company's specialist or an auditor's specialist often involves
professional judgment, the nature of which the auditor may not fully
appreciate when evaluating the work of the specialist. In particular,
the specialist's work is highly technical in nature and often is not
entirely transparent to the auditor, who may not have complete access
to the specialist's work \159\ or the same level of knowledge and skill
in the specialist's field.\160\ Thus, due to the potential that an
auditor would incur relatively higher cost to supervise an auditor's
specialist or to evaluate the work of a company's or an auditor's
specialist, the auditor may have incentives to forego procedures
related to the use of the work of specialists that could be beneficial
to investors.
---------------------------------------------------------------------------

    \159\ For example, as further discussed in section C, some
commenters on the Proposal expressed concern that the auditor may
have limited access to proprietary information used by a company's
specialist or an auditor-engaged specialist (as compared with
information used by an auditor-employed specialist). The final
amendments do not require the auditor to obtain such proprietary
information, but instead to obtain sufficient information to assess
whether the model is in conformity with the applicable financial
reporting framework.
    \160\ See, e.g., Griffith, Auditors, Specialists, and
Professional Jurisdiction in Audits of Fair Values 23 (``[Results]
show[ ] that many auditors review specialists' work for general
understanding and sufficiency of the work performed, rather than
reviewing in detail as they would in other areas of the audit. They
approach the review this way because they cannot fully understand
specialists' work.'').
---------------------------------------------------------------------------

    The potential negative impact on audit quality of the auditor's
incentives to forgo procedures is compounded by the possibility that an
auditor's specialist may perceive little benefit (compared to the
corresponding costs and efforts) in fully carrying out their
responsibilities, including the objectives of the work to be
performed.\161\ Alternatively, the specialist may in some instances
believe that he or she faces few negative consequences (such as an
increase in potential liability) when performing low quality work or,
as one commenter on the Proposal asserted, an auditor's specialist may
not set forth conclusions anticipated to be rejected by the auditor.
However, any such concerns are at least partially alleviated to the
extent specialists are subject to codes of conduct, standards, and
disciplinary processes of their own profession or could perceive a risk
of reputational damage.\162\
---------------------------------------------------------------------------

    \161\ To the extent that an auditor's specialist has a stronger
relationship with the auditor (e.g., repeated business interactions
between the specialist and the auditor), the potential for moral
hazard arising in the context of the auditor using such an auditor's
specialist could be higher. However, a stronger relationship between
the auditor and the auditor's specialist may also result in the
specialist's work being more commensurate with the risk of material
misstatement associated with the financial statement assertion and,
therefore, improve audit quality.
    \162\ See, e.g., Letter from American Academy of Actuaries (Aug.
29, 2017), at 1-2, available on the Board's website in Docket 044
(stating that the Academy's members ``are subject to a code of
professional conduct, standards of qualification and practice, and a
disciplinary process'' and that ``our profession has a specific
standard that defines appropriate practice for actuaries during the
course of an audit'').
---------------------------------------------------------------------------

    The Proposal stated that enhanced performance standards regarding
the use of the work of specialists might improve audit quality and
benefit investors. One commenter asserted that the Proposal had not
articulated a pervasive problem that would be solved by a change in
auditing standards. This commenter further stated that it was not
persuaded

that a change in the audit framework for the auditor's use of
specialists was necessary, based on its view that a significant amount
of audit work is currently being performed. The Board believes,
however, that the changes in the final amendments described in section
C are needed (and preferable to other policy-making approaches) \163\
because market forces alone cannot mitigate the moral hazard problem
described above.
---------------------------------------------------------------------------

    \163\ See below for a discussion of why the Board believes that
standard setting is preferable to other policy-making approaches.
---------------------------------------------------------------------------

    Strengthening the requirements for evaluating the work of a
company's specialist, as well as applying a risk-based supervisory
approach when using the work of both auditor-employed and auditor-
engaged specialists, will prompt auditors to plan and perform audit
procedures commensurate with the risk of material misstatement inherent
in the specialist's work, and thereby mitigate the moral hazard
problem. The final amendments direct more audit attention and effort,
when using the work of specialists, to areas where the specialist's
work is more significant to the auditor's conclusion on a financial
statement assertion and the risk of material misstatement is higher.
    Specifically, as discussed in section C, the final amendments
mitigate the moral hazard problem by linking the auditor's
responsibilities for determining the necessary evidence when evaluating
the work of the company's specialist, including the data, significant
assumptions, and methods used by the specialist, to four factors: The
risk of material misstatement of the relevant assertion; the
significance of the specialist's work to the auditor's conclusion
regarding that assertion; the level of knowledge, skill, and ability of
the specialist; and the ability of the company to significantly affect
the specialist's judgments about the work performed, conclusions, or
findings.
    Further, the final amendments mitigate the moral hazard problem in
the context of the use of the work of an auditor's specialists by
clarifying the auditor's supervisory responsibilities over auditor-
employed specialists and establishing parallel requirements when
auditors use the work of auditor-engaged specialists, as discussed in
section C. In addition, the necessary extent of supervision under the
final amendments depends on factors similar to those that govern the
necessary auditor effort in evaluating the work of a company's
specialist.

Economic Impacts

    The magnitude of the benefits and costs of the final amendments
will be affected by the nature of and risks involved in the work
performed by specialists, because more complex work and work in areas
of greater risk will likely require greater audit effort, holding all
else constant. In addition, benefits and costs are likely to be
affected by the degree to which auditors have already adopted audit
practices and methodologies that are similar to those that the final
amendments will require.\164\
---------------------------------------------------------------------------

    \164\ Additionally, the new standard and related amendments in
the Estimates Release, supra note 20, may affect the future
prevalence and significance of the use of the work of specialists
and, therefore, have an impact on the benefits and costs of the
final amendments discussed in this section.
---------------------------------------------------------------------------

    The remainder of this subsection discusses the potential benefits,
costs, and unintended consequences that may result from the final
amendments the Board is adopting.
Benefits
    The requirements in the final amendments are expected to benefit
investors and auditors by directing auditors to devote more attention
to the work of specialists and enhancing the coordination between
auditors and their specialists. This should mitigate the problem of
auditor moral hazard discussed in the preceding section and contribute
to improved audit quality. The final amendments are intended to
accomplish this, and increase the likelihood that auditors will detect
material misstatements, through requirements that take into account
current auditing practices by some larger audit firms and more strongly
align auditors' interests with the interests of investors when auditors
use the work of specialists. At the same time, by fostering improved
audit quality, the final amendments should increase investors'
perception of the credibility of a company's financial statements, and
help address uncertainty about audit quality and the potential risks
associated with the use of the work of company specialists, auditor-
employed specialists, and auditor-engaged specialists.
    The Board believes that investors will benefit from the final
amendments because the application of the requirements should result in
more consistently rigorous practices among auditors when using the work
of a company's specialist in their audits, as well as a more consistent
approach to the supervision of auditor-employed and auditor-engaged
specialists. The current divergence in practices related to the
auditor's use of the work of specialists, combined with a lack of
information about such divergence, could mean that investors are unable
to distinguish the quality of each audit separately, which in turn
could lead investors to discount the quality of all audits. Conversely,
greater consistency in such practices--such as would be promoted by the
final amendments--could mitigate those concerns by both enhancing the
quality of less rigorous audits and correcting the inappropriate
discounting of more rigorous audits. From an investor's perspective,
and as one commenter concurred, the increase in audit quality that
should result from the final amendments should contribute to investor
protection. Specifically, an increase in audit quality may increase the
quality of the information provided in a company's financial statements
and decrease the cost of capital for that company,\165\ especially if
less information is available about the company because it has a
shorter financial reporting history.\166\
---------------------------------------------------------------------------

    \165\ See, e.g., Richard A. Lambert, Christian Leuz, and Robert
E. Verrecchia, Accounting Information, Disclosure, and the Cost of
Capital, 45 Journal of Accounting Research 385, 386-7 (2007)
(``[A]ccounting information influences a [company's] cost of capital
. . . where higher quality accounting information . . . affects the
market participants' assessments of the distribution of future cash
flows''); see also Randolph P. Beatty, Auditor Reputation and the
Pricing of Initial Public Offerings, 64 The Accounting Review 693,
696 (1989) (``Since auditing firms that have invested more in
reputation capital have greater incentives to reduce application
errors, the information disclosed in the accounting reports audited
by these firms will be more precise, ceteris paribus. This reduction
in measurement error will allow uninformed investors to estimate
more precisely the distribution of firm value.'').
    \166\ See, e.g., Jeffrey A. Pittman and Steve Fortin, Auditor
Choice and the Cost of Debt Capital for Newly Public Firms, 37
Journal of Accounting and Economics 113, 114 (2004) (``[E]ngaging
[an audit firm with] a brand name reputation for supplying higher-
quality audit that enhances the credibility of financial statements,
enables young [companies] to reduce their borrowing costs . . .
[O]ur research suggests that the economic value of auditor
reputation declines with age as [companies] shift toward exploiting
their own reputations to reduce information asymmetry.'').
---------------------------------------------------------------------------

    From a broader capital markets perspective, an increase in the
information quality of a company's financial statements because of
improved audit quality can increase the efficiency of capital
allocation decisions. In other words, an increase in the information
quality of companies' financial statements can reduce the non-
diversifiable risk to investors and generally should result in
investment decisions by investors that more accurately reflect the
financial position

and operating results of each company.\167\
---------------------------------------------------------------------------

    \167\ See, e.g., Lambert et al., Accounting Information,
Disclosure, and the Cost of Capital 388 (finding that information
quality directly influences a company's cost of capital and that
improvements in information quality by individual companies
unambiguously affect their non-diversifiable risks.); Ahsan Habib,
Information Risk and the Cost of Capital: Review of the Empirical
Literature, 25 Journal of Accounting Literature 127, 128 (2006) (``A
commitment to increased level [and quality] of disclosure reduces
the possibility of information asymmetries and hence should lead to
a lower cost of capital effect. . . . In addition, high quality
auditing . . . could provide credible information in the market
regarding the future prospect of the [company] and hence could
reduce the cost of capital in general, and cost of equity capital in
particular.'' (footnote omitted)).
---------------------------------------------------------------------------

    In addition to the general benefits to investors and the capital
markets described above, the final amendments should result in specific
benefits to auditors. In particular, the final amendments should lead
to improvements in the ability of auditors to supervise auditor-
employed and auditor-engaged specialists and evaluate their work, to
the extent that auditors devote more attention to the work of auditor-
employed and auditor-engaged specialists and enhance the coordination
with those specialists. The final amendments with regard to the use of
the work of a company's specialist should also lead to improvements in
the auditor's understanding of the data, significant assumptions, and
methods used by the company's specialist. As auditors are better able
to identify and detect potential risks of material misstatement, this
may also spur companies and their specialists over time to improve the
quality of financial reporting and their work.
    The final amendments may also contribute to the aggregate benefits
of the auditing standards (i.e., by enhancing auditors' understanding
of, and compliance with, other PCAOB auditing standards), in addition
to the other improvements in audit quality described above. For
example, the final amendments to evaluate the work of a company's
specialist should result in some auditors developing a better
understanding of the company's accounting estimates in significant
financial statement accounts and disclosures. In turn, this may also
result in improved communications with audit committees.\168\
---------------------------------------------------------------------------

    \168\ See paragraphs .12c and .13c of AS 1301, Communications
with Audit Committees, for the auditor's communication requirements
related to the company's critical accounting estimates.
---------------------------------------------------------------------------

    The magnitude of the benefits discussed in this section resulting
from improved audit quality will likely vary to the extent that current
practices are aligned with the final amendments. Based on observations
from the Board's oversight activities, most firms would need to enhance
their methodologies, but to varying degrees. In general, both the
greatest changes and the greatest benefits are likely to occur with
auditors that need to enhance their methodologies the most.
Costs
    The Board recognizes that the benefits of the final amendments will
come at additional costs to auditors and the companies they audit. As
with any changes to existing requirements, it is anticipated that there
will be one-time costs for auditors associated with updating audit
methodologies and tools, preparing new training materials, and
conducting training.\169\ The final amendments could also give rise to
recurring costs in the form of additional time and effort spent on any
individual audit engagement by specialists and engagement team members.
---------------------------------------------------------------------------

    \169\ The PCAOB has observed that larger firms are likely to
update their methodologies using internal resources, whereas smaller
firms are more likely to purchase updated methodologies from
external vendors.
---------------------------------------------------------------------------

    The most significant impact of the final amendments on costs for
auditors is expected to result from the requirements to evaluate the
work of a company's specialist. This area of potential impact was also
noted by some commenters on the proposed requirements for testing and
evaluating the work of a company's specialist.
    Compared with the existing requirements,\170\ the auditor will be
required under the final amendments to evaluate the significant
assumptions used by the company's specialist whenever the specialist's
work is used, rather than only in certain circumstances,\171\ as well
as the methods used by the specialist. In practice, these requirements
may result in auditors performing more work or using an auditor's
specialist to assist them in evaluating the work of a company's
specialist. This may lead to significant changes in practice for some
firms, particularly smaller firms that currently do not employ
specialists and follow methodologies solely based on existing AS 1210,
even though the final amendments do not require the auditor to use the
work of an auditor's specialist.
---------------------------------------------------------------------------

    \170\ See existing AS 1210.12.
    \171\ In circumstances when an auditor is auditing fair value
measurements and disclosures in accordance with AS 2502, footnote 2
of that standard provides that management's assumptions include
assumptions developed by a specialist engaged or employed by
management. Therefore, the auditor is currently required to evaluate
the reasonableness of significant assumptions developed by the
company's specialist when auditing a fair value measurements and
disclosures.
---------------------------------------------------------------------------

    Compared to the Proposal, however, the final amendments clarify the
auditor's responsibility when evaluating the work of the company's
specialist and, therefore, should further limit any incremental cost to
circumstances where increases in audit quality can be reasonably
expected. For example, as detailed in section C, the final amendments
reflect changes to the Proposal relating to the auditor's evaluation of
the data, significant assumptions, and methods used by the company's
specialist. These revisions clarify that the focus of the auditor's
evaluation does not require reperforming the specialist's work.
Instead, the auditor's responsibility is to evaluate whether the
specialist's work provides sufficient appropriate evidence to support a
conclusion regarding whether the corresponding accounts or disclosures
in the financial statements are in conformity with the applicable
financial reporting framework.
    In addition, some of the expected cost increases for auditors due
to the final amendments are likely to be offset by the implementation
of more risk-based audit approaches in practice (e.g., more targeted
procedures when using the work of specialists). More risk-based audit
approaches reduce the risk to the auditor of failing to detect material
misstatement and thus could lead to a reduction in costs resulting from
potential liability or reputational loss faced by auditors.
    The final amendments' impact on costs for auditors could also vary
based on the size and complexity of an audit engagement. Holding all
else constant, anticipated costs generally would be higher for larger,
more complex audits than for smaller, less complex audits.\172\ As
discussed above, a smaller portion of audits performed by smaller audit
firms tend to involve use of the work of specialists, compared with
audits performed by larger audit firms. Accordingly, it is reasonable
to infer that relatively fewer audits of smaller firms will be impacted
by the final amendments than audits of larger firms.
---------------------------------------------------------------------------

    \172\ See Letter from American Academy of Actuaries (July 31,
2015), at 18, available on the Board's website in Docket 044
(stating that ``smaller audit firms also tend to have clients that
require fewer special needs'' and thus implying that audit
engagements of smaller audit firms tend to be less complex than
audit engagements of larger audit firms).
---------------------------------------------------------------------------

    The impact of the final amendments would also likely vary, however,
depending on the extent to which elements of the final amendments have
already been incorporated in an audit

firm's methodologies or applied in practice by individual engagement
teams. For auditors that have already implemented elements of the final
amendments, the costs of implementing the final amendments will be
lower than for firms that currently perform more limited audit
procedures. For example, some firms employ procedures to reach and
document their understanding with an auditor's specialist about, among
other things, the responsibilities of the auditor's specialist and the
nature of the work to be performed. Firms that do not already employ
such procedures may incur additional costs under the final amendments.
    Similarly, the incremental impact of the final amendments on costs
incurred by auditors would likely vary depending on, among other
things, how many of an audit firm's engagements involve the use of the
work of specialists. Among audit firms that use the work of specialists
on their engagements, the anticipated costs would likely be higher for
those firms that use the work of specialists more frequently or
extensively than for firms that do so less frequently or extensively.
Larger audit firms generally perform a larger number of audit
engagements, however, and the incremental impact of the final
amendments on their costs per engagement should be lower than for
smaller firms that generally perform a smaller number of audit
engagements. This would be the case regardless of whether the audit
engagements of the larger and smaller firms involve the use of the work
of specialists, since larger firms, due to their existing economies of
scale \173\ and scope,\174\ would tend to be able to distribute the
overall cost impact of the final amendments over a larger number of
audit engagements.
---------------------------------------------------------------------------

    \173\ See Economies of Scale and Scope, The Economist, Oct. 20,
2008 (available at https://www.economist.com/news/2008/10/20/economies-of-scale-and-scope) (``Economies of scale are factors that
cause the average cost of producing something to fall as the volume
of its output [i.e., number of audit engagements] increases.''). In
this context, the average cost would likely fall with the number of
audit engagements, because certain costs, such as the cost of
employing specialists, are not directly related to the number of
audit engagements that an auditor assumes. See also Simon Yu Kit
Fung, Ferdinand A. Gul, and Jagan Krishnan, City-Level Auditor
Industry Specialization, Economies of Scale, and Audit Pricing 87
The Accounting Review 1281, 1287 (2012) (``For an audit firm, the
scale economies can arise from substantial investment in general
audit technology (e.g., audit software development or hardware
acquisition) and human capital development (e.g., staff training),
which are likely to be shared among all of their clients. Once these
investments are in place, additional clients can be serviced at a
lower marginal cost than the cost of servicing the first few
clients.'').
    \174\ See Economies of Scale and Scope, The Economist
(``[E]conomies of scope [are] factors that make it cheaper to
produce a range of products together than to produce each one of
them on its own. Such economies can come from businesses sharing
centralised functions . . .'').
---------------------------------------------------------------------------

    Some commenters argued that the Proposal could lead, in some
instances, to significant (and potentially pervasive) increases in
auditing costs, due to increased audit effort that would not
necessarily be accompanied by corresponding increases in audit quality.
In contrast, one commenter asserted that the requirements could be
implemented effectively with minimal costs. In adopting the final
amendments, the Board modified certain of the proposed amendments with
the intent that the final amendments be risk-based and scalable, and
that any cost increases be accompanied by commensurate improvements in
audit quality. For example, as discussed earlier in this subsection,
the final amendments reflect changes to the Proposal relating to the
auditor's evaluation of the data, significant assumptions, and methods
used by the company's specialist. These changes clarify that the focus
of the auditor's evaluation does not require reperforming the
specialist's work and thus should limit incremental costs to situations
where more auditor involvement is necessary to address the identified
risk of material misstatement.
    The final amendments might result in additional costs for some
companies, compared to costs incurred under current requirements, to
the extent that the final amendments lead auditors to raise their audit
fees.\175\ Such additional costs could vary for the same reasons as
described above relating to the final amendments' potential impact on
costs incurred by auditors. The final amendments could also give rise
to new recurring costs for management, to the extent that the final
amendments result in the need for companies to devote more time and
resources to respond to auditor inquiries and requests. Some commenters
on the Proposal expressed concern about the potential cost to
companies, including smaller companies. For example, one commenter
suggested that companies might need to provide more support for their
discount rate assumptions under the proposed amendments. On the other
hand, another commenter suggested that, in the context of the size of
the U.S. fixed income market, consistent use of methodologies compliant
with fair value accounting requirements by companies would be a small
cost to bear.
---------------------------------------------------------------------------

    \175\ It is not clear to what extent the final amendments will
result in higher audit fees. The Board is aware of public reports
that have analyzed historical and aggregate data on audit fees and
suggest that audit fees generally have remained stable in recent
years, notwithstanding the fact that the Board and other auditing
standard setters have issued new standards and amended other
standards during that period. See, e.g., Audit Analytics, Audit Fees
and Non-Audit Fees: A Fifteen Year Trend (Dec. 2017). For a general
discussion of cost pass-through, see, e.g., James Bierstaker, Rich
Houston, Arnold Wright, The Impact of Competition on Audit Planning,
Review, and Performance, 25 Journal of Accounting Literature 1, 12
(2006) (summarizing research on the market for audit services and
finding ``there is evidence of lower fee premiums when clients
switch auditors, suggesting that auditors are less able to pass on
the increased costs associated with new audits in a more competitive
environment''); and RBB Economics, Brief 48: The Price Effect of
Cost Changes: Passing Through and Here to Stay 1, 3 (Dec. 2014).
---------------------------------------------------------------------------

    For many companies (and, indirectly, investors), however, the final
amendments should not result in significant additional costs or
significantly increased audit fees, particularly recurring costs, as
their auditors, especially if they are larger audit firms, may have
already incorporated many or all elements of the final amendments into
their audit methodologies, and individual engagement teams may already
be applying many or all of the final amendments in practice. In
addition, the changes from the Proposal reflected in the final
amendments, which clarify the auditor's responsibility when evaluating
the work of the company's specialist, should mitigate some of the
potential additional costs suggested by commenters.
Unintended Consequences
    In addition to the benefits and costs discussed above, the final
amendments could have unintended economic impacts, the possibility of
which the Board has taken into account in adopting the final
amendments. The discussion below describes the potential unintended
consequences that were identified in the Proposal or by commenters, as
well as the Board's consideration of such consequences in adopting the
final amendments. The discussion also addresses, where applicable,
factors that mitigate the potential negative consequences, including
revisions to the proposed amendments reflected in the final amendments
and the existence of other countervailing factors.
Potential Adverse Impact on the Ability of Smaller Firms To Provide
Audit Services
    In instances where the final amendments would increase the need of
some audit firms to use the work of an auditor's specialist (rather
than only use the work of a company's specialist under existing AS
1210), the final amendments might result in some smaller firms
accepting fewer audit engagements that would require the use

of an auditor's specialist. Relatedly, in such instances, some smaller
firms might be inhibited from expanding their audit services for
similar reasons. The Board had acknowledged the possibility of such
unintended consequences in the Proposal, and some commenters also
expressed the view that the proposed amendments might adversely impact
the ability of smaller firms to provide audit services in certain
situations.
    In particular, to the extent that auditors at smaller audit firms
have less experience evaluating the work of a company's specialist than
auditors at larger firms, some auditors may have an increased need to
use the work of an auditor's specialist for certain engagements.
Potentially, such firms would be unable to take advantage of the
economies of scale and scope available to larger firms (for example, if
they did not employ their own specialists and had to identify and
engage qualified specialists), and find it economically less attractive
to accept such engagements. In addition, some commenters on the
Proposal suggested more broadly that the ability of smaller firms to
compete in the audit services market would be adversely affected. The
Board acknowledges that the final amendments could have a more
significant impact on smaller firms than on larger firms. However, the
Board believes that two factors will lessen any such adverse impact of
the final amendments on smaller firms.
    First, as described earlier in this section, the evidence from
PCAOB inspections data indicates that smaller audit firms generally
have comparatively few audit engagements in which they use the work of
a company's specialist or an auditor's specialist. For example, the
results for smaller audit firms in Figure 5 above indicate that the
auditors did not use the work of either a company's specialist or an
auditor's specialist in 81% and 94% of the audits of smaller audit
firms--U.S. and non-U.S. firms, respectively--inspected in 2017, and
that the auditors used the work of a company's specialist without also
using the work of an auditor's specialist \176\ in only 10% and 6% of
the audits of smaller audit firms--U.S. and non-U.S. firms,
respectively--inspected in 2017.\177\ These results suggest that the
number of engagements where smaller firms might be faced with using an
auditor's specialist for the first time to evaluate the work of a
company's specialist under the final amendments is a relatively small
proportion of audits subject to the Board's standards.
---------------------------------------------------------------------------

    \176\ The fact that the auditor did not use the work of an
auditor's specialist does not imply that the auditor should have
used the work of an auditor's specialist.
    \177\ Furthermore, given that the engagements selected for
inspection are on average more likely to be complex (and thus more
likely to involve the use of the work of a specialist) than the
overall population of audit engagements of smaller audit firms, the
percentage results shown above for audits involving the use of the
work of specialists are likely greater than the actual percentage of
the overall population of audit engagements of smaller audit firms.
---------------------------------------------------------------------------

    Second, there is some evidence that smaller and larger audit firms
do not directly compete with one another in some segments of the audit
market.\178\ To the extent smaller audit firms compete in different
segments of the audit market than larger audit firms, the competitive
impact of the final amendments on smaller firms would be lessened.
---------------------------------------------------------------------------

    \178\ See, e.g., GAO Report No. GAO-03-864, Public Accounting
Firms: Mandated Study on Consolidation and Competition (July 2003).
---------------------------------------------------------------------------

    Taking into consideration the factors described above, the final
amendments further mitigate the potential adverse impact on the ability
of smaller firms to provide audit services involving, or compete for
audit engagements that require, the use of the work of specialists. For
example, the clarifications in the final amendments for evaluating the
work of a company's specialist, such as limiting the use of the term
``test'' to procedures applied to company-produced information used by
the specialist, should alleviate concerns expressed by certain
commenters on the Proposal that auditors would be required to reperform
the work of a company's specialist. In addition, under the final
amendments, auditors are allowed to assess the objectivity of an
auditor-engaged specialist along a spectrum, rather than make a binary
determination whether they can use the work of an auditor-engaged
specialist.\179\
---------------------------------------------------------------------------

    \179\ Similarly, the final amendments recognize that a company's
ability to significantly affect the judgments of a company's
specialist may vary and provide for the auditor to evaluate along a
spectrum the company's ability to significantly affect those
judgments.
---------------------------------------------------------------------------

Potential Diversion of Auditor Attention From Other Tasks That Warrant
Attention
    In some audit engagements involving specialists, the final
amendments might lead auditors to devote more of their attention and
resources to the work of a company's specialists (including the related
training of audit personnel) and to enhancing the coordination with an
auditor's specialists, and less time and resources to other tasks that
warrant greater attention.
    The potential impact on overall audit quality might vary as the re-
orientation of attention would occur in different ways for each audit
engagement. Any potential adverse impact on overall audit quality is
mitigated, however, by the risk-based approach in the final amendments
to using the work of specialists. To the extent that the re-orientation
of the auditor's attention leads to more effort in areas with the
greatest risk of material misstatement to the financial statements,
overall audit quality would be expected to increase. Furthermore, if
auditors devote more attention to the work of specialists and enhancing
the coordination with their specialists, the final amendments will
result in some auditors acquiring greater expertise, which could
positively affect the quality of audit work performed by such auditors.
Such auditor specialization could lead some audit firms to seek fewer
audit engagements involving specialists, while other firms might seek
more such engagements. In such a market, the competitive effects of
increased specialization would likely be highly dependent on the
circumstances.
Potential for Unnecessary Effort by the Auditor or the Auditor's
Specialist
    Under the final amendments, the potential exists that auditors
might interpret the final requirements to suggest that they should use
the work of an auditor's specialist in situations where the auditor had
already obtained sufficient appropriate evidence with respect to a
relevant assertion of a significant account or disclosure. The Proposal
also identified this potential consequence, and some commenters
expressed concern that auditors might feel compelled to do more work
than was necessary or optimal under the proposed requirements. This
unintended consequence might also arise under the final amendments if
an auditor had already evaluated the work of a company's specialist,
but decided to employ or engage its own specialist to perform
additional procedures. For example, the auditor might ask an auditor's
specialist to develop or assist in developing an independent
expectation of an estimate in order to further demonstrate his or her
diligence or err on the side of caution. In some instances, it is
possible that the auditor might do so even though the auditor believes
the costs of using the work of an auditor's specialist will outweigh
the expected benefits in terms of audit quality.
    The final amendments, however, mitigate this risk in several
respects. In particular, the final amendments do not require the
auditor to use the work of an

auditor's specialist. Moreover, the final amendments regarding the
nature, timing, and extent of the evaluation of the work of the
company's specialist are designed to be risk-based and scalable to
companies of varying size and complexity. In addition, as discussed
above, the final amendments clarify the requirements for evaluating the
work of a company's specialist and assessing the objectivity of an
auditor-engaged specialist, which should avoid unnecessary effort by
the auditor or auditor's specialist. Accordingly, any increases in
effort should be accompanied by improvements in audit quality.
Potential Shift in the Balance Between the Work of a Company's
Specialist and the Work of an Auditor's Specialist
    In audit engagements involving specialists, the potential exists
that the final amendments could affect the balance between the work of
a company's specialist and the work of an auditor's specialist. The
Proposal also identified this potential consequence, and some
commenters expressed concern that companies might, in some instances,
choose not to engage or involve a company's specialist if they expected
that the auditor would use an auditor's specialist to perform
additional procedures.\180\
---------------------------------------------------------------------------

    \180\ See, e.g., Letter from Duff & Phelps (Aug. 30, 2017), at
4, available on the Board's website in Docket 044 (``situations may
arise where management may feel compelled to invest less time, costs
and effort in supporting certain assertions in the financial
statements by not engaging a specialist when one would otherwise be
called for--especially given the expectation that the auditor's
specialist would perform extensive testing and calculations as part
of the audit'').
---------------------------------------------------------------------------

    The final amendments do not change management's responsibility for
the financial statements or their obligation to maintain effective
internal control over financial reporting. Anticipating the use of an
auditor's specialist for the audit engagement, however, some issuers
may decide to use a company's specialist to a lesser extent (or not at
all) when preparing financial statements and some company specialists
may exhibit a reduced sense of responsibility. In such instances, the
auditor's specialist may have to perform more work in order to
adequately evaluate potential audit evidence provided by the issuer,
including the work of a company's specialist if the issuer continues to
use such a specialist. Alternatively the auditor may decide not to use
the work of a company's specialist or use that work to a lesser extent.
If the situations described above were to occur, audit quality might be
reduced, not enhanced, in some instances.
    The change in the balance between the work of a company's
specialist and the work of an auditor's specialist, however, would
likely be limited, as companies control the work of a company's
specialist over information to be used in the financial statements, but
lack similar control over an auditor's specialist. Companies generally
are likely, therefore, to prefer to continue their use of a company's
specialist. In addition, the final amendments do not require auditors
to use an auditor's specialist when using the work of a company's
specialist. Moreover, compared to the Proposal, the final amendments
clarify the requirements for evaluating the work of a company's
specialist. For example, the final amendments clarify the auditor's
responsibilities for evaluating the methods and significant assumptions
used by the company's specialist, and limit the use of the term
``test'' to procedures applied to company-produced information used by
the specialist. These clarifications should alleviate concerns
expressed by certain commenters.
Potential Reduction in the Availability of Specialists
    Some commenters on the Proposal suggested that the proposed
amendments, if adopted, would not affect the pool of qualified
specialists available to serve as auditors' specialists. Other
commenters, however, expressed concern that the proposed amendments
might result in a shortage of, or strains on, the pool of qualified
auditors' specialists, especially in situations where an audit firm
currently uses the work of a company's specialist, but does not
concurrently use an auditor's specialist.\181\ Situations that involved
the auditor's use of the work of a company's specialist, but did not
concurrently involve the use of an auditor's specialist, comprised a
small percentage of audit engagements, ranging from 6% to 10% of the
audit engagements of smaller and larger audit firms--U.S. and non-
U.S.--that were selected for inspection in 2017 (category (1) of Figure
5 above).
---------------------------------------------------------------------------

    \181\ Commenters did not specify whether such shortages would be
permanent, or instead would reflect a temporary disruption to which
the market would adjust over time.
---------------------------------------------------------------------------

    Similar to the proposed amendments, the final amendments do not
require auditors to use an auditor's specialist when using the work of
a company's specialist. Moreover, in comparison to the proposed
amendments, auditors are allowed under the final amendments to assess
the objectivity of an auditor-engaged specialist along a spectrum,
rather than make a binary determination whether they can use the work
of an auditor-engaged specialist.\182\ This change should also reduce
the possibility of a shortage of qualified auditors' specialists.
Accordingly, the Board believes that the final amendments should not
result in a shortage of, or strains on, the pool of qualified
specialists available to serve as auditors' specialists.
---------------------------------------------------------------------------

    \182\ Additionally, the final amendments provide for the auditor
to evaluate along a spectrum the company's ability to significantly
affect the judgments of the company's specialist. Furthermore, as
discussed above, the final amendments reflect changes to the
Proposal relating to the evaluation of the data, significant
assumptions, and methods used by the company's specialist that
clarify that the focus of the auditor's evaluation does not require
the auditor to reperform the specialist's work.
---------------------------------------------------------------------------

Alternatives Considered, Including Key Policy Choices
    The development of the final amendments involved considering a
number of alternative approaches to address the problems described
above. This subsection explains: (1) Why standard setting is preferable
to other policy-making approaches, such as providing interpretive
guidance or enhancing inspection or enforcement efforts; (2) other
standard-setting approaches that were considered by the Board; and (3)
key policy choices made in determining the details of the proposed
standard-setting approach.
Why Standard Setting Is Preferable to Other Policy-Making Approaches
    The Board's policy tools include alternatives to standard setting,
such as issuing additional interpretive guidance or an increased focus
on inspections or enforcement of existing standards. One commenter
stated that the Board should be proactive and supported the Board's
preference for standard setting over other policy tools, while other
commenters noted that other policy tools, such as the issuance of staff
guidance and inspections activity, should also be considered.
    While other policy tools may complement auditing standards, the
Board has determined that providing additional guidance or increasing
its inspection or enforcement efforts, without also amending the
existing requirements regarding the auditor's responsibilities for
using the work of specialists, would not be effective corrective
mechanisms to address concerns with the evaluation of the work of a
company's specialist, the

supervision of an auditor's specialists, and the sources of market
failure discussed previously. In addition, while devoting additional
resources to such activities might focus auditors' attention on
existing requirements, it would not provide the benefits associated
with improving the standards discussed above. Thus, the final approach
reflects the conclusion that standard setting is needed to fully
achieve the benefits resulting from improvement in audits involving
specialists. The Board will, however, monitor the implementation of the
final amendments by audit firms and, if appropriate, consider the need
for additional guidance.
Other Standard-Setting Alternatives Considered
    Several alternative standard-setting approaches were also
considered, including: (1) Retaining the existing framework but
requiring the auditor to disclose when the auditor used the work of
specialists in the audit; or (2) targeted amendments to existing
requirements.
Disclosing When the Work of a Specialist Is Used
    As an alternative to amending AS 1105 and AS 1201 and replacing
existing AS 1210 in its entirety, the Board considered amending
existing AS 1210 to remove the current limitations in existing AS
1210.15 on disclosing that a specialist was involved in the audit.
Under this approach, the auditor would have been required to disclose
this fact. Investors might benefit from such a requirement, since it
would inform investors, at a minimum, that the auditor had evaluated
the need for specialized skill or knowledge in order to perform an
audit in accordance with PCAOB standards. Such disclosures could, in
theory, positively affect audit practice, as auditors might face more
scrutiny from investors regarding their decisions whether or not to use
specialists.
    Disclosure alone, however, would be unlikely to achieve the Board's
objectives, which includes effecting more consistently rigorous
practices among auditors when using the work of a company's specialist
in their audits, as well as effecting a more consistent approach to the
supervision of auditor-employed and auditor-engaged specialists. For
example, with disclosure alone, some auditors might not evaluate the
significant assumptions and methods of a company's specialist, even in
higher risk audit areas.
    Moreover, in a separate rulemaking, the Board has adopted a new
auditing standard that requires the auditor to communicate CAMs in the
auditor's report. 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 relates to accounts or
disclosures that were material to the financial statements and involved
especially challenging, subjective, or complex auditor judgment.\183\
Depending on the circumstances, the description of such CAMs might
include a discussion of the work or findings of a specialist. While it
is not yet clear how frequently the use of the work of specialists will
be disclosed in the auditor's report as part of CAMs, these disclosure
requirements are complemented by amending AS 1105 and AS 1201 and
replacing existing AS 1210 to improve performance requirements over the
use of the work of specialists. As discussed above, this should
directly mitigate auditor moral hazard and change certain elements of
audit practice observed by PCAOB oversight activities that have given
rise to concern, such as situations where auditors did not apply
appropriate professional skepticism when using the work of specialists.
---------------------------------------------------------------------------

    \183\ See 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. 2017-001
(June 1, 2017).
---------------------------------------------------------------------------

Targeted Amendments to Existing Requirements for Using the Work of an
Auditor's Specialists
    The Board considered, but is not adopting, two alternative
approaches for an auditor's use of the work of an auditor's specialist,
as discussed in further detail in the Proposal. The first alternative
was to develop a separate standard for using the work of an auditor's
specialist. This approach would have created a new auditing standard
for using the work of an auditor's specialist, whether employed or
engaged by the auditor, similar to the approach in ISA 620 and AU-C
Section 620 (and thereby separating the requirements for using the work
of an auditor-engaged specialist from those for using the work of a
company's specialist). One commenter on the Proposal supported this
approach. The second alternative was to extend the supervisory
requirements in AS 1201 to an auditor-engaged specialist. This approach
would have amended existing AS 1210 to remove all references to an
auditor-engaged specialist and amended AS 1201 to include all
arrangements involving auditor-employed and auditor-engaged
specialists.
    Given the similar role of an auditor-employed and an auditor-
engaged specialist in the audit, the Board determined that the
auditor's procedures for reaching an understanding with the specialist
and evaluating the work to be performed by the specialist should be
similar. Accordingly, the Board has adopted separate, but parallel,
requirements for using the work of an auditor-employed specialist and
an auditor-engaged specialist related to reaching an understanding and
evaluating the work to be performed. However, as discussed above, the
auditor's relationship to an auditor-employed specialist differs in
certain respects from the auditor's relationship to an auditor-engaged
specialist, which may affect the auditor's visibility into the
specialist's knowledge, skill, and ability, as well as into any
relationships that might affect the specialist's independence or
objectivity. Accordingly, the final amendments address these
differences by requiring the auditor to perform procedures in AS 1210,
as amended, to evaluate the knowledge, skill, ability, and objectivity
of auditor-engaged specialists, while recognizing that the auditor
evaluates the knowledge, skill, ability, and independence of auditor-
employed specialists in accordance with the same requirements that
apply to other engagement team members.
Key Policy Choices
    Given the preference for creating separate requirements for using a
company's specialist, an auditor-employed specialist, and an auditor-
engaged specialist, the Board considered different approaches to
addressing key policy issues.
Scope of the Final Amendments
    The Board considered a variety of possible approaches to the scope
of the final amendments, including the treatment of persons with
specialized skill or knowledge in certain areas of IT and income taxes.
See section C for a discussion of the Board's considerations. In
particular, after considering comments on the Proposal, the Board has
clarified the scope and application of the final amendments in the rule
text and discussion in its adopting release. The Board, while mindful
of advances in technology that could fundamentally impact the audit
process (and hence what is understood to be skill and knowledge in
specialized areas of accounting and auditing), believes that the final
amendments are sufficiently principles-based and flexible to
accommodate continued technological advances that could impact audit
practice in the future.

Evaluating the Work of a Company's Specialist
    The Board considered a variety of possible approaches relating to
the auditor's evaluation of the work of a company's specialist. See
section C for a discussion of the Board's considerations. In
particular, after considering the comments on the Proposal, the Board
is retaining the fundamental approach in the Proposal, under which the
auditor evaluates the data, significant assumptions, and methods used
by the specialist. The final amendments, including the revisions to the
proposed requirements described in section C, retain the benefits
resulting from the use of a risk-based audit approach, while at the
same time directing the auditor to consider the quality of the source
of information when determining his or her audit approach.
Evaluating the Qualifications and Independence of the Auditor-Employed
Specialist
    The Board considered a variety of possible approaches to evaluating
the knowledge, skill, ability, and independence of auditor-employed
specialists. See section C for a discussion of the Board's
considerations. In particular, after considering the comments on the
Proposal, the Board eliminated from the final amendments certain
paragraphs that could have been misinterpreted as suggesting a
different process for evaluating the qualifications and independence of
auditor-employed specialists than for other engagement team members.
Instead, the final amendments acknowledge that an auditor-employed
specialist is a member of the engagement team and that existing
requirements for assessing the qualifications and independence of
engagement team members apply equally to auditor-employed specialists.
Assessing the Qualifications and Objectivity of the Auditor-Engaged
Specialist
    The Board considered a variety of possible approaches to assessing
the knowledge, skill, ability, and objectivity of auditor-engaged
specialists. See section C for a discussion of the Board's
considerations. In particular, after considering the comments, the
Board made revisions in adopting the requirements described in section
C to allow auditors to assess the objectivity of auditor-engaged
specialists along a spectrum, rather than make a binary determination.
The Board believes the final amendments in this area should limit any
incremental cost to circumstances where increases in audit quality can
be reasonably expected and thereby mitigate any adverse economic impact
from potential unintended consequences of the final amendments. For
example, requiring the auditor to perform additional procedures to
evaluate the data, significant assumptions, and methods used by the
specialist when the specialist has a relationship with the company that
affects the specialist's objectivity should increase audit quality and
reduce the risk that a material misstatement could go undetected.
Special Considerations for Audits of Emerging Growth Companies
    Pursuant to Section 104 of the Jumpstart Our Business Startups
(``JOBS'') Act, rules adopted by the Board subsequent to April 5, 2012,
generally do not apply to the audits of EGCs, unless the SEC
``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.'' \184\ As a result of
the JOBS Act, the rules and related amendments to PCAOB standards the
Board adopts are generally subject to a separate determination by the
SEC regarding their applicability to audits of EGCs.
---------------------------------------------------------------------------

    \184\ See Public Law 112-106 (Apr. 5, 2012). See Section
103(a)(3)(C) of the Sarbanes-Oxley Act, as added by Section 104 of
the JOBS Act. Section 104 of the JOBS Act also provides that any
rules of the Board requiring (1) mandatory audit firm rotation or
(2) 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 final
amendments do not fall within either of these two categories.
---------------------------------------------------------------------------

    The Proposal sought comment on the applicability of the proposed
requirements to audits of EGCs. Commenters generally supported applying
the proposed requirements to audits of EGCs. These commenters asserted
that consistent requirements should apply for similar situations
encountered in any audit of a company, whether that company is an EGC
or not, as well as that the benefits described in the Proposal would be
applicable to EGCs. One commenter suggested ``phasing'' the
implementation of the requirements for such audits to reduce the
compliance burden.
    The Board also notes that any new PCAOB standards and amendments to
existing standards determined not to apply to the audits of EGCs would
require auditors to address the differing requirements within their
methodologies, which would also create the potential for confusion.
    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.\185\ As of
the November 15, 2017 measurement date, the PCAOB staff identified
1,946 companies that had identified themselves as EGCs in at least one
SEC filing since 2012 and had filed audited financial statements with
the SEC in the 18 months preceding the measurement date.
---------------------------------------------------------------------------

    \185\ See PCAOB white paper, Characteristics of Emerging Growth
Companies as of November 15, 2017 (Oct. 11, 2018) (``EGC White
Paper''), available on the Board's website.
---------------------------------------------------------------------------

    Overall, the discussion of benefits, costs, and unintended
consequences above is generally applicable to audits of EGCs. EGCs
generally tend to have shorter financial reporting histories than other
exchange-listed companies. As a result, there is less information
available to investors regarding such companies relative to the broader
population of public companies.\186\
---------------------------------------------------------------------------

    \186\ Id.
---------------------------------------------------------------------------

    Although the degree of information asymmetry between investors and
company management for a particular issuer is unobservable, researchers
have developed a number of proxies that are thought to be correlated
with information asymmetry, including small issuer size, lower analyst
coverage, larger insider holdings, and higher research and development
costs.\187\ To the extent that EGCs exhibit one or more of these
properties, there may be a greater degree of information asymmetry for
EGCs than for the broader population of companies, which increases the
importance to investors of the external audit to enhance the
credibility of management disclosures.\188\ The final amendments

relating to the auditor's use of the work of specialists, which are
intended to enhance audit quality, could contribute to an increase in
the credibility of financial statement disclosures by EGCs.
---------------------------------------------------------------------------

    \187\ See, e.g., David Aboody and Baruch Lev, Information
Asymmetry, R&D, and Insider Gains, 55 Journal of Finance 2747
(2002); Michael J. Brennan and Avanidhar Subrahmanyam, Investment
Analysis and Price Formation in Securities Markets, 38 Journal of
Financial Economics 361 (1995); Varadarajan V. Chari, Ravi
Jagannathan, and Aharon R. Ofer, Seasonalities in Security Returns:
The Case of Earnings Announcements, 21 Journal of Financial
Economics 101 (1988); and Raymond Chiang, and P. C. Venkatesh,
Insider Holdings and Perceptions of Information Asymmetry: A Note,
43 Journal of Finance 1041 (1988).
    \188\ See, e.g., Molly Mercer, How Do Investors Assess the
Credibility of Management Disclosures?, 18 Accounting Horizons 185,
189 (2004) (``[Academic studies] provide archival evidence that
external assurance from auditors increases disclosure credibility. .
.These archival studies suggest that bankers believe audits enhance
the credibility of financial statements . . .'').
---------------------------------------------------------------------------

    When confronted with information asymmetry, investors may require a
larger risk premium, and thus increase the cost of capital to
companies.\189\ Reducing information asymmetry, therefore, can lower
the cost of capital to companies, including EGCs, by decreasing the
risk premium required by investors.\190\
---------------------------------------------------------------------------

    \189\ See supra notes 165 and 167.
    \190\ For a discussion of how increasing reliable public
information about a company can reduce risk premium, see David
Easley and Maureen O'Hara, Information and the Cost of Capital, 59
The Journal of Finance 1553 (2004).
---------------------------------------------------------------------------

    Furthermore, an analysis by PCAOB staff, the results of which are
summarized in Figure 6 below, suggests that the prevalence and
significance of the use of the work of specialists in audits of EGCs is
comparable to the prevalence and significance of the use of the work of
specialists in audits of non-EGCs, for audit engagements by both
smaller audit firms and larger audit firms.\191\
---------------------------------------------------------------------------

    \191\ The staff analysis was based on engagement-level data from
the subset of 74 audit engagements of EGCs by U.S. and non-U.S.
audit firms that were selected for inspection in 2017 presented
above.

  Figure 6--Audits Performed by U.S. and Non-U.S. Audit Firms of EGCs That Were Selected for Inspection by the
                          PCAOB in 2017, Categorized by Use of the Work of Specialists
----------------------------------------------------------------------------------------------------------------
                                                                                % (number) of
                                            % (number) of     % (number) of     % (number) of       audits by
                                          audits by larger      audits by     audits by larger   smaller  audit
                                             audit firms     smaller  audit      audit firms      firms  (non-
                                               (U.S.)         firms  (U.S.)      (non-U.S.)           U.S.)
----------------------------------------------------------------------------------------------------------------
(1) auditor used the work of a company's            0% (0)            9% (3)           11% (1)           13% (1)
 specialist but did not use the work of
 an auditor's specialist................
(2) auditor used the work of an                     8% (2)            0% (0)           22% (2)            0% (0)
 auditor's specialist but did not use
 the work of a company's specialist.....
(3) auditor used the work of both a                29% (7)           12% (4)           22% (2)            0% (0)
 company's specialist and an auditor's
 specialist.............................
(4) auditor neither used the work of a            63% (15)          79% (26)           44% (4)           88% (7)
 company's specialist nor used an
 auditor's specialist \192\.............
                                         -----------------------------------------------------------------------
    Total \193\.........................         100% (24)         100% (33)          100% (9)          100% (8)
----------------------------------------------------------------------------------------------------------------
Source: PCAOB

    As indicated in Figure 6, the staff analysis observed that 41 (or
about 55%) of the audit engagements were performed by U.S. and non-
U.S., smaller audit firms. Among those 41 audit engagements, only four
(or about 10%) involved the use of the work of a company's specialist
but did not concurrently involve the use of the work of an auditor's
specialist (category (1) above). In comparison, 33 of the 41 audit
engagements (or about 80%) did not involve the use of the work of
either a company's specialist or an auditor's specialist (category (4)
above) and four of the 41 audit engagements (or about 10%) involved the
use of both a company's specialist and an auditor's specialist
(category (3) above). In none of those 41 audit engagements did the
auditor use the work of an auditor's specialist without also
concurrently using the work of a company's specialist (category (2)
above). Among the 33 audit engagements of EGCs (or about 45%) performed
by larger firms, both U.S. and non-U.S. firms, one (or about 3%)
involved the use of the work of a company's specialist but did not
concurrently involve the use of the work of an auditor's specialist
(category (1) above); 19 (or about 58%) did not involve the use of the
work of either a company's specialist or an auditor's specialist
(category (4) above); nine (or about 27%) involved the use of both a
company's specialist and an auditor's specialist (category (3) above);
and four (or about 12%) involved the use of the work of an auditor's
specialist, but did not concurrently involve the use of work of a
company's specialist (category (2) above).
---------------------------------------------------------------------------

    \192\ The audit engagements not included in the preceding three
categories were included in the fourth category.
    \193\ The total for the values shown in categories (1) through
(4) may not add to 100% due to rounding.
---------------------------------------------------------------------------

    Thus, the Board believes that the need for the final amendments
discussed earlier and the associated benefits of the final amendments
generally apply also to audits of EGCs.
    While for small companies (including EGCs), even a small increase
in audit fees could negatively affect their profitability and
competitiveness, many EGCs are expected to experience minimal impact
from the final amendments. In particular, some EGCs do not use a
company's specialist and, for those EGCs that do use a company's
specialist, the final amendments relating to the auditor's use of the
work of such specialists are risk-based and designed to be scalable to
companies of varying size and complexity.
    In addition, the analysis presented in the EGC White Paper observed
that about 40% of audits of EGCs are performed by firms that provided
audit reports for more than 100 issuers and were required to be
inspected on an annual basis by the PCAOB.\194\ These firms tend to
already have practices for using the work of specialists that are
consistent with many or all elements of the final amendments. For such
audit firms, the costs on a per engagement basis of adopting the final
amendments should also be low, for the reasons discussed above.
---------------------------------------------------------------------------

    \194\ See EGC White Paper, at 3.
---------------------------------------------------------------------------

    For the other 60% of audits of EGCs, the PCAOB staff analysis
summarized in Figure 6 above suggests that the proportion of EGC audit
engagements that involve the use of the work of company specialists,
but do not involve the use of the work of an auditor's specialist, is
small and comparable to the proportion of similar issuer audit
engagements described previously. As discussed above, auditors on such
audit engagements may experience the most significant cost impact of
the final amendments. However, only a small proportion of audits of
EGCs are expected to be significantly affected by the final amendments.
In addition, the final amendments clarify the requirements for
evaluating the work of a company's specialist and assessing the
objectivity of an auditor-engaged specialist, which should avoid

unnecessary effort by the auditor or auditor's specialist. Accordingly,
any increase in effort should be accompanied by improvements in audit
quality.
    The Board has provided this analysis to assist the SEC in its
consideration of whether it 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,''
to apply the final amendments to audits of EGCs. This information
includes data and analysis of EGCs identified by the Board's staff from
public sources.
    For the reasons explained above, the Board believes that the final
amendments are in the public interest and, after considering the
protection of investors and the promotion of efficiency, competition,
and capital formation, recommends that the final amendments should
apply to audits of EGCs. Accordingly, the Board recommends that the
Commission determine that it 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, to
apply the final amendments to audits of EGCs. The Board stands ready to
assist the Commission in considering any comments the Commission
receives on these matters during the Commission's public comment
process.
Applicability to Audits of Brokers and Dealers
    The Proposal indicated that the proposed amendments would apply to
audits of brokers and dealers, as defined in Sections 110(3)-(4) of the
Sarbanes-Oxley Act. The Board solicited comment on any factors
specifically related to audits of brokers and dealers that may affect
the application of the proposed amendments to those audits. Commenters
that addressed the issue agreed that amendments to the standards for
the auditor's use of the work of specialists should apply to these
audits, citing benefits to users of financial statements of brokers and
dealers and the risk of confusion and inconsistency if different
methodologies were required under PCAOB standards for audits of
different types of entities.
    After considering comments, the Board determined that the final
amendments, if approved by the SEC, will be applicable to all audits
performed pursuant to PCAOB standards, including audits of brokers and
dealers. The Board's determination is based on the observation that the
information asymmetry between the management of brokers and dealers and
their customers about the brokers' and dealers' financial condition may
be significant and of particular interest to customers, as a broker or
dealer may have custody of customer assets, which could become
inaccessible to the customers in the event of the insolvency of the
broker or dealer.
    In addition, unlike the owners of brokers and dealers, who
themselves may be managers and thus be subject to minimal or no
information asymmetry, customers of brokers and dealers may, in some
instances, be large in number and may not be expert in the management
or operation of brokers and dealers. Such information asymmetry between
the management and the customers of brokers and dealers makes the role
of auditing important to enhance the reliability of financial
information.
    Accordingly, the discussion above of the need for the final
amendments, as well as the costs, benefits, alternatives considered and
potential unintended consequences to auditors and the companies they
audit, also applies to audits of brokers and dealers. In particular,
PCAOB staff analysis of inspections data for audits of brokers and
dealers indicates that auditors of brokers and dealers do not
frequently use the work of specialists, whether company specialists or
an auditor's specialists.\195\ Hence, the results suggest that only a
small percentage of audits of brokers and dealers will be impacted by
the final amendments. In addition, with respect to the impact of the
final amendments on customers of brokers and dealers, the expected
improvements in audit quality described previously would benefit such
customers, along with investors, capital markets and auditors, while
the final requirements are not expected to result in any direct costs
or unintended consequences to customers of brokers and dealers.
---------------------------------------------------------------------------

    \195\ The staff analysis is based on 116 audit engagements of
brokers and dealers performed by audit firms that were selected for
inspection in 2017. The results of the analysis found that the
auditor did not use the work of a specialist in about 90% of the
broker or dealer audits. This analysis also found that auditors used
the work of at least one auditor's specialist in about 8% of the
audits analyzed and used the work of at least one company specialist
in about 2% of those audits.
---------------------------------------------------------------------------

III. Date of Effectiveness of the Proposed Rules and Timing for
Commission Action

    Pursuant to Section 19(b)(2)(A)(ii) of the Exchange Act, and based
on its determination that an extension of the period set forth in
Section 19(b)(2)(A)(i) of the Exchange Act is appropriate in light of
the PCAOB's request that the Commission, pursuant to Section
103(a)(3)(C) of the Sarbanes-Oxley Act, determine that the proposed
rules apply to the audits of EGCs, the Commission has determined to
extend to July 3, 2019 the date by which the Commission should take
action on the proposed rules.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed
rules are consistent with the requirements of Title I of the Act.
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/pcaob.shtml); or
     Send an email to [email protected]. Please include
File Number PCAOB-2019-03 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number PCAOB-2019-03. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/pcaob.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rules that are filed
with the Commission, and all written communications relating to the
proposed rules between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, on official business days
between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing
will also be available for inspection and copying at the principal
office of the PCAOB. All comments received will be posted without
charge. Persons submitting comments are cautioned that we do not redact
or edit personal identifying information from comment submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number PCAOB-2019-03 and

should be submitted on or before April 25, 2019.
---------------------------------------------------------------------------

    \196\ 17 CFR 200.30-11(b)(1) and (3).

    For the Commission, by the Office of the Chief Accountant, by
delegated authority.\196\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-06425 Filed 4-3-19; 8:45 am]
BILLING CODE 8011-01-P


MIDWEST RESEARCH INSTITUTE Crossroads Corporate Park 5520 Dillard Road Suite 100 Cary, North Carolina 27511 9232 Telephone ( 919) 851 8181 FAX ( 919) 851 3232 Date: May 28, 2002 Subject: Site Visit Georgia Pacific Oriented Strandboard Plant in Brookneal, Virginia Plywood and Particleboard MACT Standard EPA Contract No. 68 D6 0012; Task Order No. 0017; ESD Project No. 95/ 11 MRI Project No. 104804.1.068 From: Melissa Icenhour, MRI Rebecca Nicholson, MRI To: Mary Tom Kissell OAQPS/ ESD/ WCPG ( C439 03) U. S. Environmental Protection Agency Research Triangle Park, NC 27711 I. Purpose The purpose of the site visit to the Georgia Pacific oriented strandboard ( OSB) manufacturing plant in Brookneal, Virginia was to collect any new information from the plant since a previous visit by EPA representatives on March 11, 1998, and to listen to Georgia Pacific personnel's ideas on alternatives for determining the capture efficiency of full and partial press enclosures. The information gathered during this site visit will be used in the development of National Emission Standards for Hazardous Air Pollutants ( NESHAP) for the plywood and composite wood products ( PCWP) manufacturing industry.

II. Place and Date Georgia Pacific Corporation U. S. Highway 501 South Gladys, Virginia 24554 July 19, 2001 III. Attendees Georgia Pacific Corporation Paul Vasquez, Manager of Environmental Engineering, Building Products Wayne Bales, Plant Operations Manager 2 Mike Robertson, Environmental Manager Kenny Richardson, Safety Manager Virginia Department of Environmental Quality ( VADEQ)

Craig Nicol, Compliance Enforcement Specialist Sr.

U. S. Environmental Protection Agency Mary Tom Kissell, Environmental Engineer Candace Sorrell, Environmental Engineer, Emission Measurement Center ( EMC)

Midwest Research Institute ( MRI)

Melissa Icenhour, Environmental Engineer Rebecca Nicholson, Manager of Environmental Engineering Section IV. Discussion A. Background Oriented strandboard is a sheathing, roofing, and flooring material constructed from wood flakes which are blended with resin, formed into a layered mat, pressed, and trimmed to size. The Georgia Pacific OSB plant in Brookneal, Virginia, began operation in 1992. In 2000, the plant produced 407 million square feet ( MMSF) of OSB ( 0.375 inch basis). The plant has a rated capacity of 325 MMSF ( 0.375 inch basis); however, because the rated capacity is a conservative estimate of the plant's actual capacity, the plant is permitted for a maximum production rate of 424 MMSF ( 0.375 inch basis) per year. The plant employs a total of 130 people.

Because this plant was visited in 1998, the remainder of this trip report will deal with changes made at the plant following that visit. For more information on the process, refer to document II B 16 in Docket A 98 44.

B. Process The main changes in the OSB production process since 1998 involve the raw materials and the drum dryers. The Brookneal plant uses approximately 70 percent southern pine and 30 percent soft hardwoods for production of OSB. This is in contrast to the 50 percent southern pine and 50 percent soft hardwoods that was used in 1998. The plant now operates three triplepass rotary drum dryers that can each process approximately 58,000 pounds per hour ( lb/ hr) of green flakes. The increase of 8,000 lb/ hr from 1998 is due to the addition of new 15 million Btu gas rings. 3 C. Control of Emissions from the Press 1. Background. In December of 1997, the Brookneal plant installed an enclosure around the hot press area and installed a Smith Engineering thermal catalytic oxidizer ( TCO) to control press emissions. Prior to the TCO, there is a drop out box for particulates. However, very little particulate accumulates, so the drop box only requires a once per year cleaning. The maintenance of the TCO requires a scheduled shutdown once or twice a year, and yearly samples of catalytic media are taken to determine the catalytic activity.

2. TCO. The TCO was selected as the most adequate control equipment to control the precipitation of pitch and waxes. It was originally installed on the press exhaust to control condensible materials that were depositing on employees' vehicles. Other control technologies, such as low and high energy scrubbers and a wet electrostatic precipitator, were considered and evaluated. These technologies were rejected because of the estimated amount of wastewater to be generated. In addition to controlling the condensible materials, the TCO has a VOC destruction efficiency of about 94.1 percent based on stack tests conducted in 1996 and 1997. The TCO was not selected based on any BACT analysis.

The set temperature in the TCO combustion chamber is used to monitor and control the operation of the TCO. The TCO has five thermocouples used to monitor temperature. These thermocouples are located between each of the six canisters. Plant personnel determine a 15 minute average and an hourly average operating temperature for the TCO by averaging the readings from all of the thermocouples. The individual temperature readings from these thermocouples may vary by as much as 50

F, because one canister is always in the cooling mode, and thus has a lower temperature than the others. However, the average temperature does not vary much.

3. Press Enclosure. When designing the press enclosure, Georgia Pacific had to include the loader, press, and unloader in the enclosure because of the tight spacing between each piece of equipment. Other companies may not include all press related equipment in the enclosure, but either type of enclosure needs openings to allow the boards to pass through. Some companies choose to install high speed " garage doors" which open and close to allow product through the enclosure.

The Brookneal enclosure was installed by the same company that installed the TCO. The walls of the enclosure are corrugated metal, which is typical of most press enclosures at Georgia Pacific plants. The capital cost of these types of enclosures is typically $ 1.00 to $ 1.70 per actual cubic foot per minute ( acfm) of press exhaust. Georgia Pacific used insulating foam to fill gaps in the metal walls and replaced the ill fitting access doors with new ones.

The requirements regarding press enclosures vary from state to state. The Brookneal press is required to be enclosed, but is not required to meet EPA Method 204, although the enclosure meets most of these design requirements. Plant personnel have expressed concerns with the concentration of fumes in the upper corners of the enclosure and the subsequent leakage of the fumes from the enclosure to the building. According to a Georgia Pacific analysis, the upper 4 portion of the enclosure is pressurized, which causes the fumes to leak through small openings and gaps.

4. Concerns of Measuring Capture Efficiency for the Press Enclosure. EPA Method 204 ( Criteria for and Verification of Permanent or Temporary Total Enclosure) can be used to determine the capture efficiency of press enclosures at PCWP plants. If the enclosure meets the criteria in EPA Method 204 for a permanent total enclosure ( PTE), then its capture efficiency is assumed to be 100 percent. If the enclosure is not a PTE, then a temporary total enclosure ( TTE) must be constructed around the press and the capture efficiency of the TTE determined according to the procedures in EPA Method 204. Georgia Pacific personnel stated that EPA Method 204 was developed for applications where emission gases have similar physical properties such as temperature and density. According to a Georgia Pacific analysis, the temperature and density of gases change as the OSB press opens and closes, creating layers of gases with different physical properties. Other layers of gases with different physical properties are also introduced by the fresh air and/ or heat radiated from hot pipes in the press pit area, which is located beneath the press. The interaction between the layers of gases results in the formation of a neutral pressure zone, which fluctuates between the middle and upper section of the hot press. In a heated enclosure, the area above the neutral line is at a higher pressure than the bottom of the enclosure. The top of the enclosure also has a higher pressure than the air outside the enclosure, whereas the bottom of the enclosure has a lower pressure than the outside of the enclosure. The variation in pressure and temperature between the layers of gases prevents them from mixing, moving, and exiting the enclosure. Georgia Pacific personnel believe that this can cause an increased concentration of fumes, dust, wax, oil, and hazardous substances which could create a hazardous environment for employees working inside the enclosure.

To study this phenomenon, one of the Brookneal process engineers built a small scale version of the press enclosure and used it to simulate press heat generation. Emissions were also simulated using smoke. The small scale study indicated that Georgia Pacific would need to increase the airflow through the press enclosure about three to five times higher than the existing flow rate in order to effectively evacuate the enclosure.

As an alternative to increasing the flow, the press pit was examined for possible design changes. If this source of heat could be lessened, Georgia Pacific personnel believe that the temperature inversion problems also could be lessened. The press pit, which slopes to a depth of 26 feet below the press, is shown in Figure 1. This depth allows adequate space for the press to fully open and also contains the thermal oil pipe network necessary to heat the press. To lessen the temperature inversion problems, engineers tried to insulate the thermal oil pipes to reduce heat loss into the press enclosure. Since the pipes reach temperatures between 400

and 500

F and the pipes flex during the pressing operation, finding an insulation to meet both demands has been unsuccessful.

During evaluations of a partial enclosure designed for a multiple opening press at another OSB facility, Georgia Pacific Corporation employees determined that effective evacuation of the gases within the partial enclosure could be accomplished by using a hood design configuration that encapsulates the hot plates of the press from top to bottom, thus allowing the mixing of the 5 26 feet Press pit thermal oil Unloader Press Loader boards 3 press vents per side Figure 1. Brookneal Press Pit Area cooler air with the hotter air, reducing the temperature differential. This also results in less heat rise affect, less pressure difference, and more efficient exhaust. Visual observations of the partial press enclosure indicate no visible gases escape from the bottom of the hood. Although these are valid results for the partial enclosure, this OSB facility is located in another state, and press enclosure requirements vary from state to state. Some states require press enclosures to meet EPA Method 204 criteria, and other states may only require a " smoke test" to demonstrate that the enclosure is working properly.

Georgia Pacific Corporation plans to conduct the necessary computational models and gas trace analysis to determine the capture efficiency of the partial enclosure design. In addition, Georgia Pacific Corporation and independent engineering/ software companies are exploring the technical feasibility of alternate designs using computation fluid dynamics for modeling the enclosures.

C:\ dmautop\ temp\ dwcgi 23438 1077568255 25275000. wpd


[Federal Register Volume 78, Number 165 (Monday, August 26, 2013)]
[Notices]
[Pages 52773-52774]
[FR Doc No: 2013-20711]

-----------------------------------------------------------------------

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Food and Drug Administration

[Docket No. FDA-2013-N-0878]

Agency Information Collection Activities; Proposed Collection;
Comment Request; Premarket Notification for a New Dietary Ingredient

AGENCY: Food and Drug Administration, HHS.

ACTION: Notice.

-----------------------------------------------------------------------

SUMMARY: The Food and Drug Administration (FDA or we) is announcing an
opportunity for public comment on our proposed collection of certain
information. Under the Paperwork Reduction Act of 1995 (the PRA),
Federal Agencies are required to publish notice in the Federal Register
concerning each proposed collection of information, including each
proposed extension of an existing collection of information, and to
allow 60 days for public comment in response to the notice. This notice
invites comments on the procedure by which a manufacturer or
distributor of dietary supplements or of a new dietary ingredient is to
submit information to us upon which it has based its conclusion that a
dietary supplement containing a new dietary ingredient will reasonably
be expected to be safe.

DATES: Submit either electronic or written comments on the collection
of information by October 25, 2013.

ADDRESSES: Submit electronic comments on the collection of information
to http://www.regulations.gov. Submit written comments on the
collection of information to the Division of Dockets Management (HFA-
305), Food and Drug Administration, 5630 Fishers Lane, Rm. 1061,
Rockville, MD 20852. All comments should be identified with the docket
number found in brackets in the heading of this document.

FOR FURTHER INFORMATION CONTACT: FDA PRA Staff, Office of Operations,
Food and Drug Administration, 1350 Piccard Dr., PI50-400B, Rockville,
MD 20850,<PHONE_NUMBER><EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION: Under the PRA (44 U.S.C. 3501-3520), Federal
Agencies must obtain approval from the Office of Management and Budget
(OMB) for each collection of information they conduct or sponsor.
``Collection of information'' is defined in 44 U.S.C. 3502(3) and 5 CFR
1320.3(c) and includes Agency requests or requirements that members of
the public submit reports, keep records, or provide information to a
third party. Section 3506(c)(2)(A) of the PRA (44 U.S.C. 3506(c)(2)(A))
requires Federal Agencies to provide a 60-day notice in the Federal
Register concerning each proposed collection of information, including
each proposed extension of an existing collection of information,
before submitting the collection to OMB for approval. To comply with
this requirement, we are publishing notice of the proposed collection
of information set forth in this document.
    With respect to the following collection of information, FDA invite
comments on these topics: (1) Whether the proposed collection of
information is necessary for the proper performance of FDA's functions,
including whether the information will have practical utility; (2) the
accuracy of FDA's estimate of the burden of the proposed collection of
information, including the validity of the methodology and assumptions
used; (3) ways to enhance the quality, utility, and clarity of the
information to be collected; and (4) ways to minimize the burden of the
collection of information on respondents, including through the use of
automated collection techniques, when appropriate, and other forms of
information technology.

Premarket Notification for a New Dietary Ingredient--21 CFR 190.6 (OMB
Control Number 0910-0330)--Extension

    Section 413(a) of the Federal Food, Drug, and Cosmetic Act (FD&C
Act) (21 U.S.C. 350b(a)) provides that at least 75 days before the
introduction or delivery for introduction into interstate commerce of a
dietary supplement that contains a new dietary ingredient, a
manufacturer or distributor of dietary supplements or of a new dietary
ingredient is to submit to us (as delegate for the Secretary of Health
and Human Services) information upon which the manufacturer or
distributor has based its conclusion that a dietary supplement
containing a new dietary ingredient will reasonably be expected to be
safe. Part 190 (21 CFR part 190) implements these statutory provisions.
Section 190.6(a) requires each manufacturer or distributor of a dietary
supplement containing a new dietary ingredient, or of a new dietary
ingredient, to submit to the Office of Nutrition, Labeling, and Dietary
Supplements (ONLDS) notification of the basis for their conclusion that
said supplement or ingredient will reasonably be expected to be safe.
Section 190.6(b) requires that the notification include the following:
(1) The complete name and address of the manufacturer or distributor,
(2) the name of the new dietary ingredient, (3) a description of the
dietary supplements that contain the new dietary ingredient, and (4)
the history of use or other evidence of safety establishing that the
dietary ingredient will reasonably be expected to be safe.
    The notification requirements described previously are designed to
enable us to monitor the introduction into the food supply of new
dietary ingredients and dietary supplements that contain new dietary
ingredients, in order to protect consumers from the introduction of
unsafe dietary supplements into interstate commerce. We use the
information collected under these regulations to help ensure that a
manufacturer or distributor of a dietary supplement containing a new
dietary ingredient is in full compliance with the FD&C Act. We are
currently developing an electronic means for submitting this
information.
    Description of Respondents: The respondents to this collection of
information are firms in the dietary supplement industry, including
dietary supplement and dietary ingredient manufacturers, packagers and
re-packagers, holders, labelers and re-labelers, distributors,
warehouses, exporters, and importers.
    We estimate the burden of this collection of information as
follows:

                                                     Table 1--Estimated Annual Reporting Burden \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Number of                       Average burden
                           21 CFR section                               Number of      responses per     Total annual     per response     Total hours
                                                                       respondents       respondent       responses      (in hours) \2\
--------------------------------------------------------------------------------------------------------------------------------------------------------
190.6..............................................................              55                1               55               20            1,100
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ There are no capital costs or operating and maintenance costs associated with this collection of information.

    We believe that there will be minimal burden on the industry to
generate data to meet the requirements of the premarket notification
program because we are requesting only that information that the
manufacturer or distributor should already have developed to satisfy
itself that a dietary supplement containing a new dietary ingredient is
in full compliance with the FD&C Act. In the past, commenters argued
that our burden estimate is too low. We revisited this issue and
believe their burden estimate included the time it takes to research
and generate safety data for a new dietary ingredient. However, sec.
190.6(a) requires each manufacturer or distributor of a dietary
supplement containing a new dietary ingredient, or of a new dietary
ingredient, to submit notification of the basis for their conclusion
that said supplement or ingredient will reasonably be expected to be
safe. Section 190.6 requests simply the extraction and summarization of
the safety data that should have already been developed by the
manufacturer or distributor. Thus, we estimate that extracting and
summarizing the relevant information from the company's files, and
presenting it in a format that will meet the requirements of section
413 of the FD&C Act will require a burden of approximately 20 hours of
work per submission.
    We estimate that 55 respondents will submit one premarket
notification each and that it will take a respondent 20 hours to
prepare the notification, for a total of 1,100 hours. The estimated
number of premarket notifications and hours per response is an average
based on our experience with notifications received during the last 3
years and information from firms that have submitted recent premarket
notifications.

    Dated: August 20, 2013.
Leslie Kux,
Assistant Commissioner for Policy.
[FR Doc. 2013-20711 Filed 8-23-13; 8:45 am]
BILLING CODE 4160-01-P