[Federal Register Volume 82, Number 207 (Friday, October 27, 2017)]
[Notices]
[Pages 49886-49899]
[FR Doc No: 2017-23379]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81916; File No. PCAOB-2017-01]

Public Company Accounting Oversight Board; Order Granting
Approval of Proposed Rules on the Auditor's Report on an Audit of
Financial Statements When the Auditor Expresses an Unqualified Opinion,
and Departures From Unqualified Opinions and Other Reporting
Circumstances, and Related Amendments to Auditing Standards

October 23, 2017.

I. Introduction

    On July 19, 2017, 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 AS 3101, The Auditor's Report on an Audit
of Financial Statements When the Auditor Expresses an Unqualified
Opinion and related amendments to other auditing standards
(collectively, the ``Proposed Rules'').\3\ The Proposed Rules were
published for comment in the Federal Register on July 28, 2017.\4\ At
the time the notice was issued, the Commission extended to October 26,
2017 the date by which the Commission should take action on the
Proposed Rules.\5\ The Commission received approximately 50 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 Board originally issued a concept release on these
matters in 2011. See Concept Release on Possible Revisions to PCAOB
Standards Related to Reports on Audited Financial Statements and
Related Amendments to PCAOB Standards, PCAOB Release No. 2011-003
(June 21, 2011) (``PCAOB Concept Release''), available at https://pcaobus.org/Rulemaking/Docket034/Concept_Release.pdf. In 2013, the
Board issued a proposed rule. See Proposed Auditing Standards--The
Auditor's Report on an Audit of Financial Statements When the
Auditor Expresses an Unqualified Opinion; The Auditor's
Responsibilities Regarding Other Information in Certain Documents
Containing Audited Financial Statements and the Related Auditor's
Report; and Related Amendments to PCAOB Standards, PCAOB Release No.
2013-005 (August 13, 2013) (``PCAOB Proposal''), available at
https://pcaobus.org/Rulemaking/Docket034/Release_2013-005_ARM.pdf.
The Board issued a re-proposal in 2016. See Proposed Auditing
Standard--The Auditor's Report on an Audit of Financial Statements
When the Auditor Expresses an Unqualified Opinion and Related
Amendments to PCAOB Standards, PCAOB Release No. 2016-003 (May 11,
2016) (``PCAOB Re-proposal''), available at https://pcaobus.org/Rulemaking/Docket034/Release-2016-003-ARM.pdf.
    \4\ See Release No. 34-81187 (July 21, 2017), 82 FR 35396 (July
28, 2017) available at https://www.sec.gov/rules/pcaob/2017/34-81187.pdf.
    \5\ See id.
    \6\ Copies of the comment letters received on the Commission
order noticing the Proposed Rules are available on the Commission's
Web site at https://www.sec.gov/comments/pcaob-2017-01/pcaob201701.htm.
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II. Description of the Proposed Rules

    On June 1, 2017, the Board adopted AS 3101, The Auditor's Report on
an Audit of Financial Statements When the Auditor Expresses an
Unqualified Opinion, which replaces portions of AS 3101, Reports on
Audited Financial Statements, and re-designates the remaining portions
of AS 3101 as AS 3105, Departures from Unqualified Opinions and Other
Reporting Circumstances. The Proposed Rules will require that the
auditor provide new information about the audit that is intended to
make the auditor's report

more informative and relevant to investors and other financial
statement users, as discussed further below.

A. Changes to PCAOB Standards

    The Proposed Rules retain the pass/fail opinion of the existing
auditor's report but make significant changes to the existing auditor's
report, including the following:
     Critical audit matters (``CAMs''). The Proposed Rules
require the auditor to communicate in the auditor's report any CAMs
arising from the current period's audit or state that the auditor
determined that there are no CAMs.
     A CAM is defined as any matter arising from the audit of
the financial statements that was communicated or required to be
communicated to the audit committee and that:
    (1) Relates to accounts or disclosures that are material to the
financial statements; and
    (2) involved especially challenging, subjective, or complex auditor
judgment.
     In determining whether a matter involved especially
challenging, subjective, or complex auditor judgment, the auditor
should take into account, alone or in combination, the following
factors, as well as other factors specific to the audit:
     The auditor's assessment of the risks of material
misstatement, including significant risks;
     The degree of auditor judgment related to areas in the
financial statements that involved the application of significant
judgment or estimation by management, including estimates with
significant measurement uncertainty;
     The nature and timing of significant unusual transactions
and the extent of audit effort and judgment related to these
transactions;
     The degree of auditor subjectivity in applying audit
procedures to address the matter or in evaluating the results of those
procedures;
     The nature and extent of audit effort required to address
the matter, including the extent of specialized skill or knowledge
needed or the nature of consultations outside the engagement team
regarding the matter; and
     The nature of audit evidence obtained regarding the
matter.
     The communication of each CAM within the auditor's report
includes:
     Identifying the CAM;
     Describing the principal considerations that led the
auditor to determine that the matter is a CAM;
     Describing how the CAM was addressed in the audit; and
     Referring to the relevant financial statement accounts or
disclosures.
     For each matter arising from the audit of the financial
statements that (a) was communicated or required to be communicated to
the audit committee, and (b) relates to accounts or disclosures that
are material to the financial statements, the auditor must document
whether or not the matter was determined to be a CAM (i.e., involved
especially challenging, subjective, or complex auditor judgment) and
the basis for such determination.
     Additional Changes to the Auditor's Report. The Proposed
Rules also include a number of other changes to the auditor's report
that are primarily intended to clarify the auditor's role and
responsibilities related to the audit of the financial statements,
provide additional information about the auditor, and make the
auditor's report easier to read. These include:
     Auditor tenure--a statement disclosing the year in which
the auditor began serving consecutively as the company's auditor;
     Independence--a statement regarding the requirement for
the auditor to be independent;
     Addressee--the auditor's report will be addressed to the
company's shareholders and board of directors or equivalents
(additional addressees are also permitted);
     Amendments to basic elements--certain standardized
language in the auditor's report has been changed, including adding the
phrase ``whether due to error or fraud,'' when describing the auditor's
responsibility under PCAOB standards to obtain reasonable assurance
about whether the financial statements are free of material
misstatement; and
     Standardized form of the auditor's report--the opinion
will appear in the first section of the auditor's report, and section
titles have been added to guide the reader.
    The amendments to other PCAOB standards include:
     AS 3105, Departures from Unqualified Opinions and Other
Reporting Circumstances to (1) require the communication of CAMs in
certain circumstances; (2) revise certain terminology to align with AS
3101 of the Proposed Rules; and (3) amend the illustrative reports for
the basic elements of AS 3101 of the Proposed Rules and the required
order of certain sections of the auditor's report;
     AS 1220, Engagement Quality Review to require the
engagement quality reviewer to evaluate the engagement team's
determination, communication, and documentation of CAMs;
     AS 1301, Communications with Audit Committees to require
the auditor to provide to and discuss with the audit committee a draft
of the auditor's report;
     AS 2201, An Audit of Internal Control Over Financial
Reporting That Is Integrated with An Audit of Financial Statements to
conform the example auditor's report with the example auditor's report
on the financial statements in AS 3101 of the Proposed Rules;
     AS 2820, Evaluating Consistency of Financial Statements to
include the existing reporting requirements and illustrative
explanatory language related to a change in accounting principle or a
restatement that is currently in AS 3105; and
     AS 4105, Reviews of Interim Financial Information to
include the basic elements of AS 3101 of the Proposed Rules, where
applicable.

B. Applicability

Critical Audit Matters
    Under the Proposed Rules, communication of CAMs in the auditor's
report is not required for audits of emerging growth companies
(``EGCs''); \7\ brokers and dealers reporting under Exchange Act Rule
17a-5; \8\ investment companies other than business development
companies (``BDCs''); and employee stock purchase, savings, and similar
plans.
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    \7\ 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, SEC Rel. 33-10332 (Mar. 31, 2017), 82 FR
17545 (Apr. 12, 2017), available at https://www.sec.gov/rules/final/2017/33-10332.pdf.
    \8\ If the broker or dealer is an issuer, the requirement to
communicate CAMs would apply.
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Additional Changes to the Auditor's Report
    The additional changes to the auditor's report contained in the
Proposed Rules apply for all audits performed under PCAOB standards,
including audits of EGCs, as discussed in Section IV below.

C. Effective Date

    The Proposed Rules would be effective as follows:
    a. All paragraphs of the Proposed Rules, except the paragraphs
related to CAMs in AS 3101 of the Proposed Rules (paragraphs .11
through .17) and amendments related to those paragraphs: All audits of
fiscal years ending on or after December 15, 2017; and
    b. All paragraphs related to CAMs in AS 3101 of the Proposed Rules

(paragraphs .11 through .17) and amendments related to those
paragraphs:
     For audits of large accelerated filers: Fiscal years
ending on or after June 30, 2019; and
     For audits of all other companies to which the
requirements apply: Fiscal years ending on or after December 15, 2020.

III. Comment Letters

    The Commission's comment period on the Proposed Rules ended on
August 18, 2017. The Commission received approximately 50 comment
letters from investors and investor associations, accounting firms,
issuers and issuer organizations, and others.\9\ Most commenters
generally supported the Board's objective to improve the auditor's
report to make it more informative and relevant to financial statement
users. Commenters' views varied on the nature and extent of specific
changes, particularly those related to CAMs. Investors and investor
associations were supportive of the Proposed Rules, including
communication of CAMs, and encouraged adoption without delay. Larger
accounting firms were generally supportive but raised certain practical
concerns and asked for guidance during the implementation phase, a
safe-harbor related to CAMs, or post-implementation reviews. A number
of other commenters raised questions and concerns about the Proposed
Rules and their application and recommended the Commission not approve
the Proposed Rules in their current form. These concerns generally
relate to: (1) Usefulness of the information in CAMs; (2) the auditor's
role as the potential source of original information about the company
in CAMs; (3) the potential impact of CAMs on the role of the audit
committee and the communication among the audit committee, management,
and the auditor; (4) the potential liability impact of CAMs; (5) the
economic analysis of CAMs; (6) practicability matters related to CAMs;
(7) disclosure of auditor tenure in the auditor's report; (8) the
effective dates of the Proposed Rules; and (9) implementation efforts.
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    \9\ See supra footnote 6.
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    As background, for several years, the Board has been considering
changes to the auditor's report, throughout which the Board has, in
various settings and formats, considered commenters' concerns on such
changes. In June 2011, the Board issued the PCAOB Concept Release to
solicit comment on a number of potential changes to the auditor's
report. The Board also held a public roundtable in September 2011 to
obtain additional insight on the alternatives presented in the PCAOB
Concept Release.
    After considering the results of its outreach and comments on the
PCAOB Concept Release, in August 2013, the Board issued the PCAOB
Proposal that included, among other things, new requirements for
auditors to communicate CAMs, as well as additional changes to the
auditor's report. In April 2014, the Board held a public meeting to
obtain further input on the PCAOB Proposal from a diverse group of
investors and other financial statement users, preparers, audit
committee members, auditors, and others.
    In May 2016, the Board issued the PCAOB Re-proposal that modified
the PCAOB Proposal in several respects in response to feedback
received. In particular, the PCAOB Re-proposal modified the source,
definition, and communication requirements for CAMs.
    Throughout the rulemaking process, the Board received comments from
investors and investor associations that consistently stressed the
importance and value to them of additional communication from the
auditor. In particular, commenters indicated that tailored, audit-
specific information from the auditor's point of view would reduce
information asymmetries and make the auditor's report more relevant and
useful, a view which also was shared by at least one of the larger
accounting firms. Based on these comments and its own analysis, the
Board concluded that requiring auditors to provide more information
about the audit through the communication of CAMs will benefit
investors and other market participants.
    As further explained below, the Board also made changes in the
Proposed Rules to address the significant comments received on the
PCAOB Proposal and the PCAOB Re-proposal. In particular, the Board
sought to balance the potential benefits of CAM communications with the
concerns expressed by some commenters about potential consequences,
including: The auditor's role as the potential source of original
information about the company; the potential impact of CAMs on the role
of the audit committee and communication among the audit committee,
management, and the auditor; and the potential liability impact of
CAMs. To balance among these competing factors, the Board, among other
things, limited the source of CAMs to matters communicated or required
to be communicated to the audit committee, added a materiality
component to the definition of a CAM, and narrowed the definition of a
CAM to only those matters that involved especially challenging,
subjective, or complex auditor judgment. In its release accompanying
the Proposed Rules, the Board acknowledged that a variety of claims can
be raised related to the statements in the auditor's report and that
litigation is inherently uncertain. The Board also stated that it will
monitor the Proposed Rules after implementation for any unintended
consequences.
    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.\10\ In making
this determination, we have considered the comments received by the
Commission 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 received
by the Commission, which were generally consistent with the comments
the PCAOB received during its deliberations.
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    \10\ 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. Usefulness of the Information in CAMs

    A number of commenters provided feedback related to the potential
usefulness of CAMs. Comments from investors and investor associations
consistently indicated they would find CAM communications to be
beneficial in understanding the audit.\11\ One commenter stated that
CAMs will provide tailored, audit-specific information directly from
the auditor's point of view and should provide insights that will add
to the mix of information that could be used in investors' capital
allocation and voting

decisions.\12\ This commenter also stated a belief that CAMs will
benefit investors, particularly institutional investors, in engaging
with management and the audit committee and in voting on the
ratification of the auditor.\13\ Another commenter noted that CAMs will
reduce the information asymmetry between investors and auditors, which
in turn should reduce the information asymmetry between investors and
management about the company's financial performance.\14\ One commenter
noted that, from its perspective as a long-term investor, the
communication of CAMs would provide an augmented basis from which
investors can more fully understand challenging, subjective, or complex
auditor judgment.\15\ Another commenter stated that, through CAMs,
investors would have more information from which to make investment
decisions.\16\ The same commenter noted that, as it indicated in
comment letters to the PCAOB, the inclusion of CAMs would enhance
transparency, relevance, reliability, and credibility in audits.\17\
Another commenter, noting that the Board has balanced the differing
perspectives of various stakeholders, indicated that investors desire
robust information within the auditor's report beyond the requirements
in the Proposed Rules.\18\
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    \11\ See e.g., Letter from Council of Institutional Investors,
August 8, 2017 (``CII Letter''); Letter from Hermes Investment
Management, August 18, 2017 (``Hermes Letter''), Letter from CFA
Institute, August 24, 2017 (``CFA Institute Letter'').
    \12\ See CII Letter.
    \13\ See id.
    \14\ See Letter from J. Robert Brown Jr., et. al., August 21,
2017 (``J. Robert Brown Jr. Letter'')
    \15\ See Letter from California State Teachers' Retirement
System, August 23, 2017.
    \16\ See Letter from California Public Employees' Retirement
System, August 18, 2017 (``CalPERS Letter'').
    \17\ See id.
    \18\ See CFA Institute Letter.
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    In commenting on the Proposed Rules, one large accounting firm
acknowledged that many financial statement users have expressed
dissatisfaction with the current reporting by auditors.\19\ This same
commenter also stated that the enhanced transparency of the audit
process benefits all stakeholders and promotes the important role of
independent auditors in serving the public interest.\20\ Another large
accounting firm generally agreed with the views of investors and
investor associations that communication of CAMs will enhance the value
and relevance of audits to the capital markets.\21\
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    \19\ See Letter from Ernst & Young LLP, August 18, 2017 (``EY
Letter'').
    \20\ See id.
    \21\ See Letter from Deloitte & Touche LLP, August 18, 2017
(``Deloitte Letter'').
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    We agree with these commenters and the Board that communicating
CAMs to investors will reduce information asymmetries. In particular,
we are persuaded that the communication of CAMs, as structured in the
Proposed Rules, will add to the total mix of information available to
investors by eliciting more information about the audit itself--
information that is uniquely within the perspective of the auditor and,
thus, not otherwise available to investors and other financial
statement users. In so doing, we believe the communication of CAMs
could enhance the value and relevance of audits to the capital markets
and be useful to investors and other financial statement users in
assessing a company's financial reporting and making capital allocation
and voting decisions. We are, therefore, of the view that the
requirement to communicate CAMs, as structured in the Proposed Rules,
is consistent with the Sarbanes-Oxley Act and the securities laws and
is necessary or appropriate in the public interest or for the
protection of investors.
    We recognize that some commenters questioned the usefulness of
CAMs, including asserting that the communications will not provide
meaningful information, likely will duplicate management disclosures,
or will use standardized language (some commenters referred to this as
``boilerplate'').\22\ A few commenters expressed concern that CAMs
could also provide information that conflicts with management
disclosures, which some argued would be confusing to investors.\23\
Some commenters indicated CAMs will force issuers to make reactive
disclosures because they will not want auditors to be the source of
information about the company that would not otherwise have been
disclosed (which commenters referred to as ``original information''),
which they argued could increase costs and reduce disclosure
effectiveness.\24\ Some commenters expressed concern that auditors may
communicate an overabundance of CAMs to reduce litigation risk, as CAMs
may be seen as a shield from litigation.\25\
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    \22\ See e.g., Letter from Aetna Inc. et al., August 18, 2017
(``Aetna Letter''); Letter from Quest Diagnostics Inc., August 15,
2017 (``Quest Letter''); Letter from Northrop Grumman Corporation,
August 18, 2017 (``Northrop Grumman Letter''); Letter from New York
City Bar, August 18, 2017 (``New York City Bar Letter''); Letter
from Davis Polk & Wardell LLP, August 18, 2017 (``Davis Polk
Letter''); Letter from Robert N. Waxman, August 19, 2017 (``Robert
Waxman Letter'').
    \23\ See e.g., Aetna Letter; Letter from Society for Corporate
Governance, August 18, 2017 (``Society for Corporate Governance
Letter'').
    \24\ See e.g., Society for Corporate Governance Letter; Letter
from Sullivan & Cromwell LLP, August 18, 2017 (``Sullivan & Cromwell
Letter''). We discuss commenters' concerns regarding the auditor's
role as the potential source of original information in section
III.B below.
    \25\ See e.g., Davis Polk Letter; Quest Letter.
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    Similar concerns were raised in the PCAOB's rulemaking process. In
response to these concerns, the Board stated in the release
accompanying the Proposed Rules that the requirements in the Proposed
Rules ``aim to provide investors with the auditor's unique perspective
on the areas of the audit that involved the auditor's especially
challenging, subjective, or complex judgments. Limiting critical audit
matters to these areas should mitigate the extent to which expanded
auditor reporting could become standardized. Focusing on auditor
judgment should limit the extent to which expanded auditor reporting
could become duplicative of management's reporting.''
    We acknowledge the risks identified by commenters that CAMs will
not provide meaningful incremental information, either because the
information is duplicative of what is already provided by the issuer,
or because auditors will communicate numerous or boilerplate CAMs. With
respect to the duplication risk, the requirement for CAM communications
focuses on the auditor's perspective, not the issuer's. Specifically,
as discussed above in Section II.A, ``Changes to PCAOB Standards,'' the
auditor must identify the CAM, describe the principal considerations
that led the auditor to determine that the matter is a CAM, describe
how the CAM was addressed in the audit, and refer to the relevant
financial statement accounts or disclosures. With the exception of the
reference to the relevant portions of the financial statements, those
required communications are not expected to overlap with the
Commission's required issuer disclosures, which generally do not focus
on the audit. Also, the required reference to the relevant financial
statement accounts or disclosures provides context for the CAM-related
communications but does not necessarily duplicate those disclosures.
    With respect to the risk that auditors would communicate
unnecessary CAMs or boilerplate CAMs, we acknowledge that our own
experience with the disclosure by companies of risk factors under Item
503(c) of Regulation S-K \26\ illustrates the potential challenges of
disclosure practices. The Commission and SEC staff have issued numerous
releases and other guidance seeking to

induce registrants to focus on clear discussions of the ``most
significant factors,'' rather than numerous boilerplate risk
factors.\27\
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    \26\ 17 CFR 229.503(c).
    \27\ See e.g., Plain English Disclosure, Release No. 33-7497
(Jan. 28, 1998), 63 FR 6370 (Feb. 6, 1998), available at https://www.sec.gov/rules/final/33-7497.txt.
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    We believe that some of these concerns are lessened by the way that
the Board has defined CAMs. Specifically, as it relates to the concern
of auditors reporting an overabundance of CAMs, we note that, under the
Proposed Rules, a matter must meet each element of the definition of a
CAM. In our view, the inclusion of a materiality component in the
definition; narrowing the source of potential CAMs to matters
communicated or required to be communicated to the audit committee;
limiting CAMs to those areas that involved especially challenging,
subjective, or complex auditor judgment; and refining the factors to
take into account in determining whether a matter involved especially
challenging, subjective, or complex auditor judgment should all act to
mitigate the risk of auditors reporting too many CAMs.
    Similarly, we believe that the focus on auditor judgment in the
definition of CAMs, along with the requirement to disclose why a matter
is a CAM and how it was addressed, should mitigate the extent to which
expanded auditor reporting could become standardized. Moreover, we
believe these concerns must be balanced against the additional insights
into the audit that we believe would be gained from the reporting of
CAMs.
    Having considered the public comments, we are persuaded that the
reporting of CAMs, as structured in the Proposed Rules will be
beneficial. The communication of CAMs should not be numerous and
boilerplate and will provide additional information about the audit--
and from the auditor's own unique perspective--that will be useful to
investors and other financial statement users in assessing a company's
financial reporting and making capital allocation and voting decisions.

B. The Auditor's Role as the Potential Source of Original Information
About the Company

    A number of commenters expressed concern with the auditor
potentially disclosing original information, including potentially
immaterial or confidential information.\28\ Some of these commenters
asserted that this runs counter to the U.S. regulatory framework, or
confuses the role of the auditor.\29\ Further, at least one commenter
questioned whether the PCAOB has the regulatory authority to require
such disclosure.\30\ Conversely, as stated in the Board's release
accompanying the Proposed Rules, ``[i]nvestor commenters, including the
auditor's report working group of the Investor Advisory Group, argued
that there should not be any limitation on the auditor providing
original information and that [the PCAOB Re-proposal] went too far in
constraining the auditor from providing original information in
response to concerns expressed by other commenters. . . .''
Furthermore, as discussed above, investors and investor associations
have indicated that there is a benefit in receiving information about
the audit directly from the auditor's point of view.\31\
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    \28\ See e.g., Letter from Center for Capital Markets
Competitiveness, U.S. Chamber of Commerce, August 11, 2017 (``CCMC
Letter''); Quest Letter; Letter from Eli Lilly and Company, August
15, 2017 (``Eli Lilly Letter''); Letter from Regions Financial
Corporation, August 17, 2017 (``Regions Letter''); Sullivan &
Cromwell Letter; Letter from American Tower Corporation, et al.,
August 18, 2017 (``American Tower Letter''); New York City Bar
Letter; Davis Polk Letter; Letter from Financial Executives
International, August 18, 2017 (``FEI Letter''); Robert Waxman
Letter; Letter from Cleary Gottlieb Steen & Hamilton LLP, August 24,
2017 (``Cleary Gottlieb Letter'').
    \29\ See e.g., CCMC Letter; Quest Letter.
    \30\ See e.g., CCMC Letter.
    \31\ See e.g., CII Letter; Letter from The Capital Group
Companies Inc., August 15, 2017 (``Capital Group Letter'').
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    Similar concerns regarding the auditor being the source of original
information about the company were raised in response to the PCAOB
Concept Release, PCAOB Proposal, and PCAOB Re-proposal. The Board
acknowledged these concerns and made certain modifications in the
Proposed Rules in an effort to balance investor interests in expanded
auditor reporting and the concerns of other stakeholders, primarily
issuers and issuer organizations and audit committees, related to the
costs, benefits, and potential unintended consequences associated with
communicating CAMs. For example, the Board added a materiality
component in the definition of a CAM ``to respond to investor requests
for informative and relevant auditor's reports while, at the same time,
addressing other commenters' concerns regarding auditor communication
of immaterial information that management is not required to disclose
under the applicable financial reporting framework and SEC reporting
requirements.'' Further, in an effort to clarify the requirements, the
Board stated in the release accompanying the Proposed Rules, among
other things, that ``while auditor reporting of original information is
not prohibited, it is limited to areas uniquely within the perspective
of the auditor: describing the principal considerations that led the
auditor to determine that the matter is a critical audit matter and how
the matter was addressed in the audit.'' AS 3101 of the Proposed Rules
includes the following note to the same effect, ``When describing
critical audit matters in the auditor's report, the auditor is not
expected to provide information about the company that has not been
made publicly available by the company unless such information is
necessary to describe the principal considerations that led the auditor
to determine that a matter is a critical audit matter or how the matter
was addressed in the audit.'' \32\
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    \32\ See Note 2 to Paragraph 14 of AS 3101 within the Proposed
Rules.
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    With respect to whether mandating such disclosure would run counter
to the U.S. regulatory framework or exceed the Board's authority, the
Board observed in the release accompanying the Proposed Rules that
there is no PCAOB standard, SEC rule, or other financial reporting
requirement prohibiting auditor reporting of information that
management has not previously disclosed.\33\ Moreover, in the release
accompanying the Proposed Rules, the Board stated its belief that
requiring expanded auditor reporting to make the auditor's report more
relevant and informative as prescribed in the Proposed Rules is
consistent with the statutory mandate of the PCAOB.\34\
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    \33\ In the release accompanying the Proposed Rules, the Board
states, ``there are areas under current law and auditing standards
that require auditor reporting that goes beyond attesting to the
compliance of management disclosures (e.g., substantial doubt about
a company's ability to continue as a going concern or illegal
acts).'' See also Cleary Gottlieb Letter (acknowledging that no
legal prohibition prevents the auditor from communicating original
information).
    \34\ The mission of the PCAOB, as provided in Section 101(a) of
the Sarbanes-Oxley Act, is ``to oversee the audit of companies that
are subject to the securities laws, and related matters, in order to
protect the interests of investors and further the public interest
in the preparation of informative, accurate, and independent audit
reports.'' (emphasis added).
---------------------------------------------------------------------------

    We agree with commenters that, in general, the preparation and
disclosure of information about an issuer should be the primary
responsibility of the issuer, and that the auditor's role, by contrast,
is to audit the issuer's financial statements and to provide a report
thereon. That said, we disagree with those commenters who expressed an

absolute view of the relative roles and responsibilities of the issuer
and the auditor. Nothing prohibits exceptions to this general
principle, and indeed, existing requirements contemplate a role for the
auditor in disclosing original information.\35\ Until recently, for
example, the auditor's role in preparing the ``going concern''
explanatory paragraph contemplated that the auditor would be required
to provide original information. Pursuant to Section 101(a) of
Sarbanes-Oxley Act, part of the Board's mission is ``to further the
public interest in the preparation of informative, accurate, and
independent audit reports.'' Providing investors and other users of
financial statements with the unique perspective of the auditor
regarding CAMs can give them valuable insight about the audit. This
furthers the underlying purpose of the auditor's report itself--to
provide investors and other users with information to use in evaluating
a company's financial statements and make informed investment
decisions--and is consistent with the U.S. regulatory framework.
---------------------------------------------------------------------------

    \35\ See supra footnote 33.
---------------------------------------------------------------------------

    Nor do we believe that CAMs, particularly as currently proposed,
will displace the financial reporting responsibilities of management.
Instead, we believe the communication of CAMs should add to the total
mix of information available to investors by eliciting more information
about the audit itself, which is uniquely within the perspective of the
auditor, irrespective of the financial reporting responsibilities of
management. Requiring communication of information about the audit,
from the auditor's perspective, as the Proposed Rules require, should
limit the extent to which original information would be provided by the
auditor. Moreover, to the extent original information would need to be
communicated in a CAM, we anticipate that the auditor, management, and
the audit committee will engage in a dialogue about that communication.
    While we acknowledge the important concerns raised by several
commenters in this area and intend to closely monitor the
implementation of the Proposed Rules, as discussed further below, we
believe that the requirements for communicating CAMs in the auditor's
report are reasonably designed to ameliorate these concerns and are
within the Board's authority. As a result, we believe that the Proposed
Rules are consistent with the Sarbanes-Oxley Act and the securities
laws and are necessary or appropriate in the public interest or for the
protection of investors. We address more specific concerns on this
matter in the following paragraphs.
1. Definition of CAM
    As discussed in Section II.A, ``Changes to PCAOB Standards'' above,
under the Proposed Rules, a CAM is defined as any matter arising from
the audit of the financial statements that was communicated or required
to be communicated to the audit committee and that: (1) Relates to
accounts or disclosures that are material to the financial statements,
and (2) involved especially challenging, subjective, or complex auditor
judgment.
    Some commenters questioned the scope of the definition of CAMs,
which states that a CAM ``relates to'' accounts or disclosures that are
material to the financial statements, rather than specifying that a CAM
itself has to be material to the financial statements.\36\ Commenters
also questioned whether there is sufficient clarity on how to apply
this requirement.\37\
---------------------------------------------------------------------------

    \36\ See e.g., CCMC Letter; American Tower Letter; Eli Lilly
Letter; New York City Bar Letter.
    \37\ See e.g., CCMC Letter; Eli Lilly Letter.
---------------------------------------------------------------------------

    The commenters that raised questions about the scope of the CAM
definition principally explained their concerns by discussing specific
examples that might result in the auditor disclosing original
information about the company as it relates to the identification of a
CAM or immaterial information that is not otherwise required to be
disclosed by the financial reporting framework or SEC regulations.
Specifically, commenters questioned whether significant deficiencies,
illegal acts, and remote loss contingencies should be identified as
CAMs. The same questions were posed to the Board in response to the
PCAOB Re-proposal. In the release accompanying the Proposed Rules, the
Board directly addressed each of the examples by providing guidance
that: (1) The determination that there is a significant deficiency in
internal control over financial reporting, in and of itself, cannot be
a CAM; (2) a potential illegal act, if an appropriate determination had
been made that no disclosure of it was required in the financial
statements, would not meet the definition of a CAM; and (3) a potential
loss contingency that was communicated to the audit committee, but that
was determined to be remote and was not recorded in the financial
statements or otherwise disclosed under the applicable financial
reporting framework, would not meet the definition of a CAM.
    Other than the specific examples described above, no other examples
raising concerns with the definition of a CAM have been brought to the
attention of the PCAOB or the Commission. We recognize that some
commenters suggested an alternative approach to materiality, but we
agree with the balance struck by the PCAOB between the benefits of
communicating CAMs and the possibility of the auditor providing
information that has not previously been disclosed by the company.
Under the Proposed Rules, communication of original information should
be limited to rare circumstances, as we further discuss in section
III.B.2 below, and relate only to the discussion of the principal
considerations as to why a matter was a CAM or how the auditor
addressed the CAM. Moreover, we believe this approach is consistent
with the Board's statutory mandate under Section 101(a) of the
Sarbanes-Oxley Act to further the public interest in the preparation of
informative, accurate, and independent audit reports. Requiring the
communication of CAMs will provide additional information about the
audit from the auditor's own unique perspective that investors have
indicated, and which we have found, could reduce information
asymmetries and be useful to investors, in assessing a company's
financial reporting and making capital allocation and voting
decisions.\38\
---------------------------------------------------------------------------

    \38\ See e.g., J. Robert Brown Jr. Letter; CII Letter; Letter
from Colorado Public Employees' Retirement Association, August 18,
2017 (``Colorado PERA Letter'').
---------------------------------------------------------------------------

    Commenters also suggested that their alternative approach to
materiality would be easier to apply in determining which matters to
communicate as CAMs. However, given the clarifications provided by the
Board, we believe commenters' concerns regarding the scope of the CAM
definition have been adequately addressed and that the Proposed Rules'
materiality component, which specifies that a CAM ``relates to''
accounts or disclosures that are material to the financial statements,
will be both workable and effective in assisting an auditor in
determining which matters to communicate as a CAM. Indeed, we note that
the accounting firms that would be responsible for implementing the
Proposed Rules, while calling for active PCAOB and SEC monitoring both
pre- and post-implementation, did not raise additional concerns in
their comment letters to the Commission regarding any lack of clarity
within the definition of a CAM under the Proposed Rules.\39\
---------------------------------------------------------------------------

    \39\ See e.g., Letter from BDO USA LLP, August 15, 2017 (``BDO
Letter''); Letter from PricewaterhouseCoopers LLP, August 18, 2017
(``PwC Letter''); Deloitte Letter; EY Letter.

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2. Disclosure of `Why' a Matter Is a CAM and How It Was Addressed
    As discussed in section II.A, ``Changes to PCAOB Standards,''
above, under the Proposed Rules, the communication of each CAM
includes: (1) Identifying the CAM; (2) describing the principal
considerations that led the auditor to determine that the matter is a
CAM; (3) describing how the CAM was addressed in the audit; and (4)
referring to the relevant financial statement accounts or disclosures
that relate to a CAM.
    Some commenters, while acknowledging that much of the discussion in
CAMs will focus on the audit itself, expressed concerns that the
description as to why \40\ a matter was designated as a CAM could
frequently include information not otherwise required to be disclosed
by a company.\41\ The example cited most frequently in comment letters
as a concern was a significant deficiency in internal control over
financial reporting (or control deficiencies, generally). At least one
commenter suggested removing the requirements to describe (1) the
principal considerations that led the auditor to determine that the
matter is a CAM, and (2) how the matter was addressed in the audit.\42\
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    \40\ Commenters indicated the second communication requirement
``describing the principal considerations that led the auditor to
determine that the matter is a CAM'' is effectively a requirement to
communicate `why' a matter is a CAM.
    \41\ See e.g., Sullivan & Cromwell Letter.
    \42\ See e.g., Cleary Gottlieb Letter.
---------------------------------------------------------------------------

    By contrast, comments from investors and investor associations
indicated a desire for information directly from the auditor's point of
view.\43\ One commenter specifically stated that CAMs will make the
auditor's report more relevant and useful to investors and other
readers by providing tailored, audit specific information.\44\ This
same commenter noted that CAMs should provide insights that could be
used in investors' capital allocation decisions by, for instance,
enabling comparison of certain aspects of the audit across companies
and over time.\45\
---------------------------------------------------------------------------

    \43\ See e.g., CII Letter; Capital Group Letter.
    \44\ See CII Letter.
    \45\ See CII Letter.
---------------------------------------------------------------------------

    Regarding the requirement to describe the principal considerations
that led to the identification of a CAM (i.e., the ``why''), the
release accompanying the Proposed Rules states: ``If auditors can
adequately convey to investors the principal considerations and how the
auditor addressed the matter without including previously undisclosed
information, it is expected that they will. However, the standard
provides that even when management has not disclosed information, the
auditor is not constrained from providing such information if it is
necessary to describe the principal considerations that led the auditor
to determine that a matter is a critical audit matter or how the matter
was addressed in the audit.'' With regard to the specific control
deficiency point raised by commenters, in the release accompanying the
Proposed Rules, the Board concluded that the determination that there
is a significant deficiency, in and of itself, cannot be a CAM, as it
does not relate to an account or disclosure that is material to the
financial statements as no disclosure of the determination is required.
As a result, even though it might involve especially challenging,
subjective, or complex auditor judgment, this determination would not
be a CAM.
    Further, should the auditor deem it necessary to discuss control-
related matters that do not rise to the level of a material weakness
within the communication of a CAM (e.g., a significant deficiency was a
principal consideration for determining that a matter was a CAM), the
Board stated that the auditor could ``describe the relevant control-
related issues in a broader context of the critical audit matter
without using the term significant deficiency.''
    Regarding the requirement to describe how the matter was addressed
in the audit, the Board indicated in the release accompanying the
Proposed Rules that including this information would be ``consistent
with the Board's objective of providing more information about the
audit and, if developed with an appropriate focus on the intended
audience, should be of interest to users.'' The Board also indicated
that this information should be specific to the circumstances of the
audit and avoid standardized language.
    We agree with the Board and certain commenters that the ``why'' and
the ``how'' elements of the CAM will provide investors with relevant
information from the auditor's perspective that could assist them in
understanding the audit, thereby reducing information asymmetries. We
believe that, by providing insight into the audit, the ``why'' and the
``how'' elements will provide additional transparency to investors,
which in turn will enhance investor confidence in the audit. We
therefore believe this requirement is consistent with the Board's
statutory mandate to ``protect the interests of investors and further
the public interest in the preparation of informative, accurate, and
independent audit reports.'' In our view, the importance of this
information to investors justifies the possibility that the auditor
would provide information about a company that is not otherwise
required to be disclosed by the company.
    Further, we are not persuaded that the description of principal
considerations will frequently lead to communication of original
information, as commenters suggested. We believe that situations where
auditors would be required to provide information about the company
that management has not already made public would be exceptions,
arising only in limited circumstances, and not a pervasive occurrence.
With respect to providing original information about control
deficiencies in particular, we similarly believe these situations would
be rare. The especially challenging, subjective, or complex auditor
judgment in these cases is typically limited to the determination as to
whether a control deficiency is a significant deficiency or material
weakness. The other judgment to consider when a control deficiency
exists is whether and how the auditor might need to adjust the original
audit plan (i.e., the audit response). The concerns expressed by
commenters related to disclosing original information about control
deficiencies are primarily related to scenarios where the company and
auditor have concluded a material weakness in internal control over
financial reporting does not exist but the deficiency is a principal
consideration for determining that a matter is a CAM. The audit
response to a deficiency that is not a material weakness is typically
less extensive because the auditor has already concluded that a
reasonable possibility of material misstatement due to the control
deficiency does not exist. For example, the audit response might be
more of the same procedures being performed without changing the nature
of the procedures. In those instances, typically, judgments about the
audit response would not be a principal consideration of why something
is a CAM and therefore would not need to be reported.
3. Client Confidentiality--Professional Obligations and State Laws
    At least one commenter stated that auditors may have a requirement
to maintain client confidentiality under certain states' laws or
professional obligations that could conflict with the Proposed Rules,
if the Proposed Rules required the auditor to communicate original
information about the

company.\46\ In the release accompanying the Proposed Rules, the Board
noted that auditor's obligations under PCAOB standards arise under
federal law and regulations and professional or state law duties of
client confidentiality should not apply to, or should be preempted by,
the obligation to communicate CAMs.
---------------------------------------------------------------------------

    \46\ See e.g., CCMC Letter.
---------------------------------------------------------------------------

    We agree that the communications called for by the Proposed Rules
should not be precluded by existing state legal or professional
obligations as to client confidentiality in light of, among other
things, existing exceptions for disclosure where required by applicable
law. For example, the AICPA Code of Professional Conduct articulates
the professional duties of a member CPA in public practice regarding
confidential client information and stipulates that ``[a] member in
public practice shall not disclose any confidential client information
without the specific consent of the client.'' \47\ However, the Code
goes on to state that ``[t]his rule shall not be construed . . . to
prohibit a member's compliance with applicable laws and government
regulations.'' \48\ While we are sensitive to the importance of client
confidentiality, and do not believe it should be overridden lightly, we
believe that the benefits of requiring communication to investors of
CAMs--within the confines of the Proposed Rules--justify the potential
that some information that otherwise would be considered a client
confidence will be made public.\49\
---------------------------------------------------------------------------

    \47\ AICPA Code of Professional Conduct 1.700.001.01.
    \48\ AICPA Code of Professional Conduct 1.700.001.02. See also,
e.g., Rule 10-4 of the Uniform Accountancy Act Model Rules, which
has been the basis for many state rules for professional conduct.
    \49\ One commenter stated that the PCAOB reaffirmed the
propriety of confidentiality requirements imposed on auditors by
other authorities within PCAOB Release No. 2008-001 which adopted
Auditing Standard No. 6, Evaluating Consistency of Financial
Statements (since reorganized as AS 2820) in which the Board stated
that the revisions contained therein ``did not reflect a decision
that auditor confidentiality requirements imposed by other
authorities were inappropriate.'' See CCMC Letter. However, by
reaffirming the propriety of confidentiality requirements imposed on
auditors by other authorities in PCAOB Release 2008-001, we believe
the Board also effectively reaffirmed professional requirements such
as the AICPA's confidential client information rule, which, as
discussed above, expressly states that the rule does not prohibit a
member's compliance with applicable laws and government regulations.
---------------------------------------------------------------------------

C. The Potential Impact of CAMs on the Role of the Audit Committee and
the Communication Among the Audit Committee, Management, and the
Auditor

    Commenters provided mixed views on the potential impact of CAM
reporting on the role of the audit committee and the communication
among the audit committee, management, and the auditor. Some commenters
indicated they believe the public reporting of CAMs will likely result
in improved communications between auditors and audit committees.\50\
At least one commenter suggested audit committees should have a
particular interest in matters communicated by the auditor that are
likely to be made public in the auditor's report and they will likely
want to more fully understand any auditing matter that resulted in a
CAM.\51\
---------------------------------------------------------------------------

    \50\ See e.g., CII Letter; J. Robert Brown Jr. Letter.
    \51\ See e.g., J. Robert Brown Jr. Letter.
---------------------------------------------------------------------------

    Conversely, some commenters indicated they believe there is a risk
that the requirement for auditors to communicate CAMs will result in
``chilled'' conversation among audit committees, management, and
auditors.\52\ Generally, these commenters expressed concern that the
Proposed Rules could unintentionally discourage free and open
communication between the auditor and management and between the
auditor and audit committee. Further, some commenters expressed concern
that the role of the audit committee will be undermined by the
auditor's responsibilities under the Proposed Rules.\53\
---------------------------------------------------------------------------

    \52\ See e.g., Letter from Bruce J. Nordstrom, August 11, 2017
(``Bruce J. Nordstrom Letter''); Northrop Grumman Letter; Sullivan &
Cromwell Letter; Cleary Gottlieb Letter; Letter from Nasdaq, August
24, 2017.
    \53\ See e.g., Bruce J. Nordstrom Letter; Quest Letter; Aetna
Letter.
---------------------------------------------------------------------------

    Similar comments were received by the PCAOB in its rulemaking
process. In the release accompanying the Proposed Rules, the Board
explained that it believes there should not be a chilling effect or
reduced communications to the audit committee because of the
requirements included in AS 1301, Communications with Audit Committees.
Any potential chilling effect would therefore relate only to matters
that are not explicitly required to be communicated to the audit
committee. However, the Board noted that given the broad requirements
of AS 1301 (particularly paragraph .24), there may be few, if any,
relevant communications affected by that possibility.
    We acknowledge that there exists a risk that communications between
the auditor and the audit committee could be chilled, if the auditor
were to avoid raising certain issues to the audit committee's attention
so as to not trigger the requirement to determine whether such issues
are CAMs. However, we agree with the Board's conclusion that the
existing requirements to communicate matters to the audit committee--an
auditing standard that would be violated if matters were not
communicated--limits the risk of chilling to matters not falling within
the scope of AS 1301, but falling within the scope of a CAM. In this
regard, we believe it would be highly unusual for a matter to meet the
definition of a CAM and not be required to be communicated to the audit
committee. To illustrate this point, the following are examples of
matters that are required to be communicated to the audit committee
based on the requirements in AS 1301:
     Significant risks identified during the auditor risk
assessment procedures; \54\
---------------------------------------------------------------------------

    \54\ See AS 1301.9.
---------------------------------------------------------------------------

     The nature and extent of specialized skill or knowledge
needed to perform the planned audit procedures or evaluate the audit
results related to a significant risk; \55\
---------------------------------------------------------------------------

    \55\ See AS 1301.10a.
---------------------------------------------------------------------------

     Critical accounting policies and practices; \56\
---------------------------------------------------------------------------

    \56\ See AS 1301.12b.
---------------------------------------------------------------------------

     Critical accounting estimates; \57\
---------------------------------------------------------------------------

    \57\ See AS 1301.12c.
---------------------------------------------------------------------------

     Significant unusual transactions; \58\
---------------------------------------------------------------------------

    \58\ See AS 1301.12d.
---------------------------------------------------------------------------

     Difficult or contentious matters for which the auditor
consulted (outside of the engagement team); \59\ and
---------------------------------------------------------------------------

    \59\ See AS 1301.15.
---------------------------------------------------------------------------

     Other matters arising from the audit that are significant
to the oversight of the company's financial reporting process.\60\
---------------------------------------------------------------------------

    \60\ See AS 1301.24.
---------------------------------------------------------------------------

    The Proposed Rules provide the following nonexclusive list of
factors that auditors should take into account, alone or in
combination, in determining whether a matter involved especially
challenging, subjective, or complex auditor judgment for purposes of
evaluating whether a matter falls within the definition of a CAM:
     The auditor's assessment of the risks of material
misstatement, including significant risks;
     The degree of auditor judgment related to areas in the
financial statements that involved the application of significant
judgment or estimation by management, including estimates with
significant measurement uncertainty;

     The nature and timing of significant unusual transactions
and the extent of audit effort and judgment related to these
transactions;
     The degree of auditor subjectivity in applying audit
procedures to address the matter or in evaluating the results of those
procedures;
     The nature and extent of audit effort required to address
the matter, including the extent of specialized skill or knowledge
needed or the nature of consultations outside the engagement team
regarding the matter; and
     The nature of audit evidence obtained regarding the
matter.
    Given the similarity of the two lists, we believe it would be
difficult to identify an example of a matter that would meet the
definition of a CAM that would not otherwise need to be communicated to
the audit committee based on the requirements in AS 1301. Further, it
is important to bear in mind that the mere communication of information
from the auditor to the audit committee is not sufficient to meet the
definition of CAM. The information communicated also would have to meet
all other criteria in the definition of CAM, including that the matter
involved especially challenging, subjective, or complex auditor
judgment. Given auditors' existing responsibilities to discuss the
matters described above with audit committees, we do not believe that
the Proposed Rules are likely to chill these conversations.
    As it relates to the risk that the role of the audit committee will
be undermined, we emphasize that the Commission has a long history of
promoting effective and independent audit committees.\61\ We believe
the requirement for every company listed on an exchange to have an
independent audit committee \62\ plays an important role in protecting
the interests of investors by assisting the board of directors in
fulfilling its responsibility to oversee the integrity of a company's
accounting and financial reporting processes and both internal and
external audits. Dialogue between audit committees and auditors
provides real benefits to investors and the financial reporting
process. The intent of the Proposed Rules is to supplement the role of
the audit committee by providing information about the audit through
the lens of the auditor. The Proposed Rules are unlikely to impact this
relationship or the dialogue between audit committees and auditors, and
may even encourage audit committees to engage more extensively with
auditors given that there will be disclosures by the auditor about
those aspects of the audit that constitute CAMs.
---------------------------------------------------------------------------

    \61\ See e.g., Possible Revisions to Audit Committee
Disclosures, Release No. 33-9862 (July 1, 2015), 80 FR 38995 (July
8, 2015) available at https://www.sec.gov/rules/concept/2015/33-9862.pdf.
    \62\ See Section 301 of the Sarbanes Oxley Act and Section
10A(m) of the Exchange Act.
---------------------------------------------------------------------------

D. The Potential Liability Impact of CAMs

    Commenters provided mixed views related to potential liability
impacts of the introduction of CAMs.\63\ Some commenters expressed
concern that the communication of CAMs may result in an increase of
meritless claims under the securities laws by expanding the number and
variety of statements that will be attributed to the auditor.\64\ Some
commenters also expressed concerns that the requirements for auditor
reporting of CAMs will increase litigation risk for both auditors and
companies.\65\ However, other commenters expressed views that the
communication of CAMs by the auditor may have the potential to decrease
liability as it involves disclosure of risks and challenges, and
accordingly, could effectively provide a defense for the auditor.\66\
---------------------------------------------------------------------------

    \63\ Some commenters suggested the Commission undertake
rulemaking to provide a safe harbor around auditor reporting of
CAMs. See e.g., PwC Letter, CCMC Letter. The question before the
Commission at this time, however, is whether the rules as proposed
meet the statutory criteria for approval. Moreover, we believe it
would be more appropriate to consider whether any potential
rulemaking is warranted related to safe harbors after the Board and
the Commission have the opportunity to observe how the Proposed
Rules are implemented in practice.
    \64\ See e.g., Quest Letter; PwC Letter; Davis Polk Letter.
    \65\ See e.g., CCMC Letter; American Tower Letter; EY Letter.
    \66\ See e.g., CII Letter; Letter from The Value Alliance and
Corporate Governance Alliance, August 18, 2017.
---------------------------------------------------------------------------

    These concerns were also raised by commenters during the PCAOB
rulemaking process. As the Board acknowledged in the release
accompanying the Proposed Rules, CAMs themselves would be new
statements that could be the basis for asserted claims against
auditors. The Board also noted in its release that information provided
regarding CAMs could be used to impact other aspects of securities
fraud claims, such as providing evidence to support pleadings against
an issuer, an auditor, or both.
    In response to these concerns, the Board limited and clarified the
process for determining CAMs, including by narrowing the source of CAMs
to matters communicated or required to be communicated to the audit
committee, adding a materiality component to the CAM definition, and
refining the factors used to determine CAMs. We believe these
modifications, as well as the CAM definition's focus on the auditor's
judgment, should help mitigate potential liability concerns. For
example, one of the concerns expressed by commenters regarding
liability is the potential omission of CAMs within the auditor's
report. By narrowing the potential matters that could be CAMs,
clarifying the process for determining CAMs, and revising the
definition of a CAM as discussed above, the Board has provided a
framework for the auditor to evaluate and demonstrate whether a matter
meets the definition of a CAM in accordance with the Proposed Rules.
    We recognize, as the Board did, that mandating communication of
CAMs will, by design, entail new statements in the auditor's report,
thereby increasing the potential for litigation regarding such
statements. However, the actual litigation impacts of these
communications are difficult to predict. As the Board notes, in order
to succeed, any claim based on these new statements would have to
establish all of the elements of the relevant cause of action (e.g.,
when applicable, scienter, loss causation, and reliance). Moreover, as
discussed above, CAMs could be used to defend as well as initiate
litigation.
    Nevertheless, we recognize reporting of CAMs likely will create an
incremental risk of litigation and potential liability. To some degree,
increased litigation risk is the by-product of any new reporting
requirement and must be balanced against the perceived benefits of the
required reporting. As discussed above, we are persuaded that the
communication of CAMs, which can be provided only by auditors, will
benefit investors and other financial statement users by providing
insights into the audit--and from the auditor's own unique
perspective--that can reduce information asymmetries and be used to
assess a company's financial reporting and make capital allocation and
voting decisions. In our view, these benefits justify any such
potential incremental liability risk arising from the communication,
especially in light of the steps taken by the Board to mitigate such
risk, as discussed above. However, because of these risks and other
concerns expressed by commenters, we expect the Board to monitor the
Proposed Rules after implementation for any unintended consequences.

E. Economic Analysis of CAMs

    Several commenters expressed concerns that the costs of the
Proposed

Rules will exceed their benefits, or that the economic analysis
performed by the Board did not sufficiently analyze the costs and
benefits of the Proposed Rules.\67\ Some commenters observed
specifically that the Board's analysis lacked quantitative
information.\68\ Conversely, some commenters indicated they believe the
potential costs are not likely to be significant relative to the
potential benefits, for example because CAMs are based on matters
already being discussed by the auditor and audit committee.\69\
Further, to the extent that costs are incurred related to the Proposed
Rules, commenters from the investor community stated that, as
shareholders, they are willing to bear the additional costs of the
Proposed Rules in exchange for enhanced information about the
audit.\70\
---------------------------------------------------------------------------

    \67\ See e.g., CCMC Letter; Society for Corporate Governance
Letter; Davis Polk Letter.
    \68\ See e.g., Robert Waxman Letter; CCMC Letter; Davis Polk
Letter.
    \69\ See e.g., CII Letter; Letter from Aberdeen Asset
Management, August 11, 2017 (``Aberdeen Letter''); Hermes Letter;
CFA Institute Letter.
    \70\ Compliance and implementation costs from the auditor's
standpoint could be passed through to the company and consequently
investors in the form of increased audit fees. Moreover, companies
themselves (and consequently investors) could incur additional costs
as a consequence of the Proposed Rules, for example by engaging
additional resources such as legal counsel, and such costs would
impact investors. See also e.g., CII Letter; Aberdeen Letter; Hermes
Letter.
---------------------------------------------------------------------------

    The Board's evaluation of the potential costs and benefits of the
Proposed Rules was informed by information sought and obtained from
stakeholders. In the course of that analysis, the Board stated that
``the potential benefits and costs of the [Proposed Rules] are
inherently difficult to quantify, therefore the Board's economic
discussion is primarily qualitative in nature.'' The Board also
observed that commenters that raised concerns about the Proposed Rules'
costs generally did not quantify those costs and that ``[e]ven those
[commenters] that, at an earlier stage of the rulemaking, conducted
limited implementation testing of the proposal were unable to provide a
quantified cost estimate.'' Moreover, as stated in the release
accompanying the Proposed Rules, as related to comments provided to the
Board, ``[c]ommenters provided views on a wide range of issues
pertinent to economic considerations, including potential benefits and
costs, but did not provide empirical data or quantified estimates of
the costs or other potential impacts of the standard.'' As a result, in
lieu of providing a quantitative analysis, the Board engaged in a
detailed qualitative assessment of the Proposed Rules' potential
economic impacts, including consideration of direct and indirect
benefits, costs, and potential unintended consequences.
    We disagree with commenters' assertions that the Board's analysis
is defective for failing to adequately quantify the costs and benefits
of the Proposed Rules. Analyzing the potential economic impacts,
including the costs and benefits, of a proposed rule is a key way to
develop regulatory changes that are well-reasoned, with potential costs
that are warranted in light of the expected benefits. We believe that a
high-quality qualitative analysis can allow for this type of
evaluation, particularly in those cases where quantification is not
feasible.\71\
---------------------------------------------------------------------------

    \71\ Cf. Nat'l Ass'n of Mfrs v. SEC, 748 F.3d 359 (D.C. Cir.
2014) (acknowledging the reasonableness of the SEC's determination
that it was unable to quantify benefits because it lacked the data
necessary to do so).
---------------------------------------------------------------------------

    We also agree with the Board that it would not have been feasible
to quantify the potential costs and benefits of the Proposed Rules.
While certain components of the total potential costs related to the
Proposed Rules might be easier to estimate (e.g., the costs an auditor
might incur to draft a CAM), several of the significant components of
the total potential cost are inherently difficult to estimate. For
example, under the Proposed Rules, the auditor would need to determine
which matters are CAMs and have incremental discussions with the audit
committee regarding the draft of the CAM communications. Given the
audit-specific nature of such matters, it is difficult to predict how
many hours would need to be involved in the analysis and communication
process as this will vary based on a number of factors, including, for
example, the complexity of the company and the number of CAMs.
    In addition, there are potential costs that might be incurred by
the company as a consequence of the implementation of the Proposed
Rules. For example, besides the audit committee, other executives and
legal counsel may be required to expend more time and effort in
discussing and reviewing the auditor's report as a consequence of the
Proposed Rules. Again, estimating these costs is difficult because
these costs likely will vary among audit engagements depending on the
circumstances.
    Potential benefits from new auditor reporting requirements are also
inherently difficult to quantify. For example, to quantify the direct
benefit to investors of a more useful and informative auditor's report,
one would require an estimate of how their investment or voting
decisions would be affected by CAMs and an estimate of the amount of
profit from such decisions. Such estimates are either impossible or
very difficult to calculate with reasonable reliability. In addition to
the direct benefits, there may be indirect benefits from the new
reporting requirements. For example, the communication of CAMs can
provide some auditors, management, and audit committees with additional
incentives to enhance audit quality. Enhanced audit quality ultimately
can lead to a reduced cost of capital. However, at this time, it is
impossible to predict the amount of reduction in cost of capital that
would arise from the Proposed Rules.
    Moreover, we agree with the Board's qualitative analysis of the
possible economic consequences of the Proposed Rules. As they did
before the Board, investors and investor associations have expressed
strong support to the Commission for the Proposed Rules and stated that
they expect the potential benefits to justify the potential costs.\72\
As an example, one commenter stated the Proposed Rules will not require
changes to the audit process and hence should not impose any
significant incremental costs.\73\ This same commenter further stated
that, while incremental costs or auditor effort should be minimal,
there are manifold benefits for investors.\74\ Several commenters also
informed the Commission that they believe that the information from the
auditor's perspective that would be required by the Proposed Rules
would be useful, for example, in forming voting and investment
decisions.\75\
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    \72\ See e.g., CFA Institute Letter; CII Letter.
    \73\ See e.g., CFA Institute Letter.
    \74\ See id.
    \75\ See e.g., CII Letter; Letter from Public Citizen, August
18, 2017; CalPERS Letter; Hermes Letter; CFA Institute Letter.
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    We believe these are important benefits. The Proposed Rules are
consistent with the broader economic theory regarding the benefits from
enhanced disclosures. More specifically, we believe that the Proposed
Rules are likely to improve the information currently available to
investors and facilitate their efforts to understand the financial
statements. Importantly, the Proposed Rules will assist investors in
identifying those matters that relate to the relevant financial
statement accounts or disclosures that involved especially challenging,
subjective, or complex auditor judgment. This will, in turn, provide
investors with audit-specific information directly from the auditor's
point of view and add to the

total mix of information that could be used in their capital allocation
and voting decisions. Further, investors will be able to observe
reported CAMs for other companies. Within the right context, such
information could be used by investors to improve their understanding
of both the audit itself and the company's financial statements.
    Moreover, the Proposed Rules may stimulate discussions between the
auditor and the company regarding CAMs, and potentially increase
professional skepticism by the auditor. The public nature of CAMs may
also act to further enhance auditors' professional skepticism. An
increase in skepticism may lead to an increase in audit quality and, as
a consequence, result in lower cost of capital for companies.
    Like the Board, we recognize that there are costs associated with
complying with the Proposed Rules. The Board indicated that costs to
auditors are most likely to arise from additional time to prepare and
review auditor's reports, including discussions with management and
audit committees, as well as potential legal costs for review of the
information provided in the CAMs. In addition, auditors may choose to
perform more audit procedures related to areas reported as CAMs (even
though auditor performance requirements have not changed in those
areas), with cost implications for both auditors and companies. For
auditors, costs might represent both one-time costs and recurring
costs. One-time costs could be incurred as a result of: (1) Updating
accounting firm audit and quality control methodologies; and (2)
developing and conducting training. Recurring costs could include: (1)
Drafting descriptions of CAMs and related documentation; (2) additional
reviews by senior members of engagement teams, engagement quality
reviewers, and national office personnel; and (3) additional time as a
result of discussions with management or the audit committee regarding
CAMs.
    Companies, including audit committees, will likely also incur both
one-time and recurring costs. One-time costs could be incurred, for
example, in educating audit committee members about the requirements of
the new standard and in developing management and audit committee
processes for the review of draft descriptions of CAMs and the related
interaction with auditors. Recurring costs could include the costs
associated with carrying out those processes, potential legal
costs,\76\ as well as any increase in audit fees associated with new
reporting requirements.
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    \76\ See discussion in section III.D above, ``The Potential
Liability Impact of CAMs.''
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    We recognize that there is some level of uncertainty as to the
costs that will be incurred to comply with the Proposed Rules. However,
as discussed above, the Board has taken steps to mitigate those costs,
including by, as an example, limiting the source of CAMs to matters
communicated or required to be communicated to the audit committee and
by adding a materiality component to the definition of a CAM. At the
same time, for the reasons explained above, we believe that the
Proposed Rules will provide significant new benefits to investors and
other financial statement users. Based on the economic analysis in the
release accompanying the Proposed Rules and our own evaluation of
comments received by both the Board and the Commission regarding the
potential economic effects of the Proposed Rules, we are persuaded that
there is a sufficient basis to conclude that the potential benefits of
the Proposed Rules will justify the potential related costs, and
therefore, that the Proposed Rules are necessary and appropriate in the
public interest and for the protection of investors.

F. Practicability Matters Related to CAMs

    Several commenters raised certain practical concerns with the
Proposed Rules. We discuss each of these concerns in detail below.
1. Timing
    Some commenters expressed concerns that the requirement to
communicate CAMs will impose additional burdens on auditors, audit
committees, and preparers during an already time-constrained period as
management finalizes its annual financial statements.\77\ In the
release accompanying the Proposed Rules, the PCAOB acknowledged that if
drafting and reviewing of CAMs takes place towards the end of the
audit, there will also be an opportunity cost associated with the time
constraints on the parties involved.
---------------------------------------------------------------------------

    \77\ See e.g., Society for Corporate Governance Letter; Letter
from ArcBest, August 17, 2017.
---------------------------------------------------------------------------

    We also acknowledge these concerns, but we expect most matters that
will ultimately need to be communicated as CAMs will be identified
throughout the audit and not just at the end of the audit. As a result,
we believe much of the work can be completed prior to the time-
constrained period at the end of the financial reporting process. In
those cases, we encourage auditors, audit committees, and preparers to
coordinate and work together before the critical year-end financial
reporting period so that, if other CAMs arise later in the audit, the
burden can be lessened during the finalization of the audit.
2. Inconsistent Application by Auditors
    Some commenters also expressed concerns that the principles-based
nature of the Proposed Rules as it pertains to both the identification
and communication of CAMs could lead to inconsistent application by
auditors.\78\ In the release accompanying the Proposed Rules, the Board
stated that the determination of CAMs is principles-based and the
Proposed Rules do not specify any items that would always constitute
CAMs as the auditor determines CAMs in the context of the specific
audit.
---------------------------------------------------------------------------

    \78\ See e.g., CCMC Letter; Aetna Letter.
---------------------------------------------------------------------------

    We recognize commenters' concerns that the subjective requirements
related to CAMs could lead to diversity in communications, but we agree
with the Board that it is important for the CAM requirements,
particularly the communication requirements, to be principles-based in
order to meet the Board's objective of having CAM communications
provide tailored, audit-specific information by the auditor within the
auditor's report. We also believe the guidance provided by the Board in
the release accompanying the Proposed Rules will assist auditors in
implementing the Proposed Rules consistently.
3. Lack of Examples
    Some commenters noted that the PCAOB did not include the
illustrative example CAMs from the PCAOB Re-proposal in the release
accompanying the Proposed Rules, and they expressed concern that the
removal of these examples will add to uncertainties and confusion for
auditors in reporting CAMs.\79\ As the PCAOB noted in the release
accompanying the Proposed Rules, given the principles-based nature of
the requirements for CAMs and the objective of providing tailored,
audit-specific information, the examples in the PCAOB Re-proposal were
intended to function as illustrations of how CAMs could be
communicated, and not as templates for how CAMs should be communicated.
In this regard, it is important to bear in mind that a number of
commenters expressed concerns that

the CAMs will become boilerplate and will not be useful.\80\
---------------------------------------------------------------------------

    \79\ See e.g., CCMC Letter; Robert Waxman Letter.
    \80\ See e.g., Aetna Letter; Quest Letter; Davis Polk Letter.
---------------------------------------------------------------------------

    We agree with the Board's objective of providing tailored, audit-
specific information and believe it is important for auditors to
develop CAM descriptions that comply with the Proposed Rules without
conforming to an example provided by the Board. As a result, inclusion
of examples may lead to more boilerplate descriptions of CAMs. In
addition, the PCAOB does present certain examples in the release
accompanying the Proposed Rules to provide guidance on how to identify
and communicate CAMs. The release includes examples such as, whether
the auditor's evaluation of the company's ability to continue as a
going concern could also represent a CAM and whether a potential
illegal act, if an appropriate determination had been made that no
disclosure of it was required in the financial statements, would be a
CAM. The Proposed Rules also include a note incorporating four examples
of potential approaches to addressing the requirement to describe how
the CAM was addressed in the audit.

G. Disclosure of Auditor Tenure in the Auditor's Report

    Commenters provided mixed perspectives related to the disclosure of
auditor tenure in the auditor's report. Some commenters did not support
disclosure of auditor tenure in the auditor's report. These commenters
indicated such disclosure may give undue prominence to the information,
thereby giving an impression that a correlation exists between auditor
tenure and independence or audit quality.\81\ Some of these commenters
suggested alternative locations for this information, such as the proxy
statement, so that the information could be provided with context from
the audit committee, or PCAOB Form AP.\82\ At least one commenter did
not support requiring the disclosure of auditor tenure as this
commenter stated the audit committee is in the best position to
evaluate the auditor's independence.\83\ Other commenters, including
investors and investor associations, supported the disclosure of
auditor tenure, indicating the information is useful in matters such as
proxy voting.\84\
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    \81\ See e.g., CCMC Letter; PwC Letter; Deloitte Letter.
    \82\ See e.g., Davis Polk Letter; Regions Letter.
    \83\ See e.g., Bruce J. Nordstrom Letter.
    \84\ See e.g., Colorado PERA Letter; CFA Institute Letter.
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    As described in the release accompanying the Proposed Rules,
issuers are not currently required to disclose auditor tenure, although
some voluntarily choose to do so. Based on recent surveys,\85\ and as
noted in the release accompanying the Proposed Rules, there is a
growing trend of voluntary disclosure of auditor tenure in the proxy
statement, presumably reflecting audit committees' use of and
investors' demand for such information. We believe it is important to
note, for issuers that do not disclose auditor tenure voluntarily,
investors themselves, in some circumstances, may be able to determine
auditor tenure based on publicly available information. Further, we are
aware that various third-party commercial databases provide auditor
tenure information based on public records (e.g., the auditor's report
in an issuer's annual report on Form 10-K). Institutional investors or
professional analysts typically have access to such databases; however,
retail investors typically do not. To the extent that these retail
investors seek to obtain auditor tenure information, they would need to
incur the cost to determine this information themselves.\86\
Accordingly, we believe requiring this disclosure could lower
information acquisition costs for such investors, which we find to be a
compelling potential benefit in support of the requirement.
---------------------------------------------------------------------------

    \85\ See e.g., Deloitte, Center for Board Effectiveness, Audit
Committee Disclosure in Proxy Statements--2017 Trend (Aug. 2017),
available at https://www2.deloitte.com/content/dam/Deloitte/us/Documents/center-for-board-effectiveness/us-cbe-august-2017-on-the-boards-agenda.pdf.
    \86\ Though institutional investors and professional analysts
need to pay to get access to the databases, their marginal cost of
acquiring this piece of information is likely much lower than that
of retail investors because the database provider can spread the
cost among the database's many subscribers.
---------------------------------------------------------------------------

    As it relates to the location of the disclosure, the PCAOB does not
have the statutory authority to require disclosure in the proxy
statement. While the Commission does have authority to amend the proxy
rules, as discussed in the release accompanying the Proposed Rules, not
all companies required to be audited under PCAOB standards are subject
to the proxy rules (e.g., foreign private issuers). In addition,
certain issuers that are not required to hold annual meetings of
shareholders, such as most registered investment companies, generally
will solicit proxies less frequently than other issuers. Also, as
discussed in the release accompanying the Proposed Rules, the Board
considered disclosure of auditor tenure in Form AP, which requires
disclosure of the name of the engagement partner and of the names and
percentage of participation of other accounting firms in the audit for
all issuer audits. However, Form AP was developed primarily to respond
to commenter concerns about the potential liability consequences of
naming persons in the auditor's report, the potential need to obtain
consents from those named persons in connection with registered
securities offerings, and the additional time needed to compile
information about the other accounting firms. The Board's determination
to create Form AP, rather than require disclosure of these items in the
auditor's report, was a means to address these concerns.
    We believe it is important to acknowledge that the disclosure of
auditor tenure does not have the same potential liability or other
consequences as disclosure of the name of the engagement partner or
other accounting firms. We therefore agree with the Board that such an
approach is unnecessary in the Proposed Rules. Overall, we believe it
is appropriate for this disclosure to appear in the auditor's report
because it will provide for a consistent location and decrease search
costs with respect to information about auditor tenure.

H. The Effective Dates of the Proposed Rules

    Some commenters suggested postponement or further consideration of
the effective dates included in the Proposed Rules.\87\ At least one
commenter suggested postponement of the effective dates as companies
and auditors will be dealing with the implementation of significant new
GAAP standards, including those related to revenue, leases, and credit
losses.\88\ In the release accompanying the Proposed Rules, the Board
took into consideration commenters' feedback and phased effective dates
for CAMs, indicating this ``may facilitate any post-implementation
review of the impact of the final standard.''
---------------------------------------------------------------------------

    \87\ See e.g., CCMC Letter; FEI Letter; Eli Lilly Letter.
    \88\ See e.g., CCMC Letter.
---------------------------------------------------------------------------

    We believe the Board took a balanced approach to effective dates by
adopting a reasonable phase-in schedule. For certain entities listed
internationally, audit firms are already required to communicate
information similar to CAMs. Given that the effective date for
communication of CAMs for large accelerated filers is phased in first,
larger firms will likely be able to observe practices developed by
other firms within their global network in considering implementation
questions.

    As the Board discussed, the staggered approach to implementation
may allow the Board to evaluate implementation by the first cohort of
companies before applying the Proposed Rules to other companies. Also,
the second cohort of auditors and companies will have more time to
prepare, and will have the benefit of observing how the Proposed Rules
have been implemented by the first cohort. The Commission itself, for
many similar reasons, has used, at times, staggered implementation
dates for new regulatory requirements.\89\ With respect to the other
changes to the auditor's report in the Proposed Rules that are not
subject to a phase-in approach, those changes should not be a
significant burden to implement as they involve relatively
straightforward changes to the existing auditor's report. Accordingly,
we believe the effective dates in the Proposed Rules are reasonable.
---------------------------------------------------------------------------

    \89\ See e.g., Shareholder Approval of Executive Compensation
and Golden Parachute Compensation, Release No. 33-9178 (Jan. 25,
2011), 76 FR 6010 (Feb. 2, 2011) available at https://www.sec.gov/rules/final/2011/33-9178.pdf.
---------------------------------------------------------------------------

I. Implementation Efforts

    Several commenters, including most notably audit firms, generally
expressed support for the Proposed Rules while simultaneously
expressing concern that unintended consequences may arise during
implementation. These commenters stated that uncertainty surrounding
the effects of the Proposed Rules would necessitate a post-
implementation review.\90\ Commenters called on the Commission and
PCAOB to assist with implementation efforts should the Commission
approve the Proposed Rules and encouraged the Board to take advantage
of the proposed phased effective dates to undertake a post-
implementation review of the impact of the final standard.\91\ Some
accounting firms have also stated their willingness to work with both
the Commission and PCAOB to provide feedback on implementation
experiences.\92\ In the release accompanying the Proposed Rules, the
Board stated that it ``intends to monitor the results of
implementation, including consideration of any unintended
consequences.''
---------------------------------------------------------------------------

    \90\ See e.g., BDO Letter; Letter from the Center for Audit
Quality, August 18, 2017 (``CAQ Letter''); Deloitte Letter; EY
Letter; PwC Letter.
    \91\ See id.
    \92\ See e.g., CAQ Letter; EY Letter; PwC Letter.
---------------------------------------------------------------------------

    The Commission acknowledges that the communication required of
auditors by the Proposed Rules is a significant change in practice for
auditors, companies, and audit committees. Accordingly, it will be
important to closely monitor the implementation of the Proposed Rules,
including potentially issuing incremental implementation guidance (if
needed), providing PCAOB staff to be available to respond to questions
and challenges as they arise, and completing a post-implementation
review as soon as reasonably possible, including some analysis between
effective dates for CAMs. The Commission expects the PCAOB to take such
steps.

IV. Effect on Emerging Growth Companies

    Under the Proposed Rules, the requirement to communicate CAMs would
not apply to the audits of EGCs, but all other provisions within the
Proposed Rules would apply to such audits.\93\ As described in section
II.A, these include a number of changes to the auditor's report that
are primarily intended to clarify the auditor's role and
responsibilities related to the audit of the financial statements,
provide additional information about the auditor's tenure, and make the
auditor's report easier to read.
---------------------------------------------------------------------------

    \93\ See Paragraph .05b of AS 3101 within the Proposed Rules.
---------------------------------------------------------------------------

    Section 103(a)(3)(C) of the Sarbanes-Oxley Act, as amended by
Section 104 of the Jumpstart Our Business Startups 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 of the issuer (auditor discussion and analysis)''
shall not apply to an audit of an EGC. The provisions of the Proposed
Rules applicable to the audits of EGCs do not fall into this
category.\94\ 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 provisions of the Proposed Rules applicable to
the audits of EGCs fall within this category, and thus the Commission
must make a determination under the statute about the applicability of
these provisions to EGCs. Having considered those statutory factors,
the Commission finds that applying these provisions to the audits of
EGCs is necessary or appropriate in the public interest.
---------------------------------------------------------------------------

    \94\ 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 a certain format for the auditor's report or inclusion of
additional factual information about auditor tenure, auditor
independence and other requirements related 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 certain 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 facilitate
the Commission's determination, the Board 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
certain of 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.\95\ The
data on EGCs outlined in the white paper indicates that a majority of
EGCs are smaller public companies that are generally new to the SEC
reporting process. This suggests that there is less information
available to investors regarding such companies relative to the broader
population of public companies because, in general, investors are less
informed about companies that are smaller and newer.
---------------------------------------------------------------------------

    \95\ See White Paper on Characteristics of Emerging Growth
Companies (Nov. 15, 2016), available at https://pcaobus.org/EconomicAndRiskAnalysis/ORA/Documents/White-Paper-Characteristics-Emerging-Growth-Companies-November-2016.pdf.
---------------------------------------------------------------------------

    We expect that the changes to the auditor's report that would be
applied to the audits of EGCs under the Proposed Rules, will: (1)
Provide a consistent location and decrease search costs with respect to
information about auditor tenure; (2) enhance users' understanding of
the auditor's role; and (3) make the auditor's report easier to read
and facilitate comparison across companies by making the format of the
report more uniform. Given the relatively straightforward nature of the
additional changes to the auditor's report, we expect that the costs
associated with these changes will not be significant and will be
primarily one-time, rather than recurring, costs. Overall, we expect
the changes to increase the efficiency with which users are able to
locate and understand the information presented in the auditor's
report. We do not expect the changes to

significantly impact competition or capital formation. 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 for the Commission to determine that
applying the Proposed Rules, other than the provisions related to CAMs,
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, which do not have a requirement
to communicate CAMs, 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-2017-01) be and hereby are approved.

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-23379 Filed 10-26-17; 8:45 am]
BILLING CODE 8011-01-P