[Federal Register Volume 81, Number 93 (Friday, May 13, 2016)]
[Notices]
[Pages 29925-29928]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-11292]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77787; File No. PCAOB-2016-01]
Public Company Accounting Oversight Board; Order Granting
Approval of Proposed Rules To Require Disclosure of Certain Audit
Participants on a New PCAOB Form and Related Amendments to Auditing
Standards
May 9, 2016.
I. Introduction
On January 29, 2016, 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 two new rules, a new form, and amendments
to auditing standards to improve transparency regarding the engagement
partner and other accounting firms that participate in issuer audits
(collectively, the ``Proposed Rules'').\3\ The Proposed Rules were
published for comment in the Federal Register on February 16, 2016.\4\
At the time the notice was issued, the Commission extended to May 16,
2016 the date by which the Commission should take action on the
Proposed Rules.\5\ The Commission received four comment letters in
response to the notice.\6\ This order approves the Proposed Rules.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 7217(b).
\2\ 15 U.S.C. 78s(b).
\3\ The Board originally issued a concept release in 2009. See
Concept Release on Requiring the Engagement Partner to Sign the
Audit Report, PCAOB Release No. 2009-005 (July 28, 2009) (``Concept
Release''), available at http://pcaobus.org/Rules/Rulemaking/Docket029/2009-07-28_Release_No_2009-005.pdf. In 2011, the Board
issued proposed rules. See Improving the Transparency of Audits:
Proposed Amendments to PCAOB Auditing Standards and Form 2, PCAOB
Release No. 2011-007 (Oct. 11, 2011) (``Proposal''), available at
https://www.sec.gov/rules/pcaob/2016/34-77082.pdfhttp://pcaobus.org/Rules/Rulemaking/Docket029/PCAOB_Release_2011-007.pdf. Subsequently,
the Board issued a re-proposal in 2013. See Improving the
Transparency of Audits: Proposed Amendments to PCAOB Auditing
Standards to Provide Disclosure in the Auditor's Report of Certain
Participants in the Audit, PCAOB Release No. 2013-009 (Dec. 4, 2013)
(``Reproposal''), available at http://pcaobus.org/Rules/Rulemaking/Docket029/PCAOB%20Release%20No%20%202013-009%20-%20Transparency.pdf.
In 2015, the Board issued a supplemental request for comment, which
ultimately formed the framework for these Proposed Rules. See
Supplemental Request for Comment: Rules to Require Disclosure of
Certain Audit Participants on a New PCAOB Form, PCAOB Release No.
2015-004 (June 30, 2015) (``Supplemental Request''), available at
http://pcaobus.org/Rules/Rulemaking/Docket029/Release_2015_004.pdf.
\4\ See Release No. 34-77082 (Feb. 8, 2016), 81 FR 7927 (Feb.
16, 2016).
\5\ Ibid.
\6\ See letters to the Commission from CFA Institute, dated
February 15, 2016 (``CFA Letter''); Tom Quaadman, Senior Vice
President, Center for Capital Markets Competitiveness, U.S. Chamber
of Commerce, dated March 3, 2016 (``Chamber Letter''); Deloitte &
Touche LLP, dated March 4, 2016 (``Deloitte Letter''); and Michael
R. McMurtry, CPA, dated March 18, 2016 (``McMurtry Letter'').
---------------------------------------------------------------------------
II. Description of the Proposed Rules
On December 15, 2015, the Board adopted two new rules (``Rules 3210
and 3211'') and Form AP to provide investors and other financial
statement users with information about engagement partners and
accounting firms that participate in audits of issuers.
A. Changes to PCAOB Rules and Forms
Under the Proposed Rules, for each audit report it issues for an
issuer, a registered public accounting firm must file with the Board a
report on Form AP that includes the following:
The name of the engagement partner and Partner ID; \7\
---------------------------------------------------------------------------
\7\ The firm is required to assign a 10-digit Partner ID number,
beginning with the Firm ID (a unique five-digit number based on the
number assigned to the firm by the PCAOB at the time of
registration) followed by a unique series of five digits assigned by
the firm.
---------------------------------------------------------------------------
[[Page 29926]]
For other accounting firms \8\ participating in the audit
for which the responsibility for the audit is not divided:
---------------------------------------------------------------------------
\8\ The Board defines ``other accounting firm'' as (i) a
registered public accounting firm other than the firm filing Form
AP; or (ii) any other person or entity that opines on the compliance
of any entity's financial statements with an applicable financial
reporting framework.
---------------------------------------------------------------------------
[cir] 5% or greater participation: The name, city and state (or, if
outside the United States, the city and country) of the headquarters'
office, and, when applicable, the Firm ID, and the percentage of total
audit hours attributable to each other accounting firm whose
participation in the audit was at least 5% of total audit hours; \9\
---------------------------------------------------------------------------
\9\ Actual hours should be used if available. If actual audit
hours are unavailable, the auditor may use a reasonable method to
estimate the components of this calculation.
---------------------------------------------------------------------------
[cir] Less than 5% participation: The number of other accounting
firms that participated in the audit whose individual participation was
less than 5% of total audit hours, and the aggregate percentage of
total audit hours of such firms; and
For other accounting firms participating in the audit for
which the responsibility for the audit is divided:
[cir] The name, and when applicable, the Firm ID; city and state
(or if outside the United States, the city and country) of the office
of the other accounting firm that issued the other auditor's report;
and the magnitude of the portion of the financial statements audited by
the other accounting firm.
Form AP has a basic filing deadline of 35 days after the date the
auditor's report is first included in a document filed with the
Commission, with a shorter deadline of 10 days after the auditor's
report is first included in a registration statement under the
Securities Act of 1933 (the ``Securities Act'') filed with the
Commission, such as for an initial public offering. Firms will file
Form AP through the PCAOB's existing web-based Registration, Annual,
and Special Reporting system.
B. Changes to PCAOB Standards
In addition to disclosing the required information on Form AP, the
Proposed Rules allow an audit firm to voluntarily provide information
about the engagement partner, other accounting firms, or both in the
auditor's report. As a result, the Proposed Rules include amendments to
PCAOB auditing standards AS 3101 (currently AU sec. 508), Reports on
Audited Financial Statements, and AS 1205 (currently AU sec. 543), Part
of the Audit Performed by Other Independent Auditors \10\ to allow for
voluntary reporting.
---------------------------------------------------------------------------
\10\ On March 31, 2015, the PCAOB adopted the reorganization of
its auditing standards using a topical structure and a single,
integrated numbering system that was approved by the Commission on
September 17, 2015. The reorganized amendments will be effective as
of December 31, 2016, and nothing precludes auditors and others from
using and referencing the reorganized standards before the effective
date.
---------------------------------------------------------------------------
C. Applicability and Effective Date
The PCAOB has proposed application of the Proposed Rules to audits
of all issuers, including audits of emerging growth companies
(``EGCs''),\11\ as discussed in Section IV. below. The Proposed Rules
would not apply to audits of brokers and dealers under Exchange Act
Rule 17a-5.\12\ The Proposed Rules would be effective as follows:
---------------------------------------------------------------------------
\11\ The term ``emerging growth company'' is defined in Section
3(a)(80) of the Exchange Act. 15 U.S.C. 78c(a)(80).
\12\ If the broker or dealer is an issuer, the Proposed Rules
would apply.
---------------------------------------------------------------------------
(a) Disclosure of the engagement partner: auditors' reports issued
on or after January 31, 2017; and
(b) Disclosure of other accounting firms: auditors' reports issued
on or after June 30, 2017.
III. Comment Letters
As noted above, the Commission received four comment letters
concerning the Proposed Rules. Two commenters expressed support for the
Proposed Rules.\13\ One commenter provided comments that were generally
consistent with those provided by others throughout the PCAOB's
rulemaking process and addressed by the PCAOB.\14\
---------------------------------------------------------------------------
\13\ See CFA Letter and Deloitte Letter.
\14\ See McMurtry Letter. The Commission believes that the Board
has reasonably responded to these comments in its rulemaking
process.
---------------------------------------------------------------------------
In addition, one commenter raised concerns that it had previously
raised in comment letters to the Board that: (a) The Proposed Rules
were not liability neutral; and b) the substance of the economic
analysis was insufficient to justify applying the Proposed Rules to
audits of EGCs.\15\ In addition, this commenter raised two additional
issues, including that the 10-digit partner identifying number was not
subject to a notice and comment period and a suggestion that the
Proposed Rules should sunset after five years, unless a post
implementation review finds that the Proposed Rules promote investor
protection, capital formation and competition. The commenter stated
that it expressed similar concerns in previous comment letters to the
PCAOB, and in its opinion, those concerns have not been resolved by the
PCAOB. We discuss each of these concerns below.
---------------------------------------------------------------------------
\15\ See Chamber Letter.
---------------------------------------------------------------------------
(a) Liability Neutrality
In the release accompanying the Proposed Rules (``Final Rule
Release''), the Board noted that this commenter asserted that the Board
should not pursue disclosure requirements for the engagement partner
and other participants in the audit unless it can be done in a
``liability neutral'' way.\16\ The Board explained that its purpose
with the Proposed Rules is not to expose auditors to additional
liability, and consistent with that purpose, it has endeavored to
mitigate any additional liability consequences that may stem from the
Proposed Rules. However, the Board also stated in the Final Rule
Release that it does not agree with the premise that it should not seek
to achieve the anticipated benefits of a new rule--here, increased
transparency and accountability for key participants in the audit--
unless it can be certain that its actions will not affect liability in
any way. On the whole, the Board believes it has appropriately
addressed concerns regarding liability consequences of its proposal in
a manner compatible with the objectives of this rulemaking, and in view
of the rulemaking's anticipated benefits.
---------------------------------------------------------------------------
\16\ See comment letter of U.S. Chamber of Commerce's Center for
Capital Markets Competitiveness, August 31, 2015 available at http://pcaobus.org/Rules/Rulemaking/Docket029/031d_Chamber.pdf. This
letter was also referenced in the Chamber Letter.
---------------------------------------------------------------------------
Since the Concept Release, the Board has sought and considered
commenters' views on the liability effect of its proposed amendments,
has taken steps with the intent not to increase auditors' liability
risk, and has tried to mitigate this possibility to the extent it would
be consistent with its policy objectives. In the Reproposal, the Board
included a detailed discussion on potential liability considerations of
its proposed amendments, including liability under Section 11 of the
Securities Act of 1933 (``Securities Act'') and Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder. The Board has also indicated
that it takes seriously commenters' concerns about the potential
effects on auditor liability, has engaged in its own review of the
relevant statutory provisions and case law and has kept the Commission
staff advised of its thoughts on these issues, as commenters suggested.
The Board has specifically tailored the Proposed Rules to address,
in part,
[[Page 29927]]
potential liability considerations raised by commenters. In the
Supplemental Request, the Board acknowledged that some commenters on
the Reproposal expressed concern that identifying the engagement
partner and other participants in the audit in the auditor's report
could create both legal and practical issues under the federal
securities laws by increasing the named parties' potential liability
and by requiring their consent if the auditors' reports naming them
were included in, or incorporated by reference into, registration
statements under the Securities Act. The Board also acknowledged that
some commenters expressed concerns about the possible litigation risk
under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder of
the engagement partner's name appearing in the auditor's report. The
Board further noted that many commenters urged the Board to proceed
with the new disclosure requirements, if it determined to do so, by
mandating disclosure on a newly created PCAOB form (or consider other
alternative locations) as a means of responding to liability concerns.
In response to these concerns, the Supplemental Request proposed
disclosure on new Form AP, an alternative location outside the
auditor's report, and specifically sought comment on whether disclosure
on Form AP would mitigate commenters' concerns about liability-related
consequences.
In the Final Rule Release, the Board further acknowledged
commenters' concerns that public identification of key audit
participants, particularly in the auditor's report, could impact the
potential liability or litigation risks of those identified. In
particular, the Board noted that it sought comment throughout the
rulemaking process on various means of disclosure--from an engagement
partner's signature on the auditor's report, to disclosure in the
auditor's report, to disclosure on Form AP--in part to respond to those
concerns. The Board stated that it believes the final rules accomplish
its disclosure goals while appropriately addressing concerns raised by
commenters about liability. The Board also observed that disclosure on
Form AP should not raise potential liability concerns under Section 11
of the Securities Act or trigger the consent requirements of Section 7
of the Act because the engagement partner and other accounting firms
would not be named in a registration statement or in any document
incorporated by reference into one.\17\ While the Board recognized that
commenters expressed mixed views on the potential for liability under
Exchange Act Section 10(b) and Rule 10b-5 and the ultimate resolution
of Section 10(b) liability is outside its control, the Board stated
that it does not believe any such risks warrant not proceeding with the
Form AP approach.
---------------------------------------------------------------------------
\17\ This assumes the auditor does not voluntarily choose to do
so by including relevant disclosures in the auditor's report.
---------------------------------------------------------------------------
The Commission believes that the Board has provided sufficient
notice of potential liability consequences of the Proposed Rules, has
provided sufficient opportunity for public comment on these issues, and
has reasonably responded to such concerns. Specifically, the Commission
believes the Board has appropriately considered concerns related to
liability neutrality as part of the Final Rule Release and taken
reasonable steps to address the comments raised with respect to
liability considerations in the Proposed Rules.
(b) Economic Analysis
The Chamber Letter also suggested that the Board's economic
analysis was insufficient to justify applying the Proposed Rules to
audits of EGCs. This commenter, however, did not indicate why the
economic analysis was insufficient, other than to say that the analysis
and the application of the Proposed Rules to EGCs are ``contrary to the
intent of Congress [in passing the Jumpstart Our Business Startups
Act].'' The Board presented, and sought comment on, an economic
analysis in the Reproposal. Further, in response to comments on the
economic analysis provided in connection with the Reproposal, the Board
revised its analysis, and sought comment on, an economic analysis as
presented in the Supplemental Request. The economic analysis in the
Supplemental Request set forth: (1) A description of the need for the
standard-setting and how the Proposed Rules address that need; (2) the
baseline to consider the economic impacts of the Proposed Rules; (3)
the economic impacts of the Proposed Rules including benefits, costs,
effects on different categories of audit firms and smaller companies,
and responses to comments received on the economic analysis included
with the Reproposal; and (4) economic considerations pertaining to
audits of EGCs, including efficiency, competition and capital
formation. In its Final Rule Release, the Board further discussed the
economic considerations of the Proposed Rules and included a separate
discussion within the economic analysis devoted to potential liability
consequences.
The Commission notes that the Board provided a qualitative analysis
that took into account the views of commenters. As the Board explained,
there was limited research and data available regarding economic costs
and benefits of the Proposed Rules for U.S. companies, making reliable
quantification difficult. As the Board further explained, as part of
its rulemaking process through the issuance of the Proposed Rules, the
Board requested input from commenters. While commenters provided views
on issues pertinent to economic considerations, including potential
benefits and costs, they did not provide empirical data. The Commission
believes that the Board's economic analysis reasonably addresses the
comments raised and, as further discussed below, is sufficient to make
a determination to apply the Proposed Rules to the audits of EGCs.
(c) 10-Digit Partner Identifying Number
The Chamber Letter also noted that the Board added the 10-digit
partner identifying number as part of the Final Rule Release without
subjecting it to notice and comment. The Board added the 10-digit
partner identifying number to the Proposed Rules in response to
suggestions made by two commenters on the Supplemental Request.\18\
These commenters suggested that a unique partner identifier would help
unambiguously identify partners and provide clear identification of
auditors with the same or similar names. The Commission's own notice
and comment period on the Proposed Rules provided an opportunity for
commenters to address concerns they may have had with the partner
identifying number. No commenter identified any substantive concerns
with the application of the identifying number. The Commission believes
that the feedback received by the Board on the Supplemental Request and
the opportunity for public comment on the Commission's notice of the
Proposed Rules provide sufficient basis for the Board to include the
10-digit partner identifying number in the Proposed Rules.
---------------------------------------------------------------------------
\18\ See letters from the Auditing Standards Committee of the
Auditing Section of the American Accounting Association, dated
August 30, 2015, available at http://pcaobus.org/Rules/Rulemaking/Docket029/024d_AAA.pdf and Maureen McNichols, dated August 31, 2015,
available at http://pcaobus.org/Rules/Rulemaking/Docket029/037d_McNichols.pdf.
---------------------------------------------------------------------------
(d) Sunset Provision
Finally, the Chamber Letter also suggested that the Proposed Rules
[[Page 29928]]
should sunset after five years, unless a post implementation review
finds that the Proposed Rules promote investor protection, capital
formation and competition. The Board stated in the Final Rule Release
that it has considered feedback received on the concept release issued
by the Commission on Possible Revisions to Audit Committee Disclosures
(``SEC Concept Release'') \19\ in developing the Proposed Rules. It
also stated that it will continue to monitor the provisions included in
the Proposed Rules to determine if revisions should be made in the
future. In addition, the Board has a process in place to perform post-
implementation reviews for its standards and rules.\20\ Therefore, the
Commission does not believe a specific sunset provision is necessary in
the Proposed Rules.
---------------------------------------------------------------------------
\19\ See Possible Revisions to Audit Committee Disclosures,
Release No. 33-9862 (July 1, 2015), available at: http://www.sec.gov/rules/concept/2015/33-9862.pdf.
\20\ See PCAOB Requests Comment on Engagement Quality Review
Standard Under New Post-Implementation Review Program, PCAOB News
Release (Apr. 6, 2016), available at http://pcaobus.org/News/Releases/Pages/2016-request-for-comment-AS7-center-post-implementation-review.aspx.
---------------------------------------------------------------------------
IV. The PCAOB's EGC Request
Section 103(a)(3)(C) of the Sarbanes-Oxley Act 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 (auditor discussion and analysis)'' shall not
apply to an audit of an EGC. The Board's Proposed Rules do not fall
into this category of rules.\21\ Section 103(a)(3)(C) further provides
that ``[a]ny additional rules'' adopted by the PCAOB after April 5,
2012 do not apply to 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 of
additional rules and thus the Commission must make a determination
under the statute about the applicability of the Proposed Rules to
EGCs. Having considered those statutory factors, and as explained
further herein, the Commission finds that applying the Proposed Rules
to audits of EGCs is necessary or appropriate in the public interest.
---------------------------------------------------------------------------
\21\ 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 additional factual information about the engagement
partner and certain audit participants to 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.
---------------------------------------------------------------------------
In proposing application of the Proposed Rules to audits of all
issuers, including EGCs, the PCAOB requested that the Commission make
the determination required by Section 103(a)(3)(C). To assist the
Commission in making its determination, the PCAOB prepared and
submitted to the Commission its own EGC analysis. The PCAOB's EGC
analysis includes discussions of characteristics of self-identified
EGCs and economic considerations pertaining to audits of EGCs,
including efficiency, competition, and capital formation.
In its analysis, the Board states, with support from commenters,
that requiring the same disclosures for audits of EGCs as for all
issuers would provide the same general benefits to investors in EGCs as
would be applicable to investors in non-EGCs. On the cost side, the
Board does not believe that compliance costs for auditors will be
significant. Rather, based on the overall characteristics of EGCs, the
Board believes it is unlikely that the cost of collecting data to
comply with the Proposed Rules will be disproportionately high for EGCs
as a group. Further, the Board's analysis notes that commenters
generally indicated they were not aware of any significant costs that
would be specific to audits of EGCs when compared to the costs of non-
EGC audits.
The PCAOB's EGC analysis was included in the Commission's public
notice soliciting comment on the Proposed Rules. Based on the analysis
submitted, we believe the information in the record is sufficient for
the Commission to make the requested EGC determination in relation to
the Proposed Rules. The Commission also takes note, in particular, of
the PCAOB's approach to the Proposed Rules, which are not intended to
substantively change auditor performance requirements; should reduce
investors' search costs since the information will be provided in one
place in a searchable database; and have been developed in a way to
mitigate potential increases in auditor liability. In addition, the
auditor's requirements under the new standard are focused on
communicating the characteristics of the auditor, of which the auditor
is already aware or can readily obtain.
V. Conclusion
The Commission has carefully reviewed and considered the Proposed
Rules and the information submitted therewith by the PCAOB, including
the PCAOB's EGC analysis, 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 EGC audits 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-2016-01) be and hereby are approved.
By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2016-11292 Filed 5-12-16; 8:45 am]
BILLING CODE 8011-01-P