combination with 
other substantive procedures may provide sufficient appropriate audit 
evidence.\11\
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    \11\ See AS 2310.12 and .13, as amended.
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     Emphasizing the auditor's responsibility to maintain 
control over the confirmation process. The Amendments state that the 
auditor should select the items to be confirmed,

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send confirmation requests, and receive confirmation responses.\12\
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    \12\ See AS 2310.14 through .17, as amended.
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     Providing more specific direction for circumstances where 
the auditor is unable to obtain relevant and reliable audit evidence 
through confirmations. The Amendments identify situations where other 
procedures should be performed by the auditor as an alternative to 
confirmations. The Amendments also include examples of such alternative 
procedures that may provide relevant and reliable audit evidence.\13\
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    \13\ See AS 2310.11, .19, .23, and Appendix C, as amended.
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B. Applicability and Effective Date

    The Amendments will be effective for all audits of financial 
statements for fiscal years ending on or after June 15, 2025. The PCAOB 
has proposed application of the Amendments to include audits of 
emerging growth companies (``EGCs''),\14\ as discussed in Section IV 
below.
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    \14\ The term ``emerging growth company'' is defined in section 
3(a)(80) of the Exchange Act (15 U.S.C. 78c(a)(80)). See also 
Inflation Adjustments and Other Technical Amendments Under Titles I 
and III of the JOBS Act, Release No. 33-10332 (Mar. 31, 2017) [82 FR 
17545 (Apr. 12, 2017)], available at https://www.sec.gov/rules/final/2017/33-10332.pdf.
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III. Comment Letters

    The comment period on the Amendments ended on November 7, 2023. We 
received three (3) comment letters.\15\ The commenters generally 
supported the Amendments and encouraged us to support the PCAOB's plans 
to monitor implementation, conduct post-implementation review, and 
monitor advancements in technology that may affect application of the 
Amendments. We acknowledge the importance of monitoring the 
implementation of the Amendments and the Commission staff works closely 
with the PCAOB as part of our general oversight mandate.\16\ 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. Additionally, one commenter 
made suggestions for expanded explanations and examples. The adopting 
release addresses the points raised by the commenter.
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    \15\ See Supra note 4.
    \16\ See section 107 of SOX.
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    SOX requires us to determine whether the Amendments are consistent 
with the requirements of SOX 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.
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    \17\ 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 the Amendments, the Board recommended 
that the Commission determine that the Amendments apply to audits of 
EGCs.\18\ section 103(a)(3)(C) of SOX, as amended by section 104 of the 
Jumpstart Our Business Startups Act of 2012, requires that any rules of 
the Board requiring mandatory audit firm rotation or a supplement to 
the auditor's report in which the auditor would be required to provide 
additional information about the audit and the financial statements of 
the issuer (auditor discussion and analysis) shall not apply to an 
audit of an EGC. The provisions of the Amendments do not fall into 
these categories.\19\
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    \18\ See the Notice of Filing of Proposed Rules, supra note 3.
    \19\ While the precise scope of this category of rules under 
section 103(a)(3)(C) is not entirely clear, we do not interpret this 
statutory language as precluding the application of Board rules 
requiring inclusion of additional factual information about 
referred-to auditors and the scope of their work in connection with 
the audits of EGCs. In our view, this approach reflects an 
appropriate interpretation of the statutory language and is 
consistent with our understanding of the Congressional purpose 
underlying this provision.
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    Section 103(a)(3)(C) further provides that ``[a]ny additional 
rules'' adopted by the PCAOB after April 5, 2012, do not apply to 
audits of EGCs ``unless the Commission determines that the application 
of such additional requirements is necessary or appropriate in the 
public interest, after considering the protection of investors and 
whether the action will promote efficiency, competition, and capital 
formation.'' The Amendments fall within this category. Having 
considered those statutory factors, we find that applying the 
Amendments to the audits of EGCs is necessary or appropriate in the 
public interest.
    With respect to the Commission's determination of whether the 
Amendments will apply to audits of EGCs, the PCAOB provided 
information, including data and analysis of EGCs identified by the 
Board's staff, from public sources that sets forth its views as to why 
it believes the Amendments should apply to audits of EGCs. In addition, 
the Board sought public input on the application of the Amendments to 
the audits of EGCs. Commenters generally supported the application of 
the Amendments to the audits of EGCs. The Board noted that while the 
associated costs may be higher for EGC audits than for non-EGC audits, 
due to the scalability of the risk-based requirements, the costs of 
performing the procedures are unlikely to be disproportionate to the 
benefits of the procedures. Overall, the Amendments are expected to 
enhance audit quality and contribute to an increase in the credibility 
of financial reporting by EGCs.
    We agree with the Board's analysis and further emphasize the price 
efficiency benefits discussed by the PCAOB noting that improvements in 
the quality of the audit may be more pronounced on the audits of EGCs, 
thereby potentially creating a larger increase to the price efficiency 
of EGCs by providing investors with more accurate information. Price 
efficiency helps investors make more informed investment decisions--
facilitating issuers', including EGCs', access to capital--thus 
enhancing capital formation. Additionally, while the Amendments could 
impact competition in the EGC market 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. As such, after considering the protection of investors and 
whether the action will promote efficiency, competition, and capital 
formation, we believe there is a sufficient basis to determine that 
applying the Amendments to the audits of EGCs is necessary or 
appropriate in the public interest.

V. Conclusion

    The Commission has reviewed and considered the Amendments, the 
information submitted therewith by the PCAOB, and the comment letters 
received. In connection with the PCAOB's filing and the Commission's 
review,
    A. The Commission finds that the Amendments are consistent with the 
requirements of SOX and the securities laws and are necessary or 
appropriate in

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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-2023-
02) be and hereby are approved.

    By the Commission.
    Dated: December 1, 2023.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-26773 Filed 12-5-23; 8:45 am]
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