[Federal Register Volume 75, Number 13 (Thursday, January 21, 2010)]
[Notices]
[Pages 3509-3511]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-1028]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-61363; File No. PCAOB-2009-02]
Public Company Accounting Oversight Board; Order Approving
Proposed Rules on Auditing Standard No. 7, Engagement Quality Review,
and Conforming Amendment
January 15, 2010.
I. Introduction
On August 4, 2009, the Public Company Accounting Oversight Board
(the ``Board'' or the ``PCAOB'') filed with the Securities and Exchange
Commission (the ``Commission'') a notice (the ``Notice'') of proposed
rules (File No. PCAOB-2009-02) on Auditing Standard No. 7, Engagement
Quality Review, and Conforming Amendment to the Board's Interim Quality
Control Standards, pursuant to Section 107(b) of the Sarbanes-Oxley Act
of 2002 (the ``Act''). Notice of the proposed rules was published in
the Federal Register on November 5, 2009.\1\ The Commission received
nine comment letters relating to the proposed rules. For the reasons
discussed below, the Commission is granting approval of the proposed
rules. As specified by the Board, the rules are
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effective for the engagement quality review (``EQR'') of audits and
interim reviews for fiscal years beginning on or after December 15,
2009.
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\1\ See SEC Release No. 34-60903 (October 29, 2009); 74 FR 57357
(November 5, 2009).
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II. Description
Section 103 of the Act directs the Board, among other things, to
set standards for public company audits, including a requirement for
each registered public accounting firm to ``provide a concurring or
second partner review and approval of [each] audit report (and other
related information), and concurring approval in its issuance * * * .''
According to the Board, the proposed rules would strengthen and expand
the Board's existing requirements for concurring reviews.
According to the Board, a well-performed EQR can serve as an
important safeguard against erroneous or insufficiently supported audit
opinions and, accordingly, can contribute to audit quality. As
described in the Notice, the engagement quality review will serve as a
meaningful check on the work performed by the engagement team, and the
Board believes this should increase the likelihood that a registered
public accounting firm will identify any significant engagement
deficiencies before it issues its audit report.
Auditing Standard No. 7 requires the engagement quality reviewer
(or the ``reviewer'') to evaluate the significant judgments made and
related conclusions reached by the engagement team in forming the
overall conclusion on the engagement and in preparing the engagement
report. Auditing Standard No. 7 also requires the engagement quality
reviewer to perform certain procedures designed to focus the reviewer
on those judgments and conclusions. As discussed in the Notice, the
procedures required of an engagement quality reviewer are different in
nature from the procedures required of the engagement team. Unlike the
engagement team, a reviewer does not perform substantive procedures or
obtain sufficient evidence to support an opinion on the financial
statements or internal control over financial reporting. If more audit
work is necessary before the reviewer may provide concurring approval
of issuance, the engagement team--not the reviewer--is responsible
under PCAOB standards for performing the work. In contrast, the
reviewer fulfills the obligation to perform an EQR by holding
discussions with the engagement team, reviewing documentation, and
determining whether to provide concurring approval of issuance.
The proposed rules also amend the Board's interim quality control
standards by replacing the third sentence of paragraph 18 of QC section
20, ``System of Quality Control for a CPA Firm's Accounting and
Auditing Practice'' with a statement that a firm's quality control
policies and procedures also should address engagement quality reviews
pursuant to PCAOB Auditing Standard No. 7.
III. Discussion
The Commission received nine comment letters on the proposed rules.
Seven letters were received from registered public accounting firms,
and two letters were received from professional organizations.\2\ The
commenters generally agreed with the requirements of Auditing Standard
No. 7 and also expressed agreement with the changes made by the PCAOB
in response to its comment process.\3\
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\2\ See comments of Deloitte & Touche LLP (``Deloitte''), Ernst
& Young LLP (``EY''), Grant Thornton LLP (``Grant''), KPMG LLP
(``KPMG''), McGladrey & Pullen LLP (``McGladrey''), Piercy Bowler
Taylor & Kern (``PBTK''), PricewaterhouseCoopers LLP (``PWC''),
Center for Audit Quality (``CAQ''), and Center for Capital Markets
Competitiveness of the U.S. Chamber of Commerce (``CCMC'').
\3\ One commenter (CCMC) provided comments related to the
PCAOB's standard-setting process in general, including due process
and convergence with international auditing standards. These
comments were similar to comments received by the PCAOB during its
standard-setting process for Auditing Standard No. 7. In response,
the PCAOB stated in its adopting release for Auditing Standard No. 7
that it continuously endeavors to improve its processes, including
the standard-setting process, and is considering comments it
receives. The Commission encourages the Board to continue to
consider comments to improve the Board's standard-setting process.
The Commission will continue to provide oversight as the Board
endeavors to improve all of its processes.
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PCAOB Use and Purpose of Release Text
Many of the comments indicated that there is a lack of clarity
resulting from perceived inconsistencies between Auditing Standard No.
7 and text in the Board's adopting release.\4\ One commenter expressed
a concern whether the release text has the ``same weight'' as the
standard itself.\5\ One commenter expressed a concern that the release
text issued with an adopted standard is not subject to the PCAOB's
comment process.\6\
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\4\ See comments of CAQ, CCMC, Deloitte, EY, Grant, KPMG,
McGladrey, and PWC.
\5\ See comments of PBTK.
\6\ See comments of CCMC.
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The release text summarizes issues that the Board considered
significant in reaching the conclusions set forth in the standard,
including responses to comments and the rationale for accepting certain
approaches and rejecting others. The Commission publishes notice of and
approves the ``Rules of the Board'' as defined in Section 2(a)(13) of
the Act, including the auditing standards adopted by the Board. The
release text accompanying the Board's issuance of an auditing standard
is not part of the ``Rules of the Board'' that are approved by the
Commission; rather, it is a statement made by the PCAOB to provide
insight into the Board's decisionmaking process.
Documentation of the EQR
Commenters generally expressed agreement with the documentation
requirement as set forth in Auditing Standard No. 7.\7\ Many of the
same commenters, however, expressed concerns regarding an example in
the PCAOB's adopting release that describes the documentation
requirement for significant engagement deficiencies identified by the
engagement quality reviewer. The release states that ``the EQR
documentation should contain sufficient information to enable an
experienced auditor, having no previous connection with the engagement,
to understand, e.g., the significant deficiency identified, how the
reviewer communicated the deficiency to the engagement team, why such
matter was important, and how the reviewer evaluated the engagement
team's response.''
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\7\ See comments of CAQ, Deloitte, EY, Grant, KPMG, McGladrey,
and PWC.
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Commenters were concerned that the example in the release could be
read to be inconsistent with the requirement in the standard and could
result in unintended consequences in terms of performance. The primary
concern was that the engagement quality reviewer may be compelled to
document every interaction with the engagement team, not knowing
whether a matter will ultimately be identified as a significant
engagement deficiency. Commenters viewed this as a documentation
requirement for an EQR that is incremental to the requirements of PCAOB
Auditing Standard No. 3, Audit Documentation. Auditing Standard No. 3
does not require the auditor to document each discussion and
preliminary conclusion.
In addition, one commenter was concerned that the example provided
in the PCAOB's adopting release may disrupt the communication between
the engagement team and the engagement quality reviewer.\8\ The
commenter expressed a view that, if unable to
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determine which matters may be significant, the engagement quality
reviewer would need to document every issue and therefore would not
perform any review procedures until the engagement team completed all
audit work and finalized all of its conclusions.
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\8\ See comments of KPMG.
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The Commission does not believe that there is any inconsistency
between the example in the adopting release and the requirements of
Auditing Standard No. 7. The PCAOB specified in its adopting release
that the example applies ``if a reviewer identified a significant
engagement deficiency to be addressed by the engagement team.'' We
believe that documentation suggested in the example from the adopting
release is appropriate after the engagement quality reviewer has
concluded that he or she has identified a significant engagement
deficiency. However, since several comments were related to this point,
we encourage the PCAOB to provide further implementation guidance on
the documentation requirement.\9\
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\9\ We note clarifications have been provided in other contexts.
For example, see PCAOB Staff Q&A at http://www.pcaobus.org/Standards/Staff_Questions_and_Answers/2009/09-02_FASB_Codification.pdf.
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Standard of Care
Commenters generally expressed agreement with the revisions that
the PCAOB made to the description of due professional care in the
standard in response to comments, including establishing the expected
standard of performance by referring to AU Section 230, Due
Professional Care in the Performance of Work (``AU 230'').\10\ However,
many of the same commenters expressed concern with language in the
adopting release about the concept of due professional care.
Particularly, many commenters pointed to language in the adopting
release that a qualified reviewer who has performed the required review
with due professional care ``will, necessarily, have discovered any
significant engagement deficiencies that could reasonably have been
discovered under the circumstances.'' Certain commenters expressed a
view that the language in the release could be read as requiring
absolute assurance or a ``flawless'' review.\11\
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\10\ See comments of CAQ, Deloitte, EY, Grant, KPMG, and PWC.
\11\ See comments of Deloitte, Grant, and KPMG.
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The Commission believes that the PCAOB adequately responded to
comments in this area during its reproposal process. We do not find any
inconsistency between the PCAOB's adopting release and the requirement
to conduct the EQR with due professional care as described in
paragraphs 12 and 17 of Auditing Standard No. 7. Paragraph 12 of
Auditing Standard No. 7 references AU 230, which is the source of
guidance regarding due professional care in the PCAOB's interim
auditing standards. Moreover, the PCAOB specified in its adopting
release that ``the Board is not redefining due professional care in the
context of the EQR standard.''
Definition of Partner
One commenter suggested that the PCAOB revise the description of
the qualifications of the engagement quality reviewer in Auditing
Standard No. 7 to specify that equity ownership in the firm is not a
requirement for a reviewer.\12\ The commenter believed Board language
in its adopting release on the distinction between ``partner'' and
``non-partner'' could be considered ``muddying and potentially biasing
(and perhaps unintended) restrictive language.''
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\12\ See comments of PBTK.
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The discussion of requiring a partner or an individual in an
equivalent position to perform the EQR is consistent with the
Commission's independence rules.\13\ We do not believe that equity
ownership is necessarily inherent in the analysis; rather the analysis
of whether an individual is a partner or in an equivalent position is
based on the organization of the individual firm and other related
facts and circumstances.
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\13\ 17 CFR 210.2-01(f)(7)(ii).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed PCAOB Rules on Auditing Standard No. 7, Engagement Quality
Review, and Conforming Amendment (File No. PCAOB-2009-02) are
consistent with the requirements of the Act and the securities laws and
are necessary or appropriate in the public interest or 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 the proposed PCAOB Rules on
Auditing Standard No. 7, Engagement Quality Review, and Conforming
Amendment (File No. PCAOB-2009-02) be and hereby are approved.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-1028 Filed 1-20-10; 8:45 am]
BILLING CODE 8011-01-P