future-period financial statements to be materially misstated. Auditing
Standard No. 16 also requires the auditor to communicate to the audit
committee those corrected misstatements, other than those that are
clearly trivial, related to accounts and disclosures that might not
have been detected except through the auditing procedures performed,
and discuss with the audit committee the implications that such
corrected misstatements might have on the company's financial reporting
process.
IAASB and ASB
    ISA 450 and AU-C Section 260 include requirements for the auditor
to communicate uncorrected misstatements and the effect that they,
individually or in aggregate, may have on the opinion in the auditor's
report. The auditor's communication shall identify the material
uncorrected misstatements individually. Additionally, under ISA 450 and
the AU-C Section 260, the auditor is required to communicate the effect
of uncorrected misstatements related to prior periods on the relevant
classes of transactions, account balances or disclosures, and the
financial statements as a whole.
    ISA 450 and AU-C Section 450 require the auditor to request that
uncorrected misstatements be corrected. Auditing Standard No. 16 does
not require the auditor to make this request, because under SEC rules
the financial statements are required to reflect all material
correcting adjustments identified by the auditor.
    ISA 450 does not include a requirement for the auditor to
communicate corrected misstatements to those charged with governance.
AU-C Section 260 requires the auditor to communicate material,
corrected misstatements that were brought to the attention of
management as a result of audit procedures.
Material Written Communication
PCAOB
    Auditing Standard No. 16 requires the auditor to communicate to the
audit committee other material written communications between the
auditor and management.
IAASB and ASB
    ISA 260 and AU-C Section 260 require the auditor to communicate to
those charged with governance written representations the auditor is
requesting.
Disagreements with Management
PCAOB
    Auditing Standard No. 16 includes a requirement for the auditor to

communicate to the audit committee any disagreements with management
about matters, whether or not satisfactorily resolved, that
individually or in the aggregate could be significant to the company's
financial statements or the auditor's report. Auditing Standard No. 16
also states that disagreements with management do not include
differences of opinion based on incomplete facts or preliminary
information that are later resolved by the auditor obtaining additional
relevant facts or information prior to the issuance of the auditor's
report.
IAASB
    The ISAs do not include a similar requirement.
ASB
    AU-C Section 260 requires the auditor to communicate disagreements
with management, if any.
Other Matters
PCAOB
    Auditing Standard No. 16 includes a requirement for the auditor to
communicate to the audit committee other matters arising from the audit
that are significant to the oversight of the financial reporting
process. This communication includes, among other matters, complaints
or concerns regarding accounting or auditing matters that have come to
the auditor's attention during the audit and the results of the
auditor's procedures regarding such matters.
IAASB and ASB
    ISA 260 and AU-C Section 260 include a similar requirement for the
auditor to communicate other matters to those charged with governance
that, in the auditor's professional judgment, are significant and
relevant to the oversight of the financial reporting process.
Form and Documentation of Communications
PCAOB
    Auditing Standard No. 16 requires the auditor to communicate the
matters in the standard to the audit committee, either orally or in
writing, unless otherwise specified in Auditing Standard No. 16. In
addition, the standard also requires the auditor to document the
communications in the work papers whether such communications took
place orally or in writing. Auditing Standard No. 16 also requires the
auditor to include a copy of or a summary of management's communication
provided to the audit committee in the audit documentation, if as part
of its communications to the audit committee, management communicated
some or all of the matters related to accounting policies and
practices, estimates, significant unusual transactions, or uncorrected
misstatements to the audit committee, and, as a result, the auditor did
not communicate these matters at the same level of detail as
management.
IAASB
    ISA 260 requires the auditor to communicate in writing with those
charged with governance regarding significant findings from the audit
if, in the auditor's professional judgment, oral communication would
not be adequate. Written communication need not include all matters
that arose during the course of the audit.
ASB
    AU-C Section 260 requires the auditor to communicate in writing
with those charged with governance significant findings or issues from
the audit if, in the auditor's professional judgment, oral
communication would not be adequate. This communication need not
include matters that arose during the course of the audit that were
communicated with those charged with governance and satisfactorily
resolved.
Timing
PCAOB
    Auditing Standard No. 16 requires the communications to the audit
committee to be made in a timely manner and prior to the issuance of
the auditor's report.\157\
---------------------------------------------------------------------------

    \157\ Auditing Standard No. 16 includes the following exception
for registered investment companies--Consistent with SEC Rule 2-07
of Regulation S-X, 17 CFR Sec.  210.2-07, in the case of a
registered investment company, audit committee communication should
occur annually, and if the annual communication is not within 90
days prior to the filing of the auditor's report, the auditor should
provide an update, in the 90-day period prior to the filing of the
auditor's report, of any changes to the previously reported
information.
---------------------------------------------------------------------------

IAASB and ASB
    ISA 260 and AU-C Section 260 require that the auditor should
communicate with those charged with governance on a timely basis.

D. Request To Apply Auditing Standard No. 16 to Audits of Emerging
Growth Companies

Introduction and Statutory Background
    On August 15, 2012, the Board adopted Auditing Standard No. 16
(Auditing Standard No. 16 may also be referred to as ``the new
standard'' in this section)\158\ pursuant to the Board's authority
under the Sarbanes-Oxley Act.\159\
---------------------------------------------------------------------------

    \158\ Communications with Audit Committees, PCAOB Release No.
2012-004 (Aug. 15, 2012).
    \159\ Public Law 107-204. Pursuant to Section 101 of the
Sarbanes-Oxley Act, the mission of the Board is to oversee the audit
of companies that are subject to the securities laws, and related
matters, in order to protect the interests of investors and further
the public interest in the preparation of informative, accurate, and
independent audit reports. Section 103 of the Sarbanes-Oxley Act
authorizes the Board to adopt auditing standards for use in public
company audits ``as required by this Act or the rules of the
[Securities and Exchange] Commission, or as may be necessary or
appropriate in the public interest or for the protection of
investors.'' In addition, Section 982 of the Dodd-Frank Act of 2010
expanded the authority of the PCAOB to oversee the audits of
registered brokers and dealers, as defined in the Exchange Act. See
Public Law 111-203.
---------------------------------------------------------------------------

    Auditing Standard No. 16 requires auditors to communicate certain
significant audit and financial statement matters to the audit
committee of the company\160\ under audit. Among other things, the
required communications include such matters as: (i)The company's
critical accounting practices; (ii) significant risks identified by the
auditor's risk assessment procedures; (iii) the company's significant
unusual transactions; and (iv) when applicable, the auditor's
evaluation of the company's ability to continue as a going concern.
Communications may be made orally or in writing, but should be made in
a timely manner and prior to the issuance of the auditor's report.
---------------------------------------------------------------------------

    \160\ The term ``company'' as used in this section is intended
to refer to companies whose audits are required to be performed in
accordance with PCAOB standards.
---------------------------------------------------------------------------

    In the Board's view, the adoption of Auditing Standard No. 16 is in
the public interest and contributes to investor protection because it
establishes requirements that enhance the relevance, timeliness, and
quality of communications between auditors and audit committees. The
enhanced relevance, timeliness, and quality of communications should
improve the audit and facilitate audit committees' financial reporting
oversight, fostering improved financial reporting. The Board's adopting
release dated August 15, 2012, discusses the record developed by the
Board in adopting Auditing Standard No. 16 in greater detail.
    In addition, the Sarbanes-Oxley Act was recently amended by Section
104 of the JOBS Act \161\ to provide that any additional rules adopted
by the Board subsequent to April 5, 2012, do not apply to the audits of
EGCs \162\ 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.'' \163\ As a result, Auditing Standard No. 16, which
was adopted by the Board after April 5, 2012, is subject to a separate
determination by the SEC regarding its applicability to audits of EGCs.
---------------------------------------------------------------------------

    \161\ Public Law 112-106.
    \162\ Section 3(a)(80) of the Exchange Act defines the term
``emerging growth company.''
    \163\ See Section 103(a)(3)(C) of the Sarbanes-Oxley Act, as
added by Section 104 of the JOBS Act.
---------------------------------------------------------------------------

    The Board is thus requesting that the Commission also take action
to apply Auditing Standard No. 16 to audits of EGCs, pursuant to
Section 104 of the JOBS Act. In this submission, the Board is providing
information 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 Auditing
Standard No. 16 to audits of EGCs.
    The information provided in this submission summarizes the Board's
record in adopting Auditing Standard No. 16 and includes a discussion
of the following areas to assist the SEC in its consideration pursuant
to Section 104 of the JOBS Act: (i) The background of and reasons for
the new standard; (ii) the Board's approach to developing the new
standard, including consideration of alternatives; (iii) key changes
and improvements from existing audit committee communication
requirements; and (iv) characteristics of EGCs and economic
considerations.
Background and Reasons for the New Standard
    The following discussion provides summary information regarding the
background and reasons for Auditing Standard No. 16. These matters are
also discussed in greater detail in the Board's adopting release.
    Auditing Standard No. 16 would replace PCAOB interim standards AU
sec. 380 and AU sec. 310.\164\ The existing PCAOB requirements
regarding auditor communications with audit committees are primarily in
AU sec. 380, while AU sec. 310 discusses establishing an understanding
between the auditor and the client regarding the audit engagement.
---------------------------------------------------------------------------

    \164\ Shortly after its inception, the Board adopted the
existing standards of the AICPA, as in existence on April 16, 2003,
on an initial, transitional basis. See PCAOB Release No. 2003-006
(Apr. 18, 2003). References to AU sections (``AU secs.'') throughout
this document are to these PCAOB interim auditing standards, which
consist of generally accepted auditing standards, as described in
the AICPA Auditing Standards Board's Statement on Auditing Standards
No. 95, as in existence on April 16, 2003, to the extent not
superseded or amended by the Board.
---------------------------------------------------------------------------

    AU sec. 380 became effective in January 1989, at a time when
management typically hired and retained the auditor and had oversight
of the work of the auditor. AU sec. 380 indicates that audit committee
communications are ``incidental to the audit'' and are not required to
occur prior to the issuance of the auditor's report. AU sec. 380
includes a variety of specified communication requirements.
    Subsequently, changes to the federal securities laws and related
SEC rules imposed additional communication requirements that are not
currently reflected in AU sec. 380. Most significantly, in 2002, the
Sarbanes-Oxley Act changed the role of the audit committee and the
interaction between the audit committee and the auditor, requiring the
auditor of a listed company to report directly to the audit committee.
Section 301 of the Sarbanes-Oxley Act made changes to the federal
securities laws to require the audit committee of a listed company to
be directly responsible for the appointment, compensation, and
oversight of the work of the external auditors, including the
resolution of disagreements between management and the auditor
regarding financial reporting. In addition, Section 204 of the
Sarbanes-Oxley Act made other changes to the federal securities laws to
require the auditor to report the following matters to the audit
committee on a timely basis:
     All critical accounting policies and practices to be used;
     All alternative treatments of financial information within
generally accepted accounting principles that have been discussed with
management, ramifications of the use of such alternative disclosures
and treatments, and the treatment preferred by the registered public
accounting firm; and
     Other material written communications between the
registered public accounting firm and the management of the issuer,
such as any management letter or schedule of unadjusted differences.
    Since the adoption of AU sec. 380, certain PCAOB auditing standards
also have changed as a result of the Board's ongoing efforts to revise
its interim standards. For example, in 2010 the Board adopted eight
standards on assessing and responding to risk in an audit (the ``risk
assessment'' standards), which cover the entire audit process, from
initial planning activities to evaluating audit evidence to forming the
opinion to be expressed in the auditor's report.\165\ The risk
assessment standards address, among other things, requirements for the
auditor in the areas of audit planning, audit strategy, and risk
assessment, including requirements for the auditor to identify
significant risks of material misstatement. As one of the PCAOB's
interim auditing standards, AU sec. 380's communication requirements
are not aligned with the procedures performed pursuant to the PCAOB's
risk assessment standards, which became effective for audits for fiscal
years beginning after December 15, 2010.
---------------------------------------------------------------------------

    \165\ See PCAOB Release 2010-004 (Aug. 5, 2010).
---------------------------------------------------------------------------

    Additionally, observations from the Board's oversight activities
raised matters for consideration. For example, some inspection
observations indicate that auditors have not made all required audit
committee communications, possibly because they are not aware of the
varying sources of communication requirements contained throughout the
Board's standards and rules. Currently, thirteen auditing standards and
rules require the auditor to communicate with the audit committee, and
other additional communication requirements are located in the federal
securities laws and SEC rules.
    In light of these changes and considerations, the Board adopted
Auditing Standard No. 16 with the goal of improving the audit by
enhancing communications between auditors and audit committees. With
the passage of the Sarbanes-Oxley Act and the establishment of the
PCAOB, Congress acknowledged that auditors play an important role in
protecting the interests of investors by preparing and issuing
informative, accurate, and independent audit reports.\166\ The audit
committee also plays an important role in protecting the interests of
investors by assisting the board of directors in fulfilling its
responsibility to a company's shareholders and others to oversee the
integrity of a company's accounting and financial reporting processes
and audits.
---------------------------------------------------------------------------

    \166\ See Section 101(a) of the Sarbanes-Oxley Act; Senate
Report No. 107-206, at 5-6 (July 3, 2002).
---------------------------------------------------------------------------

    In the Board's view, both the auditor and the audit committee
benefit from a meaningful and timely exchange of information regarding
significant risks of material misstatement in the financial statements
and other matters that may affect the integrity of the company's
financial reports. Communications with the audit committee improve the
audit by providing auditors with the audit committee's insights about
the company as well as providing auditors with a forum separate from
management to

discuss complex and significant matters about the audit and the
company's financial reporting process. Communications between the
auditor and the audit committee allow the audit committee to be well-
informed about accounting, auditing, and disclosure matters, including
the auditor's evaluation of matters that are significant to the
financial statements, and to be better able to carry out its oversight
role.
    Auditing Standard No. 16 also updates the auditing standards to
reflect the communication requirements mandated by the federal
securities laws and aligns the audit committee communication
requirements with auditor performance requirements, including those in
the risk assessment standards. Bringing these requirements together in
one place should promote the auditor's compliance with relevant
statutory and regulatory requirements (as well as facilitating audit
planning and informing audit scope). Updating auditing standards to
incorporate new statutory and regulatory requirements can help ensure
that audit firms update their audit methodologies to include all
required and relevant procedures. Such updating is particularly
critical with respect to AU sec. 380 because, as noted earlier, AU sec.
380 treats audit committee communications as ``incidental,'' and does
not focus on the important role of the audit committee in the current
regulatory environment.
The Board's Approach to Development of Auditing Standard No. 16,
Including Consideration of Alternatives
    Auditing Standard No. 16 was adopted by the Board after several
years of consideration and public outreach. For example, the issue of
auditor communications with the audit committee was discussed with the
Board's Standing Advisory Group (``SAG'') on several occasions prior to
the Board's decision to propose a new standard.\167\
---------------------------------------------------------------------------

    \167\ The SAG discussed the audit committee communications
standard at a number of its meetings, including meetings prior to
proposing a new standard on: June 21-22, 2004, June 8, 2005, Oct. 5-
6, 2005, and Oct. 14-15, 2009.
---------------------------------------------------------------------------

    The Board proposed a new standard on March 29, 2010, which was open
for comment until May 28, 2010. The comment period reopened on
September 7, 2010 and was extended until October 21, 2010, to
accommodate comments received in connection with a public roundtable
held by the Board on September 21, 2010.
    The standard was then reproposed on December 20, 2011, and open for
comment until February 29, 2012. The Board adopted the new standard on
August 15, 2012.
    The Board received and considered 44 comment letters on the
original proposal, which included the reopened comment period, and 39
comment letters on the reproposed standard. Most commenters were
supportive of the Board's efforts to enhance communications between the
auditor and the audit committee. Those commenters agreed that fuller
and more relevant communications between the auditor and audit
committee would allow the auditor to perform a more informed, and thus
more effective, audit and also would enable the audit committee to more
effectively fulfill its oversight responsibilities regarding the
financial reporting process.
    The Board's adopting release explains in greater detail the Board's
consideration of significant comments received and the reasons for
making the changes reflected in the new standard. In general, as
discussed below, the Board made a number of decisions as it developed
Auditing Standard No. 16 that make the new standard more efficient and
effective to apply, and avoid unnecessary costs. The following summary
describes the Board's overall approach and highlights some of the
choices made, and alternatives considered.
     Auditing Standard No. 16 is scalable, based on a company's
size and complexity. In developing the new standard, the Board sought
to promote high-quality audits, while considering the standard's
overall effect on current audit practice and on audit committees and
companies. In doing so, the Board sought to achieve the standard's
intended benefits, without imposing unnecessary costs, and to create a
standard that is scalable based on the company's size and complexity. A
company's size and complexity can affect the risks of material
misstatement, create auditing challenges, and involve other significant
matters that warrant bringing to the attention of the audit committee.
Thus, an auditor of a smaller, less complex company with fewer
difficult auditing or financial reporting issues may have fewer matters
to communicate than for an audit of a larger, more complex company.
Accordingly, under Auditing Standard No. 16, in an audit of a small,
less complex company, an auditor may make less extensive audit
committee communications than in an audit of a larger, more complex
company. The original proposal asked for comment on whether any of the
requirements of the proposed standard were inappropriate based on the
size or industry of the company. Commenters considered the proposed
requirements to be applicable and appropriate to companies of different
sizes and industries.
     Auditing Standard No. 16 has been carefully designed to:
(i) Retain the pre-existing communication requirements in auditing
standards; (ii) incorporate the communication requirements already
imposed by the Sarbanes-Oxley Act and related SEC rules; and (iii) link
new communications to related performance requirements arising out of
the Board's existing auditing standards. As a result of this approach,
the auditor's communications under the new standard are limited to
communicating the results of the audit or specific audit procedures
already required under the existing standards. Auditing Standard No. 16
does not impose new performance obligations on the auditor, other than
the standard's required communications.
     Auditing Standard No. 16 organizes and compiles
information regarding other PCAOB auditor communication requirements.
Auditing Standard No. 16 contains an appendix that lists in one place
other PCAOB standards and rules that require the auditor to communicate
specific matters to the audit committee. This aspect of the new
standard responds to observations from the Board's oversight activities
that suggest that auditors may not make all required audit committee
communications because they might not be aware of the varying sources
of such requirements. This convenient list facilitates auditors'
identification of other PCAOB standards and rules that contain
communication requirements.
     Auditing Standard No. 16 focuses on the communication of
significant matters relating to the audit. In developing the new
standard, the Board sought to focus on communication of significant
matters relating to the audit. In response to comments, the
requirements in Auditing Standard No. 16 were changed from the original
proposal to focus the auditor on communicating matters that are
significant to the audit committee's oversight of the financial
reporting process. For example, changes were made to limit
communications regarding the need for specialized skill or knowledge in
the audit to only those relevant to significant audit risks. Similarly,
the standard was narrowed to require communications relating to matters
on which the auditor consulted to only those 'difficult or contentious'
matters that are relevant to the audit committee's oversight of the
financial reporting process.

     Auditing Standard No. 16 provides the auditor with
flexibility to communicate orally or in writing. AU sec. 380 provides
the auditor with the flexibility to communicate orally or in writing.
Several commenters to both the original proposal and the reproposal
suggested that the communications to the audit committee should be
required to be in writing. The Board considered this approach, but
determined that requiring all communications to be in writing could
reduce the effectiveness of the communication process. The Board's goal
is to promote effective two-way communication between the auditor and
the audit committee, whether through presentations, written reports, or
interactive discussions. Allowing different forms of communication also
makes the communication requirement more flexible for companies of all
sizes and natures.
     Auditing Standard No. 16 recognizes that management, as
well as the auditor, may discuss issues relating to the company's
financial statements with the audit committee, and that it would not be
cost-effective or practical for the audit committee to receive the same
communication twice. With respect to certain auditor communications,
the new standard provides that the auditor need not duplicate
communications made by management at the same level of detail, so long
as certain conditions specified in Auditing Standard No. 16 are
met.\168\ These changes allow for better use of auditor, management,
and audit committee time and resources while, at the same time, help to
ensure that the audit committee is informed of important accounting
issues.
---------------------------------------------------------------------------

    \168\ See note to Paragraph 12 of Auditing Standard No. 16 and
discussion in PCAOB Release No. 2012-004 (Aug. 15, 2012) at pages
A4-24 to A4-25.
---------------------------------------------------------------------------

     Auditing Standard No. 16 reflects practical
considerations. The scope of the new standard was narrowed in response
to practical concerns raised during the comment process. For example,
the original proposed standard included a requirement for the auditor
to evaluate whether the two-way communications between the auditor and
the audit committee were adequate to support the objectives of the
audit. Commenters were concerned that the evaluation might not be
effective, as it would reflect only the auditor's evaluation of the
communications, and would not provide information about the audit
committee's understanding of the nature of the communications. The
Board agreed and did not adopt the requirement.
Key Changes and Improvements From Existing Standards
    The following discussion provides a summary of the existing
standards relating to auditor communications. The summary also includes
a discussion of improvements that have been made in the new standard
that should benefit audit quality. These matters also are discussed in
greater detail in the Board's adopting release.
    Existing Requirements. As previously noted, the existing
requirements for communications with the audit committee are primarily
in AU sec. 380. In addition, AU sec. 310 requires the auditor to
establish an understanding with the client regarding the audit
engagement.
    Requirements Retained from Existing Standard. The new standard
retains from AU sec. 380 the following audit committee communication
requirements:
     Major issues discussed with management prior to the
retention of the auditor;
     The company's significant accounting policies and
practices;
     The auditor's responsibility related to other information
in documents containing audited financial statements;
     Difficulties encountered in performing the audit; and
     Disagreements with management.
    Incorporation of Statutory Communication Requirements. Auditing
Standard No. 16 also incorporates the following specific auditor
communication requirements contained in Exchange Act Section 10A(k) and
SEC Rule 2-07 of Regulation S-X (``SEC Rule 2-07''):
     All critical accounting policies and practices to be used;
     All alternative treatments of financial information within
generally accepted accounting principles that have been discussed with
management, ramifications of the use of such alternative disclosures
and treatments, and the treatment preferred by the registered public
accounting firm; and
     Other material written communications between the
registered public accounting firm and the management of the issuer,
such as any management letter or schedule of unadjusted
differences.\169\
---------------------------------------------------------------------------

    \169\ See Section 10A(k) of the Exchange Act, 15 U.S.C. Sec.
78j-1(k), and implementing changes in Rule 2-07(a)(1)-(3) of
Regulation S-X, 17 CFR Sec.  210.2-07(a)(1)-(3).
---------------------------------------------------------------------------

    Improvements Made to Existing Communication Requirements. While
Auditing Standard No. 16 retains many of the communication requirements
in AU sec. 380, it also revises certain requirements to be consistent
with existing audit performance requirements or to respond to other
requirements in the Sarbanes-Oxley Act as well as SEC Rule 2-07. The
new standard improves current communication requirements in the
following areas:
     Timing/Shift in Approach to Audit Committee
Communications. AU sec. 380 provides that audit committee
communications are ``incidental to the audit.'' While AU sec. 380
requires auditors to ``discuss'' or determine that the audit committee
is ``informed'' regarding a range of matters on a timely basis, AU sec.
380 also provides that communications are not required to occur prior
to the issuance of the auditor's report. The new standard indicates
that communications between the auditor and the audit committee are
integral to the audit and that communications should occur in a timely
manner and prior to the issuance of the auditor's report. By requiring
communications prior to the issuance of the auditor's report, Auditing
Standard No. 16 makes a significant difference in the standard
regarding the timing of communications by giving auditors and audit
committees the ability to take appropriate action to address the
matters communicated, including any effect on the company's financial
statements. This timing requirement aligns with the timing of
communications required by Exchange Act Section 10A(k) and SEC Rule 2-
07.
     Understanding the Terms of the Audit and the Engagement
Letter. AU sec. 310 requires the auditor to establish an understanding
with the ``client'' regarding the terms of the audit and services to be
performed. Auditing Standard No. 16 retains the requirement for the
auditor to establish an understanding of the terms of the audit
engagement and the services to be performed, but requires the
understanding to be with the audit committee. The new standard also
requires that the understanding be recorded in an engagement letter.
These changes align the new standard with the audit committee's
oversight of the work of the external auditor.\170\ These new
requirements also build on the requirement in AU sec. 310 for the
auditor to document the understanding in the working papers, preferably
through a written communication with the client. Having a mutually
clear understanding of the terms of the engagement, including the
objectives of the audit, the responsibilities of the

auditor, and the responsibilities of management in connection with the
audit, should benefit both the auditor and the audit committee.
---------------------------------------------------------------------------

    \170\ See Section 301 of the Sarbanes-Oxley Act, and Section
10A(m)(2) of the Exchange Act, 15 U.S.C. 78j-1(m)(2).
---------------------------------------------------------------------------

     Definition of ``Audit Committee.'' AU sec. 380 does not
have a formal definition of audit committee, but describes the audit
committee as ``those that have responsibility for oversight of the
financial reporting process.'' Auditing Standard No. 16 incorporates
the definition of audit committee used in the Sarbanes-Oxley Act and
modifies the Sarbanes-Oxley Act's definition for companies that are
nonissuers, such as brokers and dealers.
     Qualitative Aspects of the Company's Financial Reporting.
AU sec. 380 requires the auditor to discuss with the audit committee
the auditor's judgments about the quality, not just the acceptability,
of the entity's accounting principles, including the consistency of the
entity's accounting policies and their application, and the clarity and
completeness of the entity's financial statements and related
disclosures. Many commenters indicated that it was unclear what was
meant by the quality, clarity, and completeness of the company's
financial statements and related disclosures. Auditing Standard No. 16
aligns the communication requirement with an underlying performance
requirement in Auditing Standard No. 14, Evaluating Audit Results.
Under this approach, the auditor communicates, among other things: (i)
the results of the auditor's evaluation of and conclusions about the
qualitative aspects of the company's significant accounting policies
and practices, including situations in which the auditor identified
bias in management's judgments and (ii) the results of the auditor's
evaluation of whether the presentation of the financial statements and
the related disclosures are in conformity with the applicable financial
reporting framework, including such matters as consideration of the
form, arrangement, and content of the financial statements. This
approach aligns with existing performance requirements and was favored
by most commenters.
     Critical Accounting Estimates. AU sec. 380 requires the
auditor to determine that the audit committee is informed about the
process used by management in formulating ``particularly sensitive''
accounting estimates. Auditing Standard No. 16 largely retains the
auditor communication requirement from AU sec. 380, but uses the term
``critical accounting estimates,'' which conforms to the term used by
the SEC.\171\ Auditing Standard No. 16 adds related requirements to
communicate matters pertaining to management's significant assumptions
and changes to the process or assumptions used to develop critical
accounting estimates. These additional requirements address
communication of the results of the auditor's procedures performed
under AU sec. 342, Auditing Accounting Estimates. The purpose of this
communication is to focus the audit committee's attention on the
estimates that might be subject to higher risk of material
misstatement.
---------------------------------------------------------------------------

    \171\ See SEC, Interpretation: Commission Guidance Regarding
Management's Discussion and Analysis of Financial Condition and
Results of Operations, Securities Act Release No. 8350 (Dec. 19,
2003).
---------------------------------------------------------------------------

     Uncorrected and Corrected Misstatements. Auditing Standard
No. 16 incorporates the communication requirements from AU sec. 380
related to uncorrected and corrected misstatements. In addition,
Auditing Standard No. 16 incorporates the requirement from the
Sarbanes-Oxley Act and SEC Rule 2-07 for the auditor to report to the
audit committee other material written communications between the
auditor and management, such as a schedule of unadjusted differences.
     Significant Unusual Transactions. AU sec. 380 requires the
auditor to determine that the audit committee is informed about the
methods used to account for significant unusual transactions. Auditing
Standard No. 16 revises the requirement by adding requirements based on
the auditor's procedures under AU sec. 316, Consideration of Fraud in a
Financial Statement Audit, for the auditor to communicate: (i)
Significant transactions that are outside the normal course of business
for the company or otherwise appear to be unusual due to their timing,
size, or nature and (ii) the auditor's understanding of the business
rationale for significant unusual transactions. Communications of
significant unusual transactions by the auditor will improve audit
quality by promoting discussion of such transactions. It will also
allow the audit committee to gain insight into such transactions and
take appropriate actions, if necessary, to address the financial
statement or disclosure impact of such transactions.
     Management Consultations with Other Accountants. When the
auditor is aware that management consulted with other accountants about
auditing and accounting matters, AU sec. 380 requires the auditor to
discuss with the audit committee the auditor's views about significant
matters that were the subject of such consultation. Auditing Standard
No. 16 modified this requirement. The new standard requires the auditor
to communicate to the audit committee only when the auditor has
identified a concern regarding such consultations. Commenters viewed
this change as an improvement as they noted that it may be good
practice for management to consult with other accountants as experts to
assist them regarding complex accounting matters, but that the audit
committee need not be informed of all such consultations, rather just
those matters for which the auditor identified a concern.
     Obtaining Information Relevant to the Audit. Auditing
Standard No. 12, Identifying and Assessing Risks of Material
Misstatement, requires the auditor to inquire of the audit committee
regarding the matters important to the identification and assessment of
risks of material misstatement, including fraud risks. Pursuant to
Auditing Standard No. 16, the auditor also inquires about whether the
audit committee is aware of additional matters relevant to the audit.
As a result, the auditor has an opportunity to focus on any additional
matters relevant to the audit, such as possible violations of laws or
regulations. This inquiry requirement might enable the auditor to learn
from the audit committee about a possible previously unidentified risk.
    New Communication Requirements. Auditing Standard No. 16 also
contains new communication requirements that improve the audit by
promoting discussion about significant aspects of the audit, while also
providing valuable information to the audit committee. These new
communications relate to audit procedures that already will be
performed under existing PCAOB standards, with the auditor
communicating the results of such procedures to the audit committee.
The new communication requirements include:
     Overall Audit Strategy and Significant Risks. Auditing
Standard No. 16 includes a requirement for the auditor to communicate
to the audit committee an overview of the overall audit strategy,
including the timing of the audit, and to discuss with the audit
committee significant risks the auditor identified, and significant
changes to the planned audit strategy or identified risks. These
changes are aligned with the results of the audit procedures performed
under the PCAOB's risk assessment standards, in particular, Auditing
Standard No. 9, Audit Planning, and Auditing Standard No.

12, Identifying and Assessing Risks of Material Misstatement.
     Other Participants in the Audit. Auditing Standard No. 16
requires the auditor to communicate, as applicable, information about
specialized skill or knowledge needed for the audit. In addition, the
auditor is required to communicate: (i) Information regarding other
participants in the audit, such as the extent of the use of internal
auditors, company personnel, other third parties (including other
independent public accounting firms), or other persons not employed by
the auditor that are involved in the audit and (ii) the basis for the
auditor's determination that the auditor can serve as the audit
engagement's principal auditor, if significant parts of the audit are
performed by other auditors. The communications related to others
involved in the audit, including the nature and extent of their
involvement, could be important for an audit committee to understand in
its oversight of the audit. These communications should reflect the
results of other audit procedures that the auditor is currently
required to perform in accordance with PCAOB standards.
     Difficult or Contentious Matters for which the Auditor
Consulted. Auditing Standard No. 16 requires the auditor to communicate
to the audit committee matters that are difficult or contentious for
which the auditor consulted outside the engagement team and that the
auditor reasonably determined are relevant to the audit committee's
oversight of the financial reporting process. Audit committees might
better appreciate the importance of difficult or contentious matters,
benefiting their governance responsibility, if they are aware that such
consultations took place. Communications are based on the results of
the procedures the auditor performed regarding difficult or contentious
matters.
     Going Concern. Auditing Standard No. 16 requires the
auditor to communicate to the audit committee certain matters related
to the auditor's evaluation of the company's ability to continue as a
going concern. The communication requirements in Auditing Standard No.
16 are based on the auditor's performance requirements under AU sec.
341, The Auditor's Consideration of an Entity's Ability to Continue as
a Going Concern. This communication enables the auditor to improve the
audit by facilitating discussion between the auditor and the audit
committee about the company's ability to continue as a going concern.
This communication also can serve to further inform the audit
committee, by focusing attention on financial difficulties the company
is encountering. Through this communication, the auditor can benefit
from the audit committee's views of the concerns identified by the
auditor. Such communications also could be significant in terms of the
audit committee's role in overseeing the company's financial reporting
process to ensure that the company's financial statements contain the
necessary disclosures.
     Other Matters. Auditing Standard No. 16 requires the
auditor to communicate to the audit committee other matters arising
from the audit that are significant to the oversight of the company's
financial reporting process, such as complaints or concerns regarding
accounting or auditing matters that have come to the auditor's
attention during the audit. The auditor benefits from a robust
discussion of such complaints or concerns with the audit committee.
Also, the audit committee should be better able to exercise its
oversight activities if the auditor informs the audit committee of
these matters. Communication to the audit committee is based on the
results of the auditor's procedures relating to such other matters.
     New Accounting Pronouncements. Auditing Standard No. 16
requires the auditor to communicate to the audit committee situations
in which, as a result of the auditor's procedures, the auditor
identified a concern regarding management's anticipated application of
accounting pronouncements that have been issued but are not yet
effective and might have a significant effect on future financial
reporting. This communication informs the audit committee of situations
relevant to the audit committee's oversight of the company's financial
reporting process. Auditing Standard No. 16 requires only that the
auditor communicate concerns identified as a result of existing audit
performance requirements and does not require the auditor to perform
additional procedures to identify such concerns.
     Departure from the Auditor's Standard Report. Auditing
Standard No. 16 requires the auditor to communicate to the audit
committee when the auditor expects to: (i) Modify the opinion in the
auditor's report or (ii) include explanatory language or an explanatory
paragraph in the auditor's report. The requirement is intended to
provide the basis for a discussion between the auditor and the audit
committee in those circumstances in which the auditor expects to change
the auditor's standard report. This requirement is limited to the
communication of changes to the audit report determined by the auditor
during the course of the audit and does not require the performance of
new audit procedures.
    Other Considerations Relating to Changes to the Standard. As part
of the Board's regular standard-setting process, the Board takes into
account costs related to its proposed changes based on, among other
things, the Board's general knowledge of audit firm practice based on
the Board's oversight activities. The Board did not specifically seek
or receive comment that attempted to quantify costs related to the new
standard.\172\
---------------------------------------------------------------------------

    \172\ The discussion in this section reflects the Board's
qualitative assessment of the new standard's impact based on the
overall design of the new standard, and the changes made by the
Board in response to comments, both of which are discussed
throughout this submission and in the record for Auditing Standard
No. 16.
---------------------------------------------------------------------------

    The Board has sought to devise an overall framework for auditor
communications that is sensitive to the new standard's overall effect.
The Board has sought to avoid unnecessary costs in developing the new
standard. To the extent that the new standard changes existing or
imposes new communication requirements, however, the Board recognizes
that those requirements will impose some incremental costs.
    To avoid unnecessary costs:
     Auditing Standard No. 16 incorporates significant existing
and new communication requirements into one standard. Bringing these
requirements together in one place should promote the auditor's
compliance with relevant statutory and regulatory requirements, as well
as potentially reducing auditor time searching for requirements.
Similarly, an appendix to the new standard lists and identifies the
location of other auditor communication requirements contained in other
PCAOB rules and standards; and
     The new standard does not impose new auditor performance
requirements, other than the required communications themselves. In
other words, the new audit committee communication requirements in
Auditing Standard No. 16 are based on the results of audit procedures
performed under existing standards.
    In considering costs, as a threshold matter, the Board notes that
auditors and audit committees already engage in audit committee
communications under the federal securities laws and existing auditing
standards and thus registered firms and companies already incur some
costs in complying with existing requirements.

    Registered firms will need to incur the one-time cost to update
their audit methodologies to reflect the new requirements and conduct
initial training of their personnel on the new requirements.\173\ In
addition, registered firms will incur the recurring costs of the
additional time required to prepare and make the communications in each
audit in which they are required and to document that those
communications were made. The Board also recognizes that audit
committees will need to receive or read, and potentially discuss and
act upon, the new required communications, which might result in the
ongoing cost of increased time required for audit committee meetings.
The Board sought to ensure that the recurring communication
requirements are scalable--that is, they vary based on the size and
complexity of the company--in part to avoid unnecessary costs.
---------------------------------------------------------------------------

    \173\ Those firms that in the past did not use an engagement
letter for audits subject to the standard will now have to develop
one. In the Board's experience, most firms currently use an
engagement letter for such audits.
---------------------------------------------------------------------------

    For all the reasons discussed above and in the Board's adopting
release, the Board does not anticipate the incremental costs imposed by
the new standard would be significant.
Characteristics of EGCs and Economic Considerations
    The PCAOB has begun to monitor implementation of the JOBS Act in
order to understand the characteristics of EGCs and inform the Board's
request to apply Auditing Standard No. 16 to audits of EGCs.\174\
---------------------------------------------------------------------------

    \174\ Pursuant to the JOBS Act, an ``emerging growth company''
is defined in Section 3(a)(80) of the Exchange Act. In general
terms, an issuer qualifies as an EGC if it has total annual gross
revenue of less than $1 billion during its most recently competed
fiscal year (and its first sale of common equity securities pursuant
to an effective Securities Act registration statement did not occur
on or before December 8, 2011). See JOBS Act Section 101(a), (b),
and (d). Once an issuer is an EGC, the entity retains its EGC status
until the earliest of: (i) The first year after it has total annual
gross revenue of $1 billion or more (as indexed for inflation every
five years by the SEC); (ii) the end of the fiscal year after the
fifth anniversary of its first sale of common equity securities
under an effective Securities Act registration statement; (iii) the
date on which the company issues more than $1 billion in non-
convertible debt during the prior three year period; or (iv) the
date on which it is deemed to be a ``large accelerated filer'' under
the Exchange Act (generally, an entity that has been public for at
least one year and has an equity float of at least $700 million).
---------------------------------------------------------------------------

    To obtain data regarding EGCs, the PCAOB's Office of Research and
Analysis has reviewed registration statements and Exchange Act reports
filed with the SEC with filing dates between April 5, 2012, and June 4,
2012, for disclosures by entities related to their EGC status. Only
those entities that have voluntarily disclosed their EGC status have
been identified.\175\
---------------------------------------------------------------------------

    \175\ The PCAOB has not validated these entities' self-
identification as EGCs. The information presented in this submission
also does not include data for entities that have confidentially
submitted draft registration statements to the SEC for confidential
non-public review in accordance with the JOBS Act. Thus, the data
and analysis are not based on the complete population of EGCs. The
Board recognizes that its initial analysis of self-identified EGCs
does not include all entities that may be EGCs and that, after the
JOBS Act has been in effect for a longer period of time, additional
analysis of the characteristics of EGCs may be possible.
---------------------------------------------------------------------------

    Characteristics of Self-Identified EGCs. As of June 4, 2012, based
on the PCAOB's research, 196 entities have voluntarily identified
themselves as EGCs in SEC filings. These 196 entities operate in
diverse industries. The five most common Standard Industrial
Classification (SIC) codes applicable to these entities are for: blank
checks; pharmaceutical preparations; prepackaged software services;
computer processing/data preparations services; and crude petroleum/
natural gas.
    Of the 196 entities, approximately 78% are companies that were
identified in a registration statement filed to conduct an initial
public offering. The other 22% were identified through Exchange Act
filings. Forty-one entities have securities listed on a national
securities exchange.
    The reported assets for the 196 entities ranged from zero to
approximately $13 billion, based on filings for the period reported.
The average and median reported assets of the 196 entities were
approximately $260.6 million and approximately $24.9 million,
respectively.\176\ The reported revenue for the 196 entities, based on
filings for the period reported, ranged from zero to approximately
$958.1 million. The average and median reported revenue of the 196
entities was approximately $106.9 million and approximately $6.7
million, respectively. Seventy-eight of the 196 entities identified
themselves as ``development stage entities'' in their financial
statements.\177\ Of the 196 entities, 103 were audited by firms that
are annually inspected by the PCAOB (i.e., firms that have issued audit
reports for more than 100 public company audit clients). The remaining
93 were audited by triennially inspected firms (i.e., firms that have
issued audit reports for 100 or fewer public company audit clients).
---------------------------------------------------------------------------

    \176\ For purposes of comparison, the PCAOB compared the data
compiled with respect to the 196 entities with companies listed in
the Russell 3000 Index in order to compare the EGC population with
the broader issuer population. The Russell 3000 was chosen for
comparative purposes because it is intended to measure the
performance of the largest 3000 U.S. companies representing
approximately 98% of the investable U.S. equity market (as marketed
on the Russell Web site). The average and median reported assets of
issuers in the Russell 3000 was approximately $11.5 billion and
approximately $1.4 billion, respectively. The average and median
reported revenue of issuers in the Russell 3000 was approximately
$4.6 billion and $742.8 million, respectively.
    \177\ According to Financial Accounting Standards Board
(``FASB'') guidance, development stage entities are entities
devoting substantially all of their efforts to establishing a new
business and for which either of the following conditions exists:
(a) Planned principal operations have not commenced or (b) planned
principal operations have commenced, but there has been no
significant revenue from operations.) See FASB Accounting Standards
Codification, Subtopic 915-10, Development Stage Entities--Overall.
---------------------------------------------------------------------------

    Based on the Board's initial analysis of EGCs, these entities
appear to represent diverse industries and are audited by a diverse
group of firms. Although these entities range in size, approximately
61% or 119 have reported revenue of less than $50 million. Given the
December 8, 2011, initial starting point for EGC eligibility, one key
difference between EGCs and other entities appears to be the length of
time an EGC has been subject to the reporting requirements under the
Exchange Act.\178\
---------------------------------------------------------------------------

    \178\ The Board notes that its initial analysis is generally
consistent with the legislative history of the JOBS Act, which
anticipated that EGCs will be somewhat smaller entities that may
have less experience in complying with some aspects of the federal
securities laws. See House Report No. 112-406, at 5-7.
---------------------------------------------------------------------------

    Economic Considerations and Application of Auditing Standard No. 16
to Audits of EGCs. The Board adopted Auditing Standard No. 16 to
``further the public interest in informative, accurate, and independent
audit reports.'' Auditing Standard No. 16 is intended to improve the
relevance, timeliness, and quality of communications between auditors
and audit committees. The Board's determination to adopt Auditing
Standard No. 16 is based on a record developed over several years that
includes extensive public outreach and comment.
    As discussed above and in the Board's release, improved
communications should result in both auditors and audit committees
becoming better informed and, therefore, better equipped to fulfill
their respective roles in the company's financial reporting. Through
this communication, the auditor may obtain more complete information
about the company, enabling the auditor to be more effective in
identifying and assessing risks of material misstatement in the
company's financial statements

and designing and performing audit procedures to address those risks.
Similarly, a better informed audit committee should contribute to
management oversight, which may also improve the company's financial
reporting as well as its oversight of management more generally.
    The Board believes the standard will enhance the quality of the
audit and the quality of the financial reporting process. In attempting
to obtain these benefits through the new standard, the Board sought to
avoid imposing unnecessary costs. The approach used by the Board was to
consider the new standard's overall effect on current audit practice
and on audit committees and companies. This approach was used to
develop a standard that is scalable based on a company's size and
complexity, thereby avoiding unnecessary costs for audits of smaller or
less complex companies, including smaller or less complex companies
that are EGCs.
    The benefits of the standard, which are summarized throughout this
submission and described more fully in the Board's adopting release,
should also be applicable to companies of various types and natures.
For example, auditors and audit committees of all types of companies
should benefit from a meaningful exchange of information regarding
significant matters that may affect the integrity of a company's
financial reports. Communications with the audit committee should
improve the audit by providing auditors with the audit committee's
insights about the company, as well as providing auditors with a forum
that is separate from management to discuss complex and significant
matters about the audit and the company's financial reporting process.
Communications between the auditor and the audit committee should allow
the audit committee to be well-informed about accounting, auditing, and
disclosure matters that are significant to the company's financial
statements, and to be better able to carry out its oversight role.
These general benefits of the new standard should accrue to audits of
all companies, including EGCs.
    Moreover, enhanced audit committee communications may be of
particular benefit to EGCs. Based on the Board's preliminary analysis
of EGC data, EGCs generally appear to be companies that are relatively
new to the SEC reporting process. Such companies may have new audit
committee members and may be relatively less familiar with SEC
reporting requirements, and have relatively more questions regarding
how to present their financial statements for SEC reporting purposes.
Similarly, some EGCs may be considering for the first time initial
choices in their accounting policies and practices that could have
implications for their financial reporting.
    Another benefit of the new standard is that it provides for
communications regarding significant matters on a timely basis. Timely
communications with the audit committee help improve the audit by,
among other things: (i) Informing the audit committee, which has
responsibility for the oversight of financial reporting, about
significant matters related to the audit and the financial statements;
(ii) enabling the auditor to obtain the audit committee's insights and
information about transactions and events; (iii) enabling the auditor
to learn from the audit committee about additional matters relevant to
the audit, including possible violations of laws or regulations; and
(iv) assisting the auditor in gaining a better understanding of the
company and its environment. Timely communications also permit both the
auditor and the audit committee to take appropriate action to address
the matters communicated, including any effect on the company's
financial statements. Again, these benefits were designed to benefit
audits of all companies, including audits of EGCs.
    The new standard also promotes communications that are tailored to
the circumstances of the company and informative, rather than ``boiler-
plate'' or standardized. Under Auditing Standard No. 16, required
communications would vary by the nature and complexity of the company
being audited. Effective communication between the auditor and the
audit committee also need not be in writing, but may involve many forms
of communication, such as presentations, charts, and robust
discussions, as well as written reports. Such flexibility in the form
of communications is an important element of the new standard and part
of what allows the standard to work for audits of companies of varying
sizes and complexity, including EGCs.
    The Board has also considered other potential economic effects on
efficiency and capital formation. The Board's overall approach is
designed to: (i) Scale the required communications to the size and
complexity of the company being audited; (ii) maintain flexibility (for
example, with respect to communicating orally or in writing); (iii)
minimize duplicative or redundant communications to the audit committee
from the auditor and management; (iv) focus the communications on the
accounting matters that are significant to the auditor and the audit
committee; and (v) reduce auditors' search costs (i.e., the costs
associated with researching the federal securities laws' and auditing
standards' various communication requirements) by providing a list of
other PCAOB standards and rules that contain audit committee
communication requirements in one place. Moreover, as previously
discussed, the auditor's requirements under the new standard are
focused on communicating the results of audit procedures that the
auditor is already required to perform.
    The Board also considered alternatives to the communication
requirements in the final standard. Before commencing this project, the
Board considered whether a new standard was necessary, particularly
since a number of the standard's requirements were already required by
existing auditing standards or provisions of the federal securities
laws. The Board also discussed whether to develop a new standard on
audit committee communications with its SAG, and had subsequent
discussions with the SAG on the nature and extent of communications in
a new standard. The Board proposed the standard, extended the
proposal's comment period, held a roundtable, and reproposed the
standard to obtain additional public input. As a result of the public
comment and outreach, through which many commenters were supportive,
the Board decided to proceed with a new standard. The Board did so
because it believes that establishing the new communication
requirements, as well as clarifying, updating and consolidating the
other communication requirements, would improve audits and audit
committee oversight with respect to all types of companies, including
EGCs, without imposing unnecessary costs.
    Many now agree that the interaction between the auditor and the
audit committee--as mandated by the Sarbanes-Oxley Act--improves audit
quality and the quality of financial reporting.\179\ Research has
indicated that improved auditor communications with audit committees
can enhance the

quality of the audit and the quality of the financial reporting
process.\180\ Also, most commenters on the new standard generally
agreed that fuller and more relevant communications between the auditor
and audit committee would allow the auditor to perform a more informed,
and thus more effective audit, and would enable the audit committee to
more effectively fulfill its oversight responsibilities regarding the
financial reporting process.\181\
---------------------------------------------------------------------------

    \179\ For example, research conducted by the Center for Audit
Quality and published in its March 2008, Report on the Survey of
Audit Committee Members, found that increased audit committee
oversight was believed to have had a positive impact on the overall
quality of audits by 92% of its audit committee member respondents.
As recently as June 12, 2012, the United Kingdom's Financial
Reporting Council issued its annual report, Audit Quality
Inspections, which indicate, among other things, that: ``Audit
committees play an essential role in ensuring the quality of
financial reporting. In particular, their work with auditors in
planning the audit and reviewing its results contributes greatly to
the quality of the audit.''
    \180\ See, e.g., Jeff Cohen, Ganesh Krishnamoorthy, and Arnie
Wright, Views to Strengthen Auditor Independence and Skepticism,
PCAOB meeting (March 22, 2012). Among other things, the statement
provides: ``Our research has validated the very important role the
audit committee plays in enhancing audit and financial reporting
quality.'' See also Jeffrey Cohen, Lisa Milici Gaynor, Ganesh
Krishnamoorthy, and Arnold M. Wright, Auditor Communications with
the Audit Committee and the Board of Directors: Policy
Recommendations and Opportunities for Future Research, Accounting
Horizons, at 183 (June 2007) (``Frequent communications with a well-
informed, financially sophisticated audit committee and
communications among the audit committee, the auditor and the full
board improve financial reporting quality.'').
    \181\ For a discussion of comments received on the new
standards, see PCAOB Release No. 2012-004 (Aug. 15, 2012) and PCAOB
Release No. 2011-008 (Dec. 20, 2011).
---------------------------------------------------------------------------

    Higher quality financial reporting (as a result of better informed
auditors, better informed audit committees, or both) improves the
quality of information available to the markets and reduces the
information asymmetry that exists about the company among investors as
well as between investors and the company's management.\182\ Academic
research indicates that improving the quality of financial reporting
can reduce investors' uncertainty about the information being provided
in companies' financial reports and thus increase efficiency in capital
allocation and foster capital formation.\183\ Higher quality financial
reporting (and improved corporate governance) can mitigate principal-
agent problems and reduce agency costs.\184\
---------------------------------------------------------------------------

    \182\ Shareholders and other financial statement users possess
less information about the company than the company's management.
This information asymmetry can provide an opportunity for management
to act in ways that are not aligned with the interests of the
company's investors. See, e.g., Greenwald, B. C., and J. E.
Stiglitz, Asymmetric Information and the New Theory of the Firm:
Financial Constraints and Risk Behavior, 80 American Economic Review
2, at 160-165 (1990). Also, information asymmetry between informed
and uninformed investors makes the latter less willing to trade and
require higher risk premiums when they do invest. See, e.g., Easley,
D., and M. O'Hara, Information and the Cost of Capital, 59 The
Journal of Finance 4, at 1553-1583 (2004).
    \183\ See, e.g., Lambert R. A., C. Leuz, and R. E. Verrecchia,
Accounting Information, Disclosure, and the Cost of Capital, 45
Journal of Accounting Research, at 385-420 (2007). The authors show
that accounting information influences a company's cost of capital
directly and indirectly. Improved financial reporting quality can
reduce a company's cost of capital by increasing precision of
investors' assessments of a company's future cash flows. The lower
cost of capital can subsequently affect real investment choices of
the company, improving future cash flows and increasing the value of
the company. See also Easley, D., and M. O'Hara, Information and the
Cost of Capital, 59 The Journal of Finance 4, at 1553-1583 (2004).
Their model suggests that increasing reliable public information
about a company reduces the risk premium investors require. Also,
Lambert et al. (2012) show that cost of capital decreases with
higher average precision of information. See Lambert R. A., C. Leuz,
and R. E. Verrecchia, Information Asymmetry, Information Precision,
and the Cost of Capital, 16 Review of Finance, at 1-29 (2012).
    \184\ In a principal-agent situation, the goals of principals
and agents generally differ and it is expensive for the principals
to directly verify the agents' actions. In a corporation, management
acts as agent for the shareholders (principals), with the audit
committee and the auditor serving as intermediary agents. Well
informed intermediary agents can more effectively exercise their
oversight responsibilities to mitigate undesired behaviors of the
management and reduce the goal incongruence between management and
shareholders.
---------------------------------------------------------------------------

    There will be some costs associated with audit committee
communications under the new standard, including additional costs
incurred by companies. As previously discussed, the costs for a company
to operate and maintain an audit committee may increase because of the
need for additional meetings and increased audit committee member time
demands. However, for the reasons explained above, the Board does not
believe these additional costs will significantly expand the time or
resources companies spend on audit committees.
    With respect to competition, as noted above, the standard is
designed to be scalable based on a company's size and complexity. The
required communications can be tailored or adjusted to fit the size and
nature of the company under audit. By doing so, the Board sought to
avoid imposing unnecessary costs that could have a disproportionate
effect on, and thereby potentially have an adverse competitive impact
on, smaller and less complex public companies. In response to the
Board's solicitation of comment on the appropriateness of the
standard's requirements for audits of companies of different sizes and
in different industries, commenters generally considered the
requirements of the standard to be applicable and appropriate to
companies of varying sizes and industries. Commenters did not raise
concerns regarding the standard's impact on competition and the Board
has not identified any economic effects on competition.
Conclusion
    As discussed throughout this submission, and in the Board's
adopting release, the Board believes that Auditing Standard No. 16 will
contribute to audit effectiveness. In addition, the new standard should
assist the audit committee in its oversight over financial reporting.
Moreover, more effective and informed communications between the
auditor and the audit committee also should help enhance the quality of
a company's financial reporting.
    In both its proposing and reproposing releases, the Board sought
comment on all aspects of the standard and as part of the process
specifically asked questions regarding the appropriateness of the
standard for companies of all sizes or industries, which include EGCs.
Commenters considered the requirements of the standard to be applicable
and appropriate to companies of different sizes and industries.
Notably, the Board received comments from a wide spectrum of
commenters, including from auditors that represented the interests of
both small and large accounting firms and that audit companies of
various sizes.
    After the enactment of the JOBS Act, the Board compiled data
available from entities voluntarily identifying themselves as EGCs in
SEC filings. Based on data available to the Board, it appears that a
wide range of entities, of differing sizes and industries, identify
themselves as EGCs. One key difference between EGCs and other issuers
appears to be the length of time that they have been subject to
Exchange Act reporting requirements.
    The Board believes that Auditing Standard No. 16 is in the public
interest, and, for the reasons explained above, after considering the
protection of investors and the promotion of efficiency, competition,
and capital formation, recommends that the standard should apply to
audits of EGCs. Accordingly, the Board requests 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
Auditing Standard No. 16 to audits of emerging growth companies. The
Board stands ready to assist the Commission in considering any comments
the Commission receives on these matters during the public comment
process.

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
rule changes apply to audits of emerging growth companies, as defined
in Section 3(a)(80) of the Exchange Act, the Commission has determined
to extend to December 17, 2012 as the date by which the Commission
should take action on the proposed rule changes.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
is consistent with the requirements of Title I of the Sarbanes-Oxley
Act.
    In addition, the Board requested that the Commission, pursuant to
Section 103(a)(3)(C) of the Sarbanes-Oxley Act, determine that the
proposed rule changes apply to audits of emerging growth companies, as
defined in Section 3(a)(80) of the Exchange Act. In order for the
proposed rule changes to apply to audits of emerging growth companies,
the Commission must determine that the application 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. Please provide any views you believe will help
the Commission in making that determination.
    Comments may be submitted by any of the following methods:

Electronic Comments

    1. Use the Commission's Internet comment form (http://www.sec.gov/rules/pcaob.shtml); or
    2. Send an email to<EMAIL_ADDRESS>Please include File
Number PCAOB-2012-01 on the subject line.

Paper Comments

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

All submissions should refer to File Number PCAOB-2012-01. 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 Web site (http://www.sec.gov/rules/pcaob/shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule that are filed
with the Commission, and all written communications relating to the
proposed rule 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 Web site 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
change; we do not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File No. PCAOB-
2012-01 and should be submitted on or before October 9, 2012.
---------------------------------------------------------------------------

    \185\ 17 CFR 200.30-11(b)(2).

    For the Commission, by the Office of the Chief Accountant, by
delegated authority.\185\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-22632 Filed 9-14-12; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 82, Number 141 (Tuesday, July 25, 2017)]
[Notices]
[Pages 34535-34536]
[FR Doc No: 2017-15539]

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

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Food and Drug Administration

[Docket No. FDA-2017-D-3235]

Institutional Review Board Waiver or Alteration of Informed
Consent for Clinical Investigations Involving No More Than Minimal Risk
to Human Subjects; Guidance for Sponsors, Investigators, and
Institutional Review Boards; Availability

AGENCY: Food and Drug Administration, HHS.

ACTION: Notice of availability.

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

SUMMARY: The Food and Drug Administration (FDA, the Agency, or we) is
announcing the availability of a guidance for sponsors, investigators,
and institutional review boards (IRBs) entitled ``IRB Waiver or
Alteration of Informed Consent for Clinical Investigations Involving No
More Than Minimal Risk to Human Subjects.'' This guidance informs
sponsors, investigators, IRBs, and other interested parties that FDA
does not intend to object to an IRB waiving or altering informed
consent requirements, as described in the guidance, for certain minimal
risk clinical investigations. In addition, this guidance explains that
FDA does not intend to object to a sponsor initiating, or an
investigator conducting, a minimal risk clinical investigation for
which an IRB waives or alters the informed consent requirements as
described in the guidance.

DATES: Submit either electronic or written comments on Agency guidances
at any time.

ADDRESSES: You may submit comments as follows:

Electronic Submissions

    Submit electronic comments in the following way:
     Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments. Comments submitted
electronically, including attachments, to https://www.regulations.gov
will be posted to the docket unchanged. Because your comment will be
made public, you are solely responsible for ensuring that your comment
does not include any confidential information that you or a third party
may not wish to be posted, such as medical information, your or anyone
else's Social Security number, or confidential business information,
such as a manufacturing process. Please note that if you include your
name, contact information, or other information that identifies you in
the body of your comments, that information will be posted on https://www.regulations.gov.
     If you want to submit a comment with confidential
information that you do not wish to be made available to the public,
submit the comment as a written/paper submission and in the manner
detailed (see ``Written/Paper Submissions'' and ``Instructions'').

Written/Paper Submissions

    Submit written/paper submissions as follows:
     Mail/Hand delivery/Courier (for written/paper
submissions): Dockets Management Staff (HFA-305), Food and Drug
Administration, 5630 Fishers Lane, rm. 1061, Rockville, MD 20852.
     For written/paper comments submitted to the Dockets
Management Staff, FDA will post your comment, as well as any
attachments, except for information submitted, marked and identified,
as confidential, if submitted as detailed in ``Instructions.''
    Instructions: All submissions received must include the Docket No.
FDA-2017-D-3235 for ``IRB Waiver or Alteration of Informed Consent for
Clinical Investigations Involving No More Than Minimal Risk to Human
Subjects; Guidance for Sponsors, Investigators, and Institutional
Review Boards.'' Received comments will be placed in the docket and,
except for those submitted as ``Confidential Submissions,'' publicly
viewable at https://www.regulations.gov or at the office of Dockets
Management Staff between 9 a.m. and 4 p.m., Monday through Friday.
     Confidential Submissions--To submit a comment with
confidential information that you do not wish to be made publicly
available, submit your comments only as a written/paper submission. You
should submit two copies total. One copy will include the information
you claim to be confidential with a heading or cover note that states
``THIS DOCUMENT CONTAINS CONFIDENTIAL INFORMATION.'' The

Agency will review this copy, including the claimed confidential
information, in its consideration of comments. The second copy, which
will have the claimed confidential information redacted/blacked out,
will be available for public viewing and posted on https://www.regulations.gov. Submit both copies to the Dockets Management
Staff. If you do not wish your name and contact information to be made
publicly available, you can provide this information on the cover sheet
and not in the body of your comments and you must identify this
information as ``confidential.'' Any information marked as
``confidential'' will not be disclosed except in accordance with 21 CFR
10.20 and other applicable disclosure law. For more information about
FDA's posting of comments to public dockets, see 80 FR 56469, September
18, 2015, or access the information at: https://www.gpo.gov/fdsys/pkg/FR-2015-09-18/pdf/2015-23389.pdf.
    Docket: For access to the docket to read background documents or
the electronic and written/paper comments received, go to https://www.regulations.gov and insert the docket number, found in brackets in
the heading of this document, into the ``Search'' box and follow the
prompts and/or go to the Dockets Management Staff, 5630 Fishers Lane,
Rm. 1061, Rockville, MD 20852.
    Submit written requests for single copies of the guidance to the
Office of Good Clinical Practice, Food and Drug Administration, 10903
New Hampshire Ave., Bldg. 32, Rm. 5169, Silver Spring, MD 20993. Send
one self-addressed adhesive label to assist that office in processing
your requests. See the SUPPLEMENTARY INFORMATION section for electronic
access to the guidance document.

FOR FURTHER INFORMATION CONTACT: Janet Norden, Office of Good Clinical
Practice, Food and Drug Administration, 10903 New Hampshire Ave.,
Silver Spring, MD 20993,<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

I. Background

    We are announcing the availability of a guidance for sponsors,
investigators and IRBs entitled ``IRB Waiver or Alteration of Informed
Consent for Clinical Investigations Involving No More Than Minimal Risk
to Human Subjects.'' We are issuing this guidance consistent with our
good guidance practices (GGP) regulation (Sec.  10.115 (21 CFR
10.115)). We are implementing this guidance without prior public
comment because we have determined that prior public participation is
not feasible or appropriate (Sec.  10.115(g)(2)). We made this
determination because this guidance presents a less burdensome policy
that is consistent with the public health. FDA believes this guidance
will facilitate the conduct of certain minimal risk clinical
investigations that are important to addressing significant public
health needs without compromising the rights, safety, or welfare of
human subjects. Although this guidance is immediately in effect, it
remains subject to comment in accordance with FDA's GGP regulation. FDA
will consider all comments received and will revise this guidance when
appropriate.
    On December 13, 2016, the 21st Century Cures Act (Cures Act) (Pub.
L. 114-255) was signed into law. Title III, section 3024 of the Cures
Act amended sections 520(g)(3) and 505(i)(4) of the Federal Food, Drug,
and Cosmetic Act (the FD&C Act) to provide authority for FDA to permit
an exception from informed consent requirements when the proposed
clinical testing poses no more than minimal risk to the human subject
and includes appropriate safeguards to protect the rights, safety, and
welfare of the human subject. This statutory amendment became effective
on December 13, 2016.
    Currently, FDA's regulations governing the protection of human
subjects (21 CFR parts 50 and 56) allow exception from the general
requirements for informed consent only in life-threatening situations
when certain conditions are met (21 CFR 50.23) or when the requirements
for emergency research are met (21 CFR 50.24), but do not include an
exception from informed consent for minimal risk clinical
investigations. In light of the Cures Act amendment to the FD&C Act
described previously, FDA intends to revise its informed consent
regulations to add a waiver or alteration for minimal risk clinical
investigations, under appropriate human subject protection safeguards,
to the two existing exceptions from informed consent.
    This guidance informs sponsors, investigators, and IRBs that until
FDA issues these regulations, we do not intend to object to an IRB
approving a consent procedure that does not include, or that alters,
some or all of the elements of informed consent set forth in 21 CFR
50.25, or waiving the requirements to obtain informed consent as
described in the guidance. In addition, we do not intend to object to a
sponsor initiating, or an investigator conducting, a minimal risk
clinical investigation for which an IRB waives or alters the informed
consent requirements as described in the guidance. We believe that this
guidance will facilitate investigators' ability to conduct studies that
may contribute substantially to the development of products to diagnose
or treat diseases or conditions, or address unmet medical needs,
without compromising the rights, safety, or welfare of human subjects.
    The guidance represents the current thinking of FDA on this topic.
It does not establish any rights for any person and is not binding on
FDA or the public. You can use an alternative approach if it satisfies
the requirements of the applicable statutes and regulations. This is
not a significant regulatory action subject to Executive Order 12866.

II. Paperwork Reduction Act of 1995

    This guidance refers to previously approved collections of
information found in FDA regulations. These collections of information
are subject to review by the Office of Management and Budget (OMB)
under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). The
collections of information referenced in this guidance that are related
to IRB recordkeeping requirements under 21 CFR part 56 have been
approved under OMB control numbers 0910-0755 and 0910-0130.

III. Electronic Access

    Persons with access to the Internet may obtain the guidance at
either http://www.fda.gov/RegulatoryInformation/Guidances/default.htm,
http://www.fda.gov/ScienceResearch/SpecialTopics/RunningClinicalTrials/GuidancesInformationSheetsandNotices/ucm219433.htm, or https://www.regulations.gov. Use the FDA Web site listed in the previous
sentence to find the most current version of the guidance.

    Dated: July 11, 2017.
Anna K. Abram,
Deputy Commissioner for Policy, Planning, Legislation, and Analysis.
[FR Doc. 2017-15539 Filed 7-24-17; 8:45 am]
 BILLING CODE 4164-01-P


[Federal Register Volume 84, Number 110 (Friday, June 7, 2019)]
[Notices]
[Pages 26727-26728]
[FR Doc No: 2019-11946]

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

DEPARTMENT OF TRANSPORTATION

Federal Motor Carrier Safety Administration

[Docket No. FMCSA-2018-0403]

Qualification of Drivers; Exemption Applications; Implantable
Cardioverter Defibrillator (ICD)

AGENCY: Federal Motor Carrier Safety Administration (FMCSA), DOT.

ACTION:  Notice of denials.

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

SUMMARY:  FMCSA announces its decision to deny applications from seven
individuals treated with Implantable Cardioverter Defibrillators (ICDs)
who requested an exemption from the Federal Motor Carrier Safety
Regulations (FMCSRs) prohibiting operation of a commercial motor
vehicle (CMV) in interstate commerce by persons with a current clinical
diagnosis of myocardial infarction, angina pectoris, coronary
insufficiency, thrombosis, or any other cardiovascular disease of a
variety known to be accompanied by syncope, dyspnea, collapse, or
congestive heart failure.

FOR FURTHER INFORMATION CONTACT: Ms. Christine A. Hydock, Chief,
Medical Programs Division,<PHONE_NUMBER><EMAIL_ADDRESS>FMCSA,
Department of Transportation, 1200 New Jersey Avenue SE, Room W64-224,
Washington, DC 20590-0001. Office hours are from 8:30 a.m. to 5 p.m.,
ET, Monday through Friday, except Federal holidays. If you have
questions regarding viewing or submitting material to the docket,
contact Docket Services, telephone<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

I. Public Participation

A. Viewing Documents and Comments

    To view comments, as well as any documents mentioned in this notice
as being available in the docket, go to http://www.regulations.gov.
Insert the docket number, FMCSA-2018-0403, in the keyword box, and
click ``Search.'' Next, click the ``Open Docket Folder'' button and
choose the document to review. If you do not have access to the
internet, you may view the docket online by visiting the Docket
Management Facility in Room W12-140 on the ground floor of the DOT West
Building, 1200 New Jersey Avenue SE, Washington, DC 20590, between 9
a.m. and 5 p.m., ET, Monday through Friday, except Federal holidays.

B. Privacy Act

    In accordance with 5 U.S.C. 553(c), DOT solicits comments from the
public

to better inform its rulemaking process. DOT posts these comments,
without edit, including any personal information the commenter
provides, to www.regulations.gov, as described in the system of records
notice (DOT/ALL-14 FDMS), which can be reviewed at www.dot.gov/privacy.

II. Background

    On February 27, 2019, FMCSA published a FR notice (84 FR 6463)
announcing receipt of applications from seven individuals treated with
ICDs and requested comments from the public. These seven individuals
requested an exemption from 49 CFR 391.41(b)(4) which prohibits
operation of a CMV in interstate commerce by persons with a current
clinical diagnosis of myocardial infarction, angina pectoris, coronary
insufficiency, thrombosis, or any other cardiovascular disease of a
variety known to be accompanied by syncope, dyspnea, collapse, or
congestive heart failure. The public comment period closed on March 29,
2019, and three comments were received.
    FMCSA has evaluated the eligibility of these applicants and
concluded that granting these exemptions would not provide a level of
safety that would be equivalent to or greater than, the level of safety
that would be obtained by complying with the regulation 49 CFR
391.41(b)(4). A summary of each applicant's medical history related to
their ICD exemption request was discussed in the February 27, 2019,
Federal Register notice and will not be repeated in this notice.
    In reaching the decision to deny these exemption requests, the
Agency considered information from the Cardiovascular Medical Advisory
Criteria, the April 2007 Evidence Report ``Cardiovascular Disease and
Commercial Motor Vehicle Driver Safety, a December 2014 focused
research report ``Implantable Cardioverter Defibrillators and the
Impact of a Shock in a Patient When Deployed.'' Copies of the reports
are included in the docket.
    FMCSA has published advisory criteria to assist medical examiners
in determining whether drivers with certain medical conditions are
qualified to operate a CMV in interstate commerce. [Appendix A to Part
391--Medical Advisory Criteria, section D, paragraph 4]. The advisory
criteria for 49 CFR 391.41(b)(4) indicates that coronary artery bypass
surgery and pacemaker implantation are remedial procedures and thus,
not medically disqualifying. Implantable cardioverter defibrillators
are disqualifying due to risk of syncope.

III. Discussion of Comments

    FMCSA received three comments in this proceeding. All three
commenters were private citizens in support of granting ICD exemptions
to these three individuals.

IV. Basis for Exemption Determination

    Under 49 U.S.C. 31136(e) and 31315, FMCSA may grant an exemption if
it finds such an exemption would likely achieve a level of safety that
is equivalent to, or greater then, the level that would be achieved
absent such an exemption.
    The Agency's decision regarding these exemption applications is
based on an individualized assessment of each applicant's medical
information provided by the applicant, available medical and scientific
data concerning ICD's, and public comments received.
    In the case of persons with ICDs, the underlying condition for
which the ICD was implanted places the individual at high risk for
syncope (a transient loss of consciousness) or other unpredictable
events known to result in gradual or sudden incapacitation. ICDs may
discharge, which could result in loss of ability to safely control a
CMV. See the April 2007 Evidence Report on Cardiovascular Disease and
Commercial Motor vehicle Driver Safety, April 2007.\1\ A focused
research report on Implantable Cardioverter Defibrillators and the
Impact of a Shock on a Patient When Deployed completed for the FMCSA
December 2014 indicates that the available scientific data on persons
with ICDs and CMV driving does not support that persons with ICDs who
operate CMVs are able to meet an equal or greater level of safety and
upholds the findings of the April 2007 report.
---------------------------------------------------------------------------

    \1\ Now available at http://ntl.bts.gov/lib/30000/30100/30123/Final_CVD_Evidence_Report_v2.pdf.
---------------------------------------------------------------------------

V. Conclusion

    The Agency has determined that the available medical and scientific
literature and research provides insufficient data to enable the Agency
to conclude that granting these exemptions would achieve a level of
safety equivalent to, or greater than, the level of safety maintained
without the exemption. Therefore, the following applicants have been
denied exemptions from the physical qualification standards in 49 CFR
391.41(b)(4):

Mark Caviola (NY)
John J. Groff (PA)
Kevin L. Krueger (NE)
Michael R. Miller (CA)
Anthony Saitta (NY)
William Allen Spivey (NC)
Aaron J. Thomas (GA)

    Each applicant has, prior to this notice, received a letter of
final disposition regarding his/her exemption request. Those decision
letters fully outlined the basis for the denial and constitutes final
action by the Agency. The list published today summarizes the Agency's
recent denials as required under 49 U.S.C. 31315(b)(4).

    Issued on: May 29, 2019.
Larry W. Minor,
Associate Administrator for Policy.
[FR Doc. 2019-11946 Filed 6-6-19; 8:45 am]
 BILLING CODE 4910-EX-P