30 Summary of Technical Literature Examining the Physiological Effects of Temperature SUPPORTING DISCUSSION AND LITERATURE   SUBLETHAL EFFECTS Incubation and Early Fry Development Which temperatures provide optimum conditions for incubation and early fry development in the following species?

Chinook salmon. Once spawning has taken place, the eggs of chinook salmon hatch in about 2 months and the young remain in the gravel for 2 3 wk before emerging. Many researchers have tested incubation survival at constant exposure to various test temperatures. Complete mortality ( 100%) has been noted at incubation temperatures from 57 to 66.9 ° F ( 13.9 19.4 ° C) ( Donaldson 1955, Garling and Masterson 1985, Seymour 1956, Eddy 1972, as cited in Raleigh et al. 1986). Significant mortality ( over 50%) has been noted at constant incubation temperatures from 49.8 to 62 ° F ( 9.9 16.7 ° C) ( Donaldson 1955, Seymour 1956, Burrows 1963, Bailey and Evans 1971, as cited in Alderdice and Velsen 1978; Hinze 1959, as cited in Healy 1979). A constant incubation temperat ure of 46.4 ° F ( 8 ° C) produced more robust alevin and fry Figure 1. Critical swimming velocity as a function of water temperature. Data source was tabulated in Myrick and Cech ( 2000). 31 Summary of Technical Literature Examining the Physiological Effects of Temperature survival than constant exposure to either 39.2 or 53.6 ° F ( 4 or 12 ° C) in a study by Murray and Beacham ( 1986), and Velsen ( 1987) compiled data showing that the best survival (> 92.9%) occurred between 44.9 and 49.2 ° F ( 7.2 and 9.6 ° C). Heming ( 1982), however, found good survival at bo th 50 and 53.6 ° F ( 10 and 12 ° C). Heming tested survival in bot h incubation t rays and artificial redds. Survival rates declined as the temperatures increased from 42.8 to 46.4, 50, and 53.6 ° F ( 6 8, 10, and 12 ° C). The greatest survival ( 91.7% 98%) occurred at 42.8 and 46.4 ° F ( 6 and 8 ° C), but it was still very good ( 90.2% 95.9%) at 50 ° F ( 10 ° C). Incubation at 53.6 ° F ( 12 ° C) consistently had the lowest survival ( 84.6% 89.3%). Heming also tested survival rates from incubation to hatching against survival rat es from hatching through complete yolk absorption. His work suggests higher incubation temperatures may create a metabolic energy deficit for pre emergent salmon that increases mortality. Once alevin have hatched and absorbed their yolk sacs they will need to make a transition to active feeding. Heming and McInery ( 1982) found that temperatures of 42.8, 46.4, and 50 ° F ( 6, 8, and 10 ° C) resulted in an average survival of 98.4% during this transitional period, while 53.6 ° F ( 12 ° C) was asso ciated with a decrease in survival to 89.2%. The maximum conversion of yolk t o tissue weight was reported by Heming ( 1982) ( as cited by Beacham and Murray 1986) to occur at 42.8 ° F ( 6 ° C) or below. Seymour ( 1956) noted a ninefold increase in abnormalities in fry incubated at 60 ° F ( 15.6 ° C) and higher when compared with those incubated between 39.9 and 55 ° F ( 4.4 12.8 ° C). Seymour also noted that fry incubated at 39.9 ° F ( 4.4 ° C) emerged at a larger size than those reared at higher temperatures; however, subsequent fry growth was maximized at 55 ° F ( 12.8 ° C).

Considered together, the work of the authors cited above most strongly suggests that constant temperatures above 48.2 50 ° F ( 9 10 ° C) and below 41 ° F ( 5 ° C) may reduce the survival of chinook salmon embryos and alevins. Although constant temperatures of 51.8 53.6 ° F ( 11 12 ° C) can still result in good success, the results are consistently less than what is produced at lower temperatures. As discussed previously in this paper, constant laboratory test temperatures of 48.2 50 ° F ( 9 10 ° C) should be considered roughly equivalent to naturally fluctuating stream temperatures with daily maximums of 51.8 53.6 ° F ( 11 12 ° C).

Some researchers have tried to mimic the naturally fluctuating and falling temperatures actually experienced by incubating eggs, or have stepwise reduced the incubation temperatures as incubation progressed. Initial incubation temperatures from 60 to 62 ° F ( 15.6 16.7 ° C) have been associated with significant to total losses of young fish through the incubation to early fry development phase ( Healy 1979, Johnson and Brice 1953, California Department of Water Resources [ CDWR] 1988, and Jewett 1970 as cited in CDWR 1988). Rice ( 1960) found that source waters declining from 60 to 46.9 ° F ( 15.6 8.3 ° C) resulted in satisfactory egg development, although he did not provide survival rates or clearly consider survival through to the fry stage. Johnson and Brice ( 1953) found survival often exceeded 90% where initial water temperatures ( as a daily mean) were below 53.9 ° F ( 12.2 ° C). Healy ( 1979) found that highest survival ( 97%) occurred in creek water where the daily maximum reached 55 ° F ( 12.8 ° C) only a few times during the first 2 wk of development, but also noted that survival was still very good ( 90% 94%) where the initial temperatures were between 55 and 57.5 ° F ( 12.8 and 14.2 ° C). Olson and Nakatani ( 1969) found 53.7% 88% survival in egg lots started at 54.5 ° F ( 12.5 ° C), experiencing a brief increase to 58.4 ° F ( 14.7 ° C) in the first wk, and then quickly dropping back to 53.6 54.5 ° F ( 12 12.5 ° C) and assuming a seasonal downward trend in temperature ( test water paralleled both diel and seasonal fluctuations). Olson and Foster ( 1955) found the greatest survival at an initial test 32 Summary of Technical Literature Examining the Physiological Effects of Temperature temperature of 52.8 ° F ( 11.6 ° C) ( 92.2%), but reported no appreciable differences in survival rates at initial test temperatures of 56.8, 59, and 60.8 ° F ( 13.8, 15, and 16 ° C) ( 89.9% 83.9%) ( test water paralleled seasonal daily average temperatures). Seymour ( 1956) t ested four geographically distinct stocks of chinook. Taking into co nsideration both mortality and growth rate, the optimum temperature was estimated as 52 ° F ( 11.1 ° C) for eggs and fry. The mortality rate was considered low at all stages of development for lots reared between 39.9 and 55 ° F ( 4.4 12.8 ° C). Lots with initial temperatures of 64.9 ° F ( 18.3 ° C) had t he highest mortality ( 11%, 24%, 40%, and 100%). In the cyclic and fluctuat ing temperature tests reviewed here, temperatures at the beginning of incubation that are below 51.8 55 ° F ( 11 12.8 ° C) are typically associated with optimal survival rates. This compares well with the adjusted optimal range o f 52.7 54.5 ° F ( 11.5 12.5 ° C) suggested above based on examining the constant temperature exposure studies. This range also compares well with the optimal temperature range of 46.4 53.6 ° F ( 8 12 ° C) recommended by the Independent Scientific Group ( 1996) study.

Donaldson ( 1955) transferred eggs to more optimal 50 55 ° F ( 10 12.8 ° C) incubation temperatures after various periods of exposure to higher temperatures. He found that tolerance to temperature exposure varies with the stage of development. He also found 20% mortality could be induced by exposing eggs to 66.9 ° F ( 19.4 ° C) for 1 d, 64.9 ° F ( 18.3 ° C) for 3 d, and 62.9 ° F ( 17.2 ° C) for less than 10 d. Donaldson's work lends further support to the observations made by other authors such as Jewett ( 1970, as cited in CDWR 1988) that the latent effects of holding eggs at higher than optimal temperatures continues through the period of absorption of the yolk sac; thus, using mortality estimates at the time of hatching underestimates the total temperature induced mortality. Donaldson found the developmental stages associated with the greatest percentages of temperature induced mortality were: ( 1) the time up until the closure of the blastopore ( 200 T. U.); ( 2) the period just previous to and during hatching; and ( 3) when fry are adapting themselves to feeding. He also found that when eggs were exposed to test temperatures 62.9, 64.9, and 66.9 ° F ( 17.2, 18.3, and 19.4 ° C) past the eye pigmentation stage ( 350 T. U.), the time necessary for complete hatching doubled, and the frequency of common abnormalities increased with both the higher temperatures and longer exposures. Murray and Beacham ( 1986) found that initial incubation at 39.2 ° F ( 4 ° C) reduced survival even with later transfer ( at completion of epiboly) to warmer waters 46.4 and 53.6 ° F ( 8 and 12 ° C). Transfers after epiboly or completion of eye pigmentation from 39.2 to 53.6 ° F ( 4 12 ° C) and from 53.6 to 39.2 ° F ( 12 4 ° C) also caused an increase in alevin mortality. The authors also found that decreasing temperature produced longer and heavier alevins and fry. Combs ( 1965) found that eggs developed to the 128 cell stage at 42.4 ° F ( 5.8 ° C) could then t olerat e 35 ° F ( 1.7 ° C) for the remainder of the incubation period with only moderate losses. Mortality of 14.5% was observed with a transfer time of 72 h, whereas only 3.3% mortality occurred with a transfer at 144 h. These three works together suggest that the effects of suboptimal initial incubation temperatures may not be nullified by later changes in the temperature regime to more optimal levels; that sudden changes in temperature at either early or lat er stages of development, regardless o f the direction of that change, can be harmful to pre emergent life stages; and that initial incubation at optimal temperatures may condition eggs and embryos such that they can withstand very low winter temperature regimes.

In addition to Donaldson ( 1955), Neitzel and Becker ( 1985) conducted work on the effects of short term increases in temperature that can be used to support daily maximum temperature 33 Summary of Technical Literature Examining the Physiological Effects of Temperature criteria. Neitzel and Becker used chinook salmon to determine the effects of short term dewatering of redds by hydropower facilities. Neitzel and Becker found that sudden increases in temperatures from 50 ° F to above 71.6 ° F ( 10 22 ° C ) for 1 8 h significantly reduced survival of cleavage eggs in chinook salmon. Controls held at 50 ° F ( 10 ° C) had very low mortalities ( less than 2%). Mortality in treatment groups was 8% 10% at 71.6 ° F ( 22 ° C) after 2 h exposure, and was 22% after a 1 h exposure at 74.3 ° F ( 23.5 ° C). They further found that decreasing the temperature from 50 ° F ( 10 ° C) to near freezing 32 ° F ( 0 ° C) for up to 24 h did not increase mortality in eggs, embryos, or alevin. Considering the work o f Neitzel and Becker, it would appear that chinook salmon eggs and embryos are relatively tolerant of short term increases in temperature up to 71.6 ° F ( 22 ° C). However, because Donaldson ( 1955) found that 66.9 ° F ( 19.4 ° C) produced 20% mortality in 1 d and 64.9 ° F ( 18.3 ° C) produced 20% in 3 d, setting a more restrictive single daily maximum temperature limit is certainly warranted. Furthermore, as described above, incubation conditions where daily maximum temperatures were in the range of 57.9 60.8 ° F ( 14.4 15.6 ° C) produced reduced survival rates, so further caution may be warranted in allowing daily maximum temperatures to exceed 56.3 58.1 ° F ( 13.5 14.5 ° C) during incubation.

Although there is some disagreement, the literature is consistent overall regarding optimal incubation requirements for chinook salmon. Providing for optimal protection from fertilization through initial fry development requires that constant or acclimation temperatures be maintained below 48.2 50 ° F ( 9 10 ° C) and that individual daily maximum temperatures generally not exceed 56.3 58.1 ° F ( 13.5 14.5 ° C).

Coho salmon. Embryo survival is consistently maximized in tests at constant temperature exposures between 36.5 and 43.7 ° F ( 2.5 6.5 ° C) and is only slightly less successful between 34.4 and 51.6 ° F ( 1.3 10.9 ° C) ( Dong 1981, Tang et al. 1987, Murray et al. 1988, Velsen 1987). Davidson and Hutchinson ( 1938, as cited in Sandercock 1991) suggested that optimum temperature for egg incubation is 39.2 51.8 ° F ( 4 11 ° C). Mortalities tend to become moderate ( 74% 79%) at 51.8 54.5 ° F ( 11 12.5 ° C), and at 54.5 56.3 ° F ( 12.5 13.5 ° C), mortalities of 50% can be expected. Above 57.2 57.9 ° F ( 14 14.4 ° C), tests commonly report 100% mortality or close to it. Alevin survival may be excellent ( 97%) at 34.3 51.6 ° F ( 1.3 10.9 ° C) ( Dong 1981, Tang et al. 1987), and the most robust fry are at incubation temperatures of 39.2 46.4 ° F ( 4 8 ° C) ( Dong 1981, Murray et al. 1988). Alevin mortalities of 51% 59% occur at 54.5 ° F ( 12.5 ° C) ( Dong 1981), and 100% mortality occurs at 57.2 57.9 ° F ( 14 14.4 ° C) ( Dong 1981, Murray et al. 1988).

From the studies discussed above, we are relatively confident that egg survival is consistently best at exposure to constant temperatures of 36.5 43.7 ° F ( 2.5 6.5 ° C), but may still be excellent for many stocks at temperatures of 34.4 51.5 ° F ( 1.3 10.9 ° C). Alevin and fry survival and health may be best at exposure to constant temperatures of 39.2 46.4 ° F ( 4 8 ° C), but survival may remain excellent up to 51.6 ° F ( 10.9 ° C). This review of the available literature suggests that a constant 44.6 50 ° F ( 7 10 ° C) may form the upper threshold for optimal development of coho salmon eggs and alevin. Adjusting this laboratory based naturally fluctuating stream environment ( as discussed previously) results in the recommendation that to fully support the pre emergent stages of coho development, the 7 d average of daily maximum temperatures should not exceed 48.2 53.6 ° F ( 9 12 ° C). 34 Summary of Technical Literature Examining the Physiological Effects of Temperature No information is available that suggests coho salmon embryos and alevins are more sensitive to short term ( daily peak) increases in temperature than any other Pacific salmon. The one study reviewed that looks at short term temperature changes for coho was by Tang et al. ( 1987). In that study, incubation temperatures were increased from 50.3 to 62.6 ° F ( 10.2 17 ° C) and lowered from 50.3 to 39.2 ° F ( 10.2 4 ° C) for 8 h. In neither test did these modest changes result in any statistically significant increase in mortality. Additionally, one field study reported coho alevins capable of at least partial survival ( substantial change in later numbers of juveniles) when daily peak temperatures rose from 14 to 20 ° C during the month of May while some were still in the gravels. The control stream had no change in later abundance of juveniles and had temperatures of 51.8 54.5 ° F ( 11 12.5 ° C) ( visually interpolated from graph) during May. In the impacted stream, summer maximum temperatures in two successive years were 75.2 and 86 ° F ( 24 and 30 ° C), and in the unimpacted stream, summer temperatures remained below 59 ° F ( 15 ° C) ( Hall and Lantz 1969). In the review of the literature, no clear basis was found for setting a daily peak temperature specific to coho incubation.

Chum salmon. Incubat ion survival fro m fertilization to emergence is variable, but can be excellent anywhere from 39.2 to 53.5 ° F ( 4 12 ° C) ( Murray and Beacham 1986, Beacham and Murray 1985). In the initial period of embryo development, temperatures of 46.4 53.6 ° F ( 8 12 ° C) produce the highest survival. However, in later stages of incubation, temperatures of 41 46.4 ° F ( 5 8 ° C) produce the best survival as well as the largest and heaviest alevin and fry ( Beacham and Murray 1986). Temperatures of 53.6 ° F ( 12 ° C) in the later developmental stages can result in heavy losses in some stocks ( Beacham and Murray 1985, Beacham and Murray 1986). The optimal temperature range for conversion of yolk to tissue weight was estimated to be 42.8 50 ° F ( 6 10 ° C) ( Beacham and Murray 1986), and optimal respiration efficiency has been estimated to range from 51.8 to 54.5 ° F ( 11 12.5 ° C) for pro larvae and larvae ( Zinichev and Zot in 1988). Constant incubation at temperatures of 57.7 and 60.8 ° F ( 14 and 16 ° C) as well as at 36.5 ° F ( 2.5 ° C) have been associated with embryonic mortalities of 50% ( Beacham and Murray 1990). The alevin stages of development ( late), however, were shown to have very high survival rates when exposed to temperatures as low as 35.6 ° F ( 2 ° C).

Based on the literature reviewed, constant incubation temperatures from 39.2 to 53.6 ° F ( 4 12 ° C) commonly produce excellent incubation results; however, some researchers have noted less than optimal survival occurring at the edges of this range. It appears that constant initial incubation temperatures of 46.4 50 ° F ( 8 10 ° C) would be most consistently optimal for chum salmon. In reviewing the literature, no specific basis was found for setting a daily peak temperature for incubating chum.

Pink salmon. The range for successful incubation has been suggested to be from 39.9 to 55.9 ° F ( 4.4 to 13.3 ° C) ( Beschta et al. 1987, Bonar et al. 1989). Murray and Beacham ( 1986) reported excellent survival ( 91% 97%) with initial fertilization occurring at 57.2 ° F ( 14 ° C) and a 0.9 ° F ( 0.5 ° C) drop in temperature every 3 d down to 41 ° F ( 5 ° C). When they allowed temperatures to drop further to 39.2 and 35.6 ° F ( 4 and 2 ° C), survival was reduced. Murray and McPhail found survival of 94% from fertilization to emergence at 41 ° F ( 5 ° C), and Beacham and Murray ( 1986) found the greatest survival for 5 stocks and 21 families of pink salmon tested at 46.4 ° F ( 8 ° C). Velsen ( 1987) compiled data showing that the best, although highly variable, survival ( generally > 89.5%) occurred between 46.4 and 55.4 ° F ( 8 and 13 ° C). Survival decreased 35 Summary of Technical Literature Examining the Physiological Effects of Temperature at an incubation temperature of 51.8 ° F ( 11 ° C) in a test by Murray and McPhail ( 1988), and was 50% at 59 60 ° F ( 15 15.5 ° C) ( Beacham and Murray 1990). Temperatures of 41 46.4 ° F ( 5 8 ° C) produced the largest alevins in a study by Murray and McPhail ( 1988), and 46.4 ° F ( 8 ° C) produced the longest ( Beacham and Murray 1986) and heaviest ( Murray and McPhail 1988) fry.

Survival of the alevin life stage was found to be generally excellent (> 97%) for 21 families of pink salmon tested at temperatures ranging from 39.2 to 35.6 ° F ( 4 2 ° C) ( Beacham and Murray 1986). Survival to emergence was reportedly low, at 57.2 ° F ( 14 ° C) ( Murray and McPhail 1988).

Examining low incubation temperatures, Beacham and Murray ( 1986) found that temperatures of 39.2 ° F ( 4 ° C) consistently resulted in the lowest survival for 5 stocks and 21 families of pink salmon, and in a 1990 study found 50% mortality at 41 ° F ( 5 ° C). Murray and McPhail ( 1988), Beacham and Murray ( 1990), and Bailey and Evans ( 1971) found 100% mortality at incubation temperatures of 35.6 ° F ( 2 ° C). Murray and Beacham ( 1986) transferred embryos in a late stage of development from 46.4 ° F to 33.8 ° F ( 1 8 ° C) and found that while northern stocks had 100% survival, southern stocks had mortalities ranging from 38% to 60%.

Based on the research cited above, constant temperatures of 40.1 53.6 ° F ( 4.5 12 ° C) and a constantly declining temperature regime beginning at 57.2 ° F ( 14 ° C) can produce excellent and perhaps optimal survival rates of incubating pink salmon. However, a constant temperature of 46.4 ° F ( 8 ° C) appears to produce the most consistently optimal results; and although tests up to 53.6 55.9 ° F ( 12 13.3 ° C) were found to produce optimal results, several tests found temperatures of 51.8 53.6 ° F ( 11 12 ° C) ( as well as ones conducted at 40.1 41 ° F [ 4.5 5 ° C]) to produce less survival and smaller fry. Furthermore, in natural streams the temperatures do not decline at a steady rate, and temperatures of 59 60.8 ° F ( 15 16 ° C) have resulted in high mortality. In considerat ion of all of these issues, we should assume that constant or acclimatio n temperatures in the range of 46.4 50 ° F ( 8 10 ° C) represent optimal conditions for embryonic development. No specific information was reviewed that examined the effect of short term and infrequent peaks of temperature on developing pink salmon.

Sockeye salmon. Murray and McPhail ( 1988) and Combs ( 1965) reported that sockeye salmon are more tolerant of low incubation temperatures and less tolerant of high incubation temperatures than the other Pacific salmon. At constant exposure, Combs ( 1965) reported that temperatures of 39.9 54.8 ° F ( 4.4 12.7 ° C) produced similarly high survival rates ( 85.8% 90.9%), with the highest occurring at 42.4 ° F ( 5.8 ° C). Combs found that incremental increases in mortality of 53% 67% occurred when the temperature was lowered from 42.4 to 39.9 ° F ( 5.8 to 4.4 ° C) or raised from 54.8 to 57.5 ° F ( 12.7 14.2 ° C). Velsen ( 1987) found that while survival rates were highly inconsistent between 34 and 59 ° F ( 1.1 15 ° C), the best survival generally occurred between 35.8 and 42.4 ° F ( 3.1 and 5.8) ( generally > 90%), with fair survival (> 70%) occurring in the range 35.8 54.9 ° F ( 2.1 12.7 ° C), and survival rates consistently poor ( 17% 76%) above 57.2 ° F ( 14 ° C). Murray and McPhail ( 1988) found that survival was highest at 46.4 ° F ( 8 ° C) ( 79%) but only 40% at both 51.8 and 41 ° F ( 11 and 5 ° C). Andrew and Geen ( 1960) reported that in the first 2 years of a 4 year field study, the Salmon Commission found that eggs initially incubated at temperatures of 45 ° F ( 7.2 ° C) had lower survival than tho se initially incubated at 50, 55, and 60 ° F ( 10, 12.8, and 15.6 ° C). In a followup experiment the following 2 years, they found that eggs exposed to temperatures of 60 62 ° F ( 15.6 16.7 ° C) for short periods suffered severe losses during the 36 Summary of Technical Literature Examining the Physiological Effects of Temperature exposure, and that temperatures of 62 64.9 ° F ( 16.7 18.3 ° C) caused extensive losses both during and following exposure. In a study by Craig et al. ( 1996), the temperature range of 46.4 50 ° F ( 8 10 ° C) resulted in the optimum 1: 1 male to female sex ratio in offspring, although the study design really only allows the conclusion that temperature in the early stage of development affects sex determination.

The data on sockeye incubation survival are highly variable. Overall, however, it can be said that constant o r acclimation temperatures in the range of 39.2 54.5 ° F ( 4 12.5 ° C) produce variable but often excellent survival rates in sockeye salmon, but that the range 46.4 50 ° F ( 8 10 ° C) appears most consistently optimum. No specific studies were found to suggest a basis for a single daily maximum temperature limit during the incubation period for sockeye salmon.

Steelhead. In establishing a State standard to protect spawning, we should consider temperature recommendations established to protect embryo development. Fuss ( 1998) considered the range 42 52 ° F ( 5.6 11.1 ° C) to be optimal for steelhead egg survival in the Washington State hatchery program, and Bell ( 1986) suggested that 50 ° F ( 10 ° C) is the preferred hatching temperature for steelhead eggs. Rombough ( 1988) found less than 4% embryonic mortality at 42.8, 48.2, and 53.6 ° F ( 6, 9, and 12 ° C), but noted an increase to 15% mortality at 59 ° F ( 15 ° C). Alevin mortality was less than 5% at all temperatures tested, but alevins hatching at 59 ° F ( 15 ° C) were considerably smaller and appeared less well developed than those incubated at the lower test temperatures. Redding and Schreck ( 1979) similarly found that emergent fry were larger at 53.6 ° F ( 12 ° C) than at 60.8 ° F ( 16 ° C). Based on the works reviewed above, it appears that an optimal constant incubation temperature occurs below 51.8 53.6 ° F ( 11 12 ° C). No specific research results were found that could be used to suggest a single daily maximum temperature limit for waters containing incubating steelhead.

Nonanadromous rainbow trout. Kamler and Kato ( 1983) tested incubation survival at 48.2, 50, 53.6, 57.2, and 60.8 ° F ( 9, 10, 12, 14, and 16 ° C). They found the highest survival of eggs at 50 and 53.6 ° F ( 10 and 12 ° C), slightly lower survival at 57.2F ( 14 ° C), and abrupt dro ps in survival at both 48.2 ° F ( 9 ° C) and 60.8 ° F ( 16 ° C). Velsen ( 1987) compiled data on the incubation survival of both rainbow trout and steelhead trout that showed survival was consistently high (> 92%) between 39.2 and 48.2 ° F ( 4 and 9 ° C), and fair (> 78%) between 37.4 and 59 ° F ( 3 and 15 ° C), but very poor ( 7%) above 60.8 ° F ( 16 ° C). Survival to the swim up stage in two strains of rainbow trout had 94% 98% survival at 44.6 ° F ( 7 ° C), 72% 95% at 39.2 ° F ( 4 ° C), and < 12% 41% survival at 35.6 ° F ( 2 ° C) ( Stonecypher and Hubert 1994). Kwain ( 1975) found that the lowest mortalities occurred at 44.6 and 50 ° F ( 7 and 10 ° C), Billard and Breton ( 1977) found a drop in fertility at temperatures higher than 50 ° F ( 10 ° C), and Kashiwagi et al. ( 1987, as cited in Taylor and Barton 1992) found optimal hatching occurred at 50 ° F ( 10 ° C). Humpesh ( 1985) found that optimal hatching (> 90%) occurred between 44.6 and 51.8 ° F ( 7 and 11 ° C), and Alekseeva ( 1987, as cited in Taylor and Barton 1992) suggested that optimal incubation occurs with temperatures rising from 41.5 ° F to 50.9 ° F ( 5.3 10.5 ° C). Rombough ( 1988, as cited in Taylor and Barton 1992) found that at temperatures less than 53.6 ° F ( 12 ° C) there was less than 4% mortality. Constant temperatures above 53.6 ° F ( 12 ° C) have produced variable, but generally lower survival during incubation temperatures, with often severe losses occurring at temperatures of 59 60.8 ° F ( 15 16 ° C) ( Velsen 1987, Billard and Breton 1977, Kwain 1975, Kamler and Kato 1983, and Rombough 1988, as cited in Taylor and Barton). 37 Summary of Technical Literature Examining the Physiological Effects of Temperature On the basis of the literature cited above, we can generally conclude that constant or acclimation temperatures in the range of 44.6 50 ° F ( 7 10 ° C) are opt imal for incubation and embryonic development of rainbow trout. No specific studies were found that test the ability of O. mykiss eggs or alevin to survive high single daily maximum temperatures.

Cutthroat trout. Eggs o f sea run cutthroat incubate 6 7 wk before they hatch, and the alevin remain in the gravel fo r about another 2 wk before they emerge ( Trotter 1989, Pauley et al. 1989). Fry may emerge from March through June, depending on the location and time of spawning, but peak emergence occurs in mid April ( Trotter 1989, Wydoski and Whitney 1979). Pauley et al. ( 1989) cite studies demonstrating that the optimum temperature for incubation is 50 60.8 ° F ( 10 11 ° C). Bell ( 1986) has suggested that the range for hatching of cutthroat trout eggs is from 39.9 to 55 ° F ( 4.4 2.8 ° C). Smith et al. ( 1983) found that west  slope cutthroat trout eggs held in creek water with a fluctuating temperature of 35.6 50 ° F ( 2 10 ° C) had significantly better survival than eggs held at a constant 50 ° F ( 10 ° C).

Hubert and Gern ( 1995) found 68.6% survival in a control population held at 44.6 ° F ( 7 ° C) when testing the effects of lowering incubation temperatures in the early stage of development. Mortality rates were no different from controls when temperatures were lowered to 37.4 ° F ( 3 ° C) at least 13 15 d after fertilization but were higher if the cooling took place sooner. Stonecypher and Hubert ( 1994) found that survival to swim up stage in Snake River cutthroat trout was 95% at 44.6 ° F ( 7 ° C), approximately 87% at 39.2 ° F ( 4 ° C), and less than 16% at 35.6 ° F ( 2 ° C).

It is somewhat problematic to set standards to protect the incubation of cutthroat trout t hat can be reasonably applied statewide. Cutthroat are a spring spawning species that often spawns high in the watershed and has a very broad period of spawning when examined statewide. Stocks that exist in lower or warmer watersheds spawn as early as February when temperatures rise above 42.8 ° F ( 6 ° C), whereas stocks that exist in high elevation snow melt streams may need to wait until late June or July for waters to be sufficiently warm ( 42.8 51.8 ° F [ 6 11 ° C]) for successful spawning. If there were no risk o f egg loss from sudden late winter and spring freshets, we could suggest that the spring spawning strategy is relatively unencumbered by changes in the temperature regime. Although earlier spawning exposes cutthroat eggs to higher risks of physical damage, the earlier hatch also places surviving resident fry in a good position to maximize summer growth and thus increase their survival opportunities over the following winter. It may well be that the superior growth of anadromous salmonids in the ocean phase makes increases in weight gain from earlier emergence of less value, but this relat ionship remains to be tested. In general, specific stocks will have adapted their spawning and emergence periods to optimize both incubation survival and early fry growth. Significant changes in the temperature regime, such as earlier spring warming, will bring unknown risks to individual populations. Therefore, although an optimal temperature regime is recommended in this paper for cutthroat trout, it would be best to tailor it to the historic spawning patterns found in specific stocks. To initiate spawning in most stocks, the water temperatures must at least warm up to daily maximums of 42.8 44.6 ° F ( 6 7 ° C), although some stocks may not begin spawning until temperatures reach 51.8 ° F ( 11 ° C). Specific studies on incubation survival suggest that incubation may be optimized with constant or acclimation temperatures in the range of 44.6 50 ° F ( 7 10 ° C). No specific basis was found in the literature for setting single daily maximum criteria for the incubation of cutthroat trout. 38 Summary of Technical Literature Examining the Physiological Effects of Temperature What are the conclusions for incubation requirements?

Spawning signals the beginning of the life cycle stage ( egg deposition and initial egg incubation) that is most sensitive to warm waters. Critical spawning temperatures for a variety of salmonids are summarized in Table 5. Because the spawning period, egg fertilization, and initial incubation are sensitive life stages dependent on thermal regimes, special consideration must be given to ensure that criteria to protect incubation are applied at the proper time of year.

Table 5. Upper optimal temperature regimes based on constant or acclimation temperatures necessary to achieve full spawning protection of the nine key cold water fish species indigenous to the Pacific Northwest Fish species Critical spawn temperatures Upper optimal temperature range ° F ( ° C) Single daily maximum temperature ° F ( ° C)

Chinook 48.2 50 ( 9 10) 56.3 58.1 ( 13.5 14.5)

Pink 50 53.6 ( 10 12)

Chum 46.4 50 ( 8 10)

Char 35.6 42.8 ( 2 6) 42.8 ( 6)

Sockeye 46.4 50 ( 8 10)

Coho 44.6 50 ( 7 10)

Cutthroat 44.6 50 ( 7 10)

Rainbow 44.6 50 ( 7 10)

Steelhead 51.8 53.6 ( 11 12)

Growth For growth, what are the demands for energy and how is the balance determined by temperature?

In terms of energy budgets, fish production energy ( P) equals the sum of growth ( G), reproduction ( Rp), shed scales ( Ex), and secretions ( S), as shown in the following equation:

P = G + Rp + Ex + S.

Energy assimilated from food equals the difference between energy ingested and defecated, or A = I ! F.

Energy assimilated is distributed into production ( P), respiration ( R), and excretion ( U), as


[Federal Register Volume 77, Number 246 (Friday, December 21, 2012)]
[Notices]
[Pages 75689-75695]
[FR Doc No: 2012-30739]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68453; File No. PCAOB-2012-01]

Public Company Accounting Oversight Board; Order Granting
Approval of Proposed Rules on Auditing Standard No. 16, Communications
With Audit Committees, and Related and Transitional Amendments to PCAOB
Standards

December 17, 2012.

I. Introduction

    On August 28, 2012, the Public Company Accounting Oversight Board
(the ``Board'' or the ``PCAOB'') filed with the Securities and Exchange
Commission (the ``Commission''), pursuant to Section 107(b) \1\ of the
Sarbanes-Oxley Act of 2002 (the ``Sarbanes-Oxley Act'') and Section
19(b) \2\ of the Securities Exchange Act of 1934 (the ``Exchange
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The Proposed Rules were published for comment in the Federal Register
on September 17, 2012.\3\ At the time the notice was issued, the
Commission designated a longer period to act on the Proposed Rules,
until December 17, 2012.\4\ The Commission received five comment
letters in response to the notice.\5\ On November 9, 2012, the PCAOB
submitted a letter addressing certain comments received by the
Commission.\6\ This order approves the Proposed Rules.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 7217(b).
    \2\ 15 U.S.C. 78s(b).
    \3\ See Release No. 34-67804 (September 10, 2012), 77 FR 57408
(September 17, 2012).
    \4\ Ibid.
    \5\ See letters to the Commission from Howard B. Levy, Principal
and Director, Technical Services, Piercy Bowler Taylor & Kern, dated
September 28, 2012 (``Piercy Letter''); Robert L. Leclerc, Chairman,
Quest Rare Minerals Ltd., dated September 30, 2012 (``Quest
Letter''); Tom Quaadman, Vice President, Center for Capital Markets
Competitiveness, U.S. Chamber of Commerce, dated October 5, 2012
(``Chamber Letter''); Deloitte & Touche LLP, dated October 5, 2012
(``Deloitte Letter''); and Cindy M. Fornelli, Executive Director of
the Center for Audit Quality, dated October 9, 2012 (``CAQ
Letter'').
    \6\ See letter to the Commission from the PCAOB, dated November
9, 2012.
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II. Description of the Proposed Rules

    Auditing Standard No. 16 will supersede PCAOB interim auditing
standard AU section 380, ``Communication with Audit Committees'' (``AU
sec. 380''), and interim auditing standard AU section 310,
``Appointment of the Independent Auditor'' (``AU sec. 310''). Auditing
Standard No. 16 retains or enhances existing audit committee
communication requirements, incorporates SEC auditor communication
requirements set forth in Rule 2-07 of Regulation S-X,\7\ provides a
definition of the term `audit committee' for issuers and non-issuers,
and adds new communication requirements that are generally linked to
performance requirements set forth in other PCAOB auditing standards.
---------------------------------------------------------------------------

    \7\ 17 CFR 210.2-07.
---------------------------------------------------------------------------

    Auditing Standard No. 16 requires the auditor to establish an
understanding of the terms of the audit engagement with the audit
committee. This requirement aligns the auditing standard with the
provision of the Exchange Act, as amended by the Sarbanes-Oxley Act,
that requires the audit committee of listed companies to be responsible
for the appointment of the external auditor.\8\ Additionally, Auditing
Standard No. 16 requires the auditor to record the terms of the
engagement in an engagement letter and to have the engagement letter
executed by the appropriate party or parties on behalf of the company
and determine that the audit committee has acknowledged and agreed to
the terms.
---------------------------------------------------------------------------

    \8\ See Section 10A(m) of the Exchange Act, as added by Section
301 of the Sarbanes-Oxley Act.
---------------------------------------------------------------------------

    Auditing Standard No. 16 requires the communications with the audit
committee to occur before the issuance

of the audit report. The standard requires auditors to communicate,
among other matters, the following to audit committees:
     Certain matters regarding the company's accounting
policies, practices, and estimates (consistent with Rule 2-07 of
Regulation S-X);
     The auditor's evaluation of the quality of the company's
financial reporting;
     Information related to significant unusual transactions,
including the business rationale for such transactions;
     An overview of the overall audit strategy, including
timing of the audit, significant risks the auditor identified, and
significant changes to the planned audit strategy or identified risks;
     Information about the nature and extent of specialized
skill or knowledge needed in the audit, the extent of the planned use
of internal auditors, company personnel or other third parties, and
other independent public accounting firms, or other persons not
employed by the auditor that are involved in the audit;
     Difficult or contentious matters for which the auditor
consulted outside the engagement team;
     The auditor's evaluation of going concern;
     Expected departures from the auditor's standard report;
and
     Other matters arising from the audit that are significant
to the oversight of the company's financial reporting process,
including complaints or concerns regarding accounting or auditing
matters that have come to the auditor's attention during the audit.
    Auditing Standard No. 16 retains from AU sec. 380 the option for
auditors to communicate to audit committees either orally or in
writing, unless otherwise specified in the standard. The auditor is
required to document the communications in the work papers, regardless
of whether the communications take place orally or in writing.
    As part of the Proposed Rules, the Board adopted conforming
amendments to several PCAOB standards, including PCAOB interim auditing
standard AU sec. 722, ``Interim Financial Information.'' In addition to
the conforming amendments, the Board adopted transitional amendments to
AU sec. 380 so that audit committee communications would continue to be
required in audits of all SEC-registered broker-dealers in the event
PCAOB standards become applicable to broker-dealer audits prior to the
effective date of Auditing Standard No. 16.
    The PCAOB has proposed application of its Proposed Rules to audits
of all issuers, including audits of emerging growth companies
(``EGCs''),\9\ and the Proposed Rules also would apply to audits of
SEC-registered brokers and dealers if the Commission subsequently
determines to make PCAOB standards applicable to such audits.\10\ The
Proposed Rules would be effective for audits of financial statements
with fiscal years beginning on or after December 15, 2012. The
transitional amendments to AU sec. 380 would be effective for the
periods that PCAOB standards become applicable to audits of SEC-
registered brokers and dealers, as designated by the Commission, if the
effective date of the application of PCAOB standards occurs prior to
the effective date of Auditing Standard No. 16.
---------------------------------------------------------------------------

    \9\ The term ``emerging growth company'' is defined in Section
3(a)(80) of the Exchange Act.
    \10\ The Commission proposed requiring application of PCAOB
standards to audits for brokers and dealers in Release No. 34-64676
(June 15, 2011).
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III. Comment Letters and the PCAOB's Responses

    As noted above, the Commission received five comment letters
concerning the Proposed Rules. Two commenters expressed unqualified
support for the Proposed Rules, and cited a link between Auditing
Standard No. 16 and investor protection.\11\ One of these commenters
expressed its view that the matters Auditing Standard No. 16 requires
auditors to communicate to audit committees are commensurate with, and
supportive of, the important role audit committees have in serving the
interests of investors through oversight of financial reporting and the
audit process.\12\ The other commenter cited its belief that 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.\13\
---------------------------------------------------------------------------

    \11\ See CAQ Letter and Deloitte Letter.
    \12\ See Deloitte Letter.
    \13\ See CAQ Letter.
---------------------------------------------------------------------------

    One of these commenters also expressed unqualified support for the
application of the proposed rules to audits of EGCs and stated its
belief that investors in public companies of all sizes are entitled to
the same level of protection, including the protection provided by
improved communications between auditors and audit committees.\14\ This
commenter also cited the following points in support of its view:
---------------------------------------------------------------------------

    \14\ See CAQ Letter.
---------------------------------------------------------------------------

     Auditing Standard No. 16 will foster improved financial
reporting. The commenter believes improved financial reporting reduces
information asymmetry and should increase the efficiency of capital
allocation, thereby fostering capital formation. The commenter also
believes this may be particularly important for EGCs, which may need to
access the capital markets more regularly than more established
companies.
     Bifurcation of the requirements would be confusing as to
the level of investor protection an investor is receiving. The
commenter believes that applying Auditing Standard No. 16 to audits of
EGCs would avoid bifurcation of the rules applied to the preparation
and audit of public company financial statements. The commenter also
believes that having different sets of rules for different categories
of public companies makes it more difficult for investors to know what
rules governed the preparation and audit of a given set of financial
statements.
    Three commenters raised questions and concerns about the Proposed
Rules and their proposed application. These matters relate to: (1)
Application of the Proposed Rules to audits of foreign private issuers
(``FPIs''); \15\ (2) application of Auditing Standard No. 16 to audits
of broker-dealers; (3) the role of management in communicating matters
to the audit committee that are also the subject of Auditing Standard
No. 16; (4) the specificity of the requirements in Auditing Standard
No. 16; (5) potential regulatory conflicts; (6) convergence of auditing
standards; and (7) the PCAOB's analysis supporting its proposal that
the Proposed Rules apply to audits of EGCs (the ``PCAOB's EGC
analysis'').
---------------------------------------------------------------------------

    \15\ The term ``foreign private issuer'' is defined in Exchange
Act Rule 3b-4(c) [17 CFR 240.3b-4(c)]. A foreign private issuer
means any foreign issuer other than a foreign government except an
issuer that meets the following conditions: (1) More than 50 percent
of the issuer's outstanding voting securities are directly or
indirectly held of record by residents of the United States; and (2)
any of the following: (i) the majority of the executive officers or
directors are United States citizens or residents; (ii) more than 50
percent of the assets of the issuer are located in the United
States; or (iii) the business of the issuer is administered
principally in the United States.
---------------------------------------------------------------------------

1. Audits of FPIs

    One commenter requested clarification as to whether or not the
Proposed Rules would apply to audits of issuers that are FPIs.\16\ The
commenter stated that it was not seeking relief, solely clarity. In
response to the commenter's request, the Commission notes that under
the Sarbanes-Oxley Act, the PCAOB's auditing and other professional
standards apply to audits of

issuers.\17\ There is no exception for issuers that are FPIs, and the
PCAOB did not propose to create an exclusion. Accordingly, the Proposed
Rules, consistent with other auditing standards adopted by the PCAOB,
will apply to audits of FPIs.
---------------------------------------------------------------------------

    \16\ See Quest Letter.
    \17\ See Sections 101(c)(2) and 103(a)(1) of the Sarbanes-Oxley
Act.
---------------------------------------------------------------------------

2. Audits of Broker-Dealers

    One commenter requested more clarity about to whom the required
Auditing Standard No. 16 audit committee communications should be made
in situations when a broker-dealer does not have a board of directors
or audit committee.\18\ The commenter also recommended that the PCAOB
make clear that the required communications should not be made to a
chief financial officer or similar officer, but rather a chief
executive officer. The commenter raised similar comments in connection
with the PCAOB's own solicitation for comments on the Proposed Rules.
The PCAOB revised Auditing Standard No. 16 in response to this comment,
which was also raised by other commenters. The PCAOB revised the
definition of audit committee with respect to non-issuers such that, if
a non-issuer broker-dealer did not have a board of directors or audit
committee, the required communications would be directed to the
person(s) identified by the auditor as responsible for overseeing the
accounting and financial reporting processes of the company.
---------------------------------------------------------------------------

    \18\ See Chamber Letter.
---------------------------------------------------------------------------

    However, the definition was not revised to exclude from the
definition of audit committee those persons with oversight
responsibility who also have management responsibilities for the
preparation of the financial statements of the company. In its adopting
release, the PCAOB stated that for non-issuers with no existing audit
committee or board of directors (or equivalent body), the auditor would
be expected to identify senior persons at the company who have
decision-making authority and responsibility to oversee the accounting
and financial reporting processes of the company and audits of the
financial statements, and to make the required communications to those
persons.\19\ The PCAOB provided examples and stated that if all persons
identified by the auditor as having responsibility for oversight of the
company's accounting and financial reporting processes and audits also
have management responsibilities for the preparation of the financial
statements, then the auditor could also make the communications
specified in the standard to other individuals at the company (e.g.,
the chief executive officer or others in charge of the company's
operations and performance, who may benefit from the communications).
The Commission does not find the PCAOB's response to be unreasonable.
---------------------------------------------------------------------------

    \19\ See PCAOB Release No. 2012-004 (August 15, 2012), pg. A4-3.
---------------------------------------------------------------------------

    The commenter also requested that the PCAOB clarify to whom audit
committee communications should be made when a broker-dealer is a
subsidiary of an entity that has an audit committee.\20\ The PCAOB
addressed this comment in its adopting release as well. In that
release, the PCAOB observed that some commenters suggested that the
standard should clarify to whom the auditor should communicate when the
company is a subsidiary of another entity. The PCAOB stated that
Auditing Standard No. 16 does not require communication outside the
governance structure of the audited entity because the standard
designates the appropriate party to receive the auditor communications
within the audited entity.\21\ The PCAOB also stated that if directed
by the audit client, or if the auditor otherwise deems it appropriate,
the auditor could also communicate to a parent company audit committee
or equivalent body. The Commission does not find the PCAOB's response
to be unreasonable.
---------------------------------------------------------------------------

    \20\ See Chamber Letter.
    \21\ See PCAOB Release No. 202-004 (August 15, 2012), pg. A4-4.
---------------------------------------------------------------------------

3. The Role of Management in Communicating Matters to the Audit
Committee

    One commenter repeated concerns expressed in letters to the PCAOB
during the PCAOB's proposal stages that Auditing Standard No. 16
appears to shift inappropriately from management to auditors the
primary responsibility to communicate to audit committees about matters
of the selection and identification of significant and critical
accounting policies, estimates and significant unusual
transactions.\22\ The commenter acknowledged that the PCAOB revised
Auditing Standard No. 16 in response to this comment, and observed that
Auditing Standard No. 16 is not intended to change the requirements of
Rule 2-07 of Regulation S-X. However, the commenter believes the
Commission should give consideration to its concerns and make
``appropriate revisions'' to Rule 2-07 to preserve what the commenter
believes is the proper balance among the responsibilities of
management, audit committees and auditors.
---------------------------------------------------------------------------

    \22\ See Piercy Letter.
---------------------------------------------------------------------------

    The Commission has previously considered views similar to those
expressed by the commenter. Exchange Act Section 10A(k), as added by
Section 204 of the Sarbanes-Oxley Act, directed the Commission to issue
rules requiring timely reporting of specific information by auditors to
audit committees. In response to this directive, in 2002, the
Commission proposed amending Regulation S-X to require each public
accounting firm registered with the Board that audits an issuer's
financial statements to report, prior to the filing of such report with
the Commission, to the issuer or registered investment company's audit
committee: \23\
---------------------------------------------------------------------------

    \23\ See Release No. 33-8154 (December 2, 2002).
---------------------------------------------------------------------------

    (1) All critical accounting policies and practices used by the
issuer or registered investment company;
    (2) All alternative accounting treatments of financial information
within generally accepted accounting principles that have been
discussed with management, including the ramifications of the use of
such alternative treatments and disclosures and the treatment preferred
by the accounting firm; and
    (3) Other material written communications between the accounting
firm and management of the issuer or registered investment company.
    In response to this proposal, some commenters expressed a view that
these communications should be the responsibility of management alone,
while others expressed a view that both the accountant and management
should share the responsibility for informing the audit committee about
such matters. In adopting Rule 2-07, the Commission stated that
``[w]hile we understand that management has the primary responsibility
for the information contained in the financial statements, since the
accounting firm is retained by the audit committee, we share the view
reflected in Section 205 [sic] of the Sarbanes-Oxley Act and current
auditing standards, that the accounting firm has a responsibility to
communicate certain information to the audit committee.'' \24\ The
Commission still holds this view and believes that the communications
required by Auditing Standard No. 16 in this regard are appropriate.
---------------------------------------------------------------------------

    \24\ See Release No. 33-8183 (March 27, 2003).
---------------------------------------------------------------------------

    Further, the Commission believes that additional changes made by
the PCAOB in response to this concern are appropriate and balanced. In
its adopting release, the PCAOB observed

that in many companies, management might communicate matters involving
management's preparation of the company's financial statements and that
in many companies, management might communicate these matters or take
the lead on communicating these matters to the audit committee. The
PCAOB also observed that it does not have the authority to require
management to communicate to the audit committee, and that certain
communications are mandated by federal securities laws and Commission
rules. Because of these factors, Auditing Standard No. 16 clearly
recognizes and acknowledges that management might communicate to the
audit committee certain matters related to the company's financial
statements; and in such circumstances, the auditor does not need to
communicate those matters at the same level of detail as management, as
long as certain conditions are met, as specified in the standard.

4. Level of Specificity of Requirements in Auditing Standard No. 16

    One commenter observed that Auditing Standard No. 16 is
``prescriptive'' in that it contains specific mandatory communication
requirements.\25\
---------------------------------------------------------------------------

    \25\ See Chamber Letter.
---------------------------------------------------------------------------

    The PCAOB addressed this comment in its letter to the Commission.
In that letter, the PCAOB stated that its standards, including Auditing
Standard No. 16, reflect the fact that a company's size and complexity
can affect the risks of material misstatement and that the Proposed
Rules are designed to allow auditors to tailor the required
communications to the size and level of complexity of a company's
operations, accounting practices, and audit issues.
    The Commission addressed a similar comment in 2010 in connection
with its consideration of rules proposed by the PCAOB to establish new
risk assessment standards.\26\ The Commission recognizes that there
should be an appropriate balance in auditing standards between
providing necessary minimum requirements and allowing auditors to apply
judgment in determining the nature and extent of audit procedures given
the particular circumstances of an individual engagement. The
Commission believes that all PCAOB standards should reflect an
appropriate balance of requirements and judgments that enables auditors
to perform high quality and effective audits and believes the PCAOB's
approach in Auditing Standard No. 16 reflects a reasonable balance in
this respect.
---------------------------------------------------------------------------

    \26\ See Release No. 34-63606 (December 23, 2010).
---------------------------------------------------------------------------

5. Potential Regulatory Conflicts

    One commenter voiced concerns that the Proposed Rules may go
outside of the scope of the PCAOB's jurisdiction over the audit and
infringe upon the corporate governance responsibilities of the
Commission or under applicable state law in overseeing the audit
committee.\27\ This commenter asked that the Commission review the
Proposed Rules ``with an eye towards eliminating any potential
regulatory conflict.'' In considering the Proposed Rules, the
Commission does not believe the Proposed Rules create any potential
regulatory conflicts. In its adopting release, the PCAOB recognized the
scope and limits of its jurisdiction. In one place, the PCAOB states
that its definition of audit committee is not intended to conflict with
or affect any requirements, or the application of any requirements,
under federal law, state law, foreign law, or an entity's governing
documents regarding the establishment, approval, or ratification of
board of directors or audit committees, or the delegation of
responsibilities of such a committee or board; \28\ and in another
place, the Board recognized that it does not have the authority to
require management to communicate to the audit committee.\29\
---------------------------------------------------------------------------

    \27\ See Chamber Letter.
    \28\ See PCAOB Release No. 202-004 (August 15, 2012), pg. A4-2.
    \29\ See PCAOB Release No. 202-004 (August 15, 2012), pg. 4.
---------------------------------------------------------------------------

6. Convergence of Auditing Standards

    One commenter expressed support for the notion of working to
achieve one set of global high quality auditing standards through the
convergence of PCAOB auditing standards with those of the International
Auditing and Assurance Standards Board (``IAASB'') and the Auditing
Standards Board of the American Institute of Certified Public
Accountants (``ASB'') and observed that the Proposed Rules do not
adequately identify and explain the rationale for differences between
the Proposed Rules and the relevant standards of the IAASB and ASB.\30\
---------------------------------------------------------------------------

    \30\ See Chamber Letter.
---------------------------------------------------------------------------

    The PCAOB has received similar comments in the past, and has
observed that:

    [B]ecause the Board's standards must be consistent with the
Board's statutory mandate, differences will continue to exist
between the Board's standards and the standards of the IAASB and
ASB, e.g., when the Board decides to retain an existing requirement
in PCAOB standards that is not included in IAASB or ASB standards.
Also, certain differences are often necessary for the Board's
standards to be consistent with relevant provisions of the federal
securities laws or other existing standards or rules of the
Board.\31\
---------------------------------------------------------------------------

    \31\ See PCAOB Release No. 2010-004, August 5, 2010, pp. A10-
91--A10-92 (internal footnotes omitted).

    The Commission also addressed a similar comment in connection with
its consideration of the rules proposed by the PCAOB to establish new
risk assessment standards.\32\ As noted then, the Commission encourages
the Board's efforts to consider standards issued by the IAASB and the
ASB, and appreciates the reasons why it is reasonable to expect that
the Board's standards may appropriately differ from such standards. In
this regard, we take note of the efforts the PCAOB has taken in
developing the Proposed Rules to consider the work of other standard
setters.
---------------------------------------------------------------------------

    \32\ See supra note 26.
---------------------------------------------------------------------------

7. The PCAOB's EGC Request and the Commission's EGC Determination

    Section 103(a)(3)(C) of the Sarbanes-Oxley Act provides that any
additional rules adopted by the PCAOB subsequent to April 5, 2012 do
not apply to the audits of EGCs, unless the Commission determines that
the application of such additional requirements is necessary or
appropriate in the public interest, after considering the protection of
investors and whether the action will promote efficiency, competition,
and capital formation.\33\ Having considered those factors, and as
explained further below, the Commission finds that applying the
Proposed Rules to audits of EGCs is necessary or appropriate in the
public interest.
---------------------------------------------------------------------------

    \33\ Section 103(a)(3)(C) of the Sarbanes-Oxley Act, as amended
by Section 104 of the Jumpstart Our Business Startups Act (the
``JOBS Act'').
---------------------------------------------------------------------------

    The PCAOB adopted Auditing Standard No. 16 on August 15, 2012 for
application to audits of all issuers, including EGCs; and the PCAOB
requested that the Commission make the determination required by
Section 103(a)(3)(C) such that Auditing Standard No. 16 would apply to
audits of EGCs. To assist the Commission in making its determination,
the PCAOB prepared and submitted to the Commission its own EGC
analysis. The PCAOB's EGC analysis includes discussions of: (1) The
background of and reasons for the new standard; (2) the PCAOB's
approach to developing the new standard, including consideration of
alternatives; (3) key changes and improvements from existing audit
committee

communication requirements; and (4) characteristics of EGCs and
economic considerations.
    In developing its analysis, the PCAOB compiled data available from
entities voluntarily identifying themselves as EGCs in SEC filings.
Based on data available to the PCAOB, the Board observed that 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.\34\ The Board also observed that the enhanced audit
committee communication requirements of Auditing Standard No. 16 may be
of particular benefit to EGCs given that: (1) Some EGCs are companies
that are relatively new to the SEC reporting process, and may have new
audit committee members that may be less familiar with SEC reporting
requirements and have relatively more questions regarding how to
present their financial statements for SEC reporting purposes; and (2)
some EGCs may also be considering, for the first time, initial choices
in their accounting policies and practices that could have implications
for their financial reporting.\35\
---------------------------------------------------------------------------

    \34\ See 77 FR 57448.
    \35\ See 77 FR. 57447.
---------------------------------------------------------------------------

    The PCAOB's EGC analysis was included in the Commission's public
notice soliciting comment on the Proposed Rules. Based on the analysis
submitted, the comments received, and the PCAOB's response, we believe
the information in the record is sufficient for us to make the EGC
determination in relation to this standard. Specifically, the PCAOB's
EGC analysis discussed its approach to developing the new standard and
its consideration of alternatives, as well as the characteristics of
EGCs and economic considerations. The Commission also takes note, in
particular, of the PCAOB's overall approach to Auditing Standard No.
16, which was designed to: (1) Scale the required communications to the
size and complexity of the company being audited; (2) maintain
flexibility (e.g., with respect to auditors communicating orally or in
writing); (3) minimize duplicative or redundant communications to the
audit committee from the auditor and management; (4) focus the
communications on the accounting matters that are significant to the
auditor and the audit committee; and (5) 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, 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.
    One commenter raised concerns about the PCAOB's EGC analysis.\36\
This commenter did not assert that any specific aspect of Auditing
Standard No. 16 should not apply to audits of EGCs. Rather, the
commenter raised several concerns about the substance and form of the
PCAOB's EGC analysis and whether it was sufficient to form a basis for
the Commission's EGC determination. We discuss each of this commenter's
main points, and set forth our responses, separately below.
---------------------------------------------------------------------------

    \36\ See Chamber Letter.

     First, the commenter states that because the JOBS Act
provides an automatic exemption for EGC audits from any future PCAOB
rules, there is a special burden on the Commission to determine that
benefits outweigh costs in order to reverse a clear Congressional
---------------------------------------------------------------------------
directive in favor of an exemption.

    As noted above, Section 103(a)(3)(C) of the Sarbanes-Oxley Act
contains very specific provisions concerning the application of PCAOB
rules to audits of EGCs. The statutory text of Section 103(a)(3)(C)
demonstrates that where Congress intended to provide EGCs with an
absolute exemption from future PCAOB rules, it did so explicitly (e.g.,
that any future PCAOB rules on mandatory audit firm rotation or an
auditor discussion and analysis shall not apply to EGCs audits). By
contrast, with respect to other future PCAOB rules, Congress indicated
that new requirements may apply to EGCs, but that for them to apply,
the Commission needs to make a determination that such 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.'' This determination is
separate from the existing finding needed to approve a PCAOB proposed
rule change under Section 107 of the Sarbanes-Oxley Act that the
proposed rule is consistent with the requirements of the Sarbanes-Oxley
Act and the securities laws, or is necessary or appropriate in the
public interest or for the protection of investors.\37\
---------------------------------------------------------------------------

    \37\ See Section 107(b)(3) of the Sarbanes-Oxley Act. As
discussed below, the Commission makes both findings. The Commission
makes each finding on its own merits and does not consider either
one dependent on the other.
---------------------------------------------------------------------------

    Just as the Section 107 finding does not require the Commission to
overcome a ``presumption'' that a proposed PCAOB rule should be
disapproved, the Section 103 EGC determination does not require the
Commission to overcome a ``presumption'' that a PCAOB proposed rule
should not apply to audits of EGCs. Rather, in both instances, the
statute sets forth a predicate finding that the Commission must make,
after considering specified factors, in order for the rule to be
approved (section 107(b)(2)) or for it to apply to EGC audits (Section
103(a)(3)(C)).
    The statutory text of Section 103(a)(3)(C) requires the Commission
to consider the protection of investors and whether the action will
promote efficiency, competition, and capital formation as part of its
affirmative determination that the application of such additional
requirements is necessary or appropriate in the public interest.
Plainly this involves considering the economic effects of the Proposed
Rules as they relate to efficiency, competition and capital formation.

     Second, the commenter believes the PCAOB's EGC analysis
is ``devoid of any semblance of an analysis of the cost of
compliance with the rule for all issuers or for EGCs,'' and asserts
that the PCAOB, in its EGC analysis, cited a belief that Auditing
Standard No. 16 would be less costly for EGCs.

    The PCAOB did provide information regarding potential costs of the
proposed rules to issuers, including EGCs. The PCAOB's analysis
included qualitative factors that would affect such costs (e.g., nature
or complexity of the issuer). As noted above, the PCAOB also provided
an analysis of the characteristics of EGCs, including data on the
number of issuers that have voluntarily disclosed their EGC status
after enactment of the JOBS Act. In its analysis, the PCAOB noted that
EGCs vary widely in size, and noted that 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. In
this regard, the PCAOB further described how this difference may in
fact relate to the ability of the Proposed Rules to promote efficiency
and capital formation for EGCs over other issuers.
    Notwithstanding the commenter's assertion that the PCAOB believes
the application of Auditing Standard No. 16 would be less costly for
EGCs, no such statement is expressed in the PCAOB's EGC analysis.
Rather, the PCAOB's EGC analysis reflects the Board's view that a
company's size and complexity can affect the risks of material
misstatement, and therefore, auditing challenges and audit strategies
(matters that impact the

amount of time and effort put into an audit). This point was reiterated
in the PCAOB's letter to the Commission. In that letter, the PCAOB also
provided examples of how communications required by Auditing Standard
No. 16 could be tailored to the audit of a less complex company, which
could have an impact on the overall cost of the audit and could help to
avoid unnecessary costs.
    Section 103(a)(3)(C) does not require the Commission to conclude
that a proposed PCAOB rule would be ``less costly'' for EGC audits than
for other issuer audits in order to find that applying the rule to EGC
audits would be necessary or appropriate in the public interest. The
relative impact on EGCs vis a vis other issuers could be a factor to
consider in whether the application of the proposed rules to EGC audits
is necessary or appropriate in the public interest, after considering
the protection of investors and whether the action will promote
efficiency, competition, and capital formation. However, nothing in the
statutory text indicates that the Commission's public interest finding
hinges on whether, on a categorical basis, the requirements of a given
PCAOB rule would be less costly for EGCs.

     Third, the commenter disputes the relevance of existing
audit committee communication requirements under PCAOB interim
auditing standard AU sec. 380 to a discussion of the application of
Auditing Standard No. 16 to audits of EGCs.

    The Commission does not view the PCAOB's discussion of the Proposed
Rules in relation to the existing standards as inconsistent with the
proper analysis of an EGC determination. Rather, establishing a
baseline for conducting an analysis of economic effects of a proposed
regulatory action is an appropriate regulatory practice. Also, it is
important to consider that currently, all issuers, including EGCs, are
subject to the existing audit committee communication requirements of
AU secs. 310 and 380 and Rule 2-07 of Regulation S-X. If the Commission
determined that the Proposed Rules should not apply to audits of EGCs,
AU secs. 310 and 380 and Rule 2-07 of Regulation S-X would still apply
to the audits of EGCs.\38\
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    \38\ Also, the Commission does not view the PCAOB's highlighting
the existing baseline as the sole justification to carry forward
existing requirements. Rather, throughout the PCAOB's submission
describing the individual requirements of the standard, while the
PCAOB notes whether the particular requirement is new or carried
forward, the PCAOB also explains why it chose to include them
irrespective of whether they already are included in the existing
standards.
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    The Commission believes the PCAOB's EGC analysis appropriately
describes the consequences of the Proposed Rules relative to the
baseline. As the PCAOB notes in its submission, the impact of the
Proposed Rules is largely incremental to existing requirements
regarding communications between auditors and audit committees.
Accordingly, this discussion of existing requirements is highly
relevant to considering the impacts on efficiency, competition and
capital formation that would be caused by applying the new standard to
audits of EGCs. The Commission does not believe the Proposed Rules can
be categorized as a major or profound change to the way auditors
communicate with audit committees. In fact, the PCAOB received comments
to this effect during its own due process. For example, one commenter
observed that ``many of the requirements [of the proposed rules] are
already reflected in the best practices of audit firms and public
companies.'' \39\ Another commenter to the PCAOB stated its ``belie[f]
that auditors, in most cases, are already providing meaningful
communications on the financial statement and audit areas that meet the
spirit of the requirements of the Proposed Standard and go beyond what
is currently required by the extant standards.'' \40\
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    \39\ See letter from The Society of Corporate Secretaries and
Governance Professionals to the PCAOB (June 1, 2010). This letter
may be viewed at: http://pcaobus.org/Rules/Rulemaking/Docket030/032_SCSGP.pdf.
    \40\ See letter from Deloitte & Touche to the PCAOB (May 28,
2010). This letter may be viewed at: http://pcaobus.org/Rules/Rulemaking/Docket030/020_DT.pdf.

     Fourth, the commenter raised a concern that the public
was never afforded an opportunity to comment upon the impact of the
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proposed rules on the audits of EGCs.

    Section 103(a)(3)(C) requires the Commission to make the specified
determination. The PCAOB submitted an EGC analysis that assisted the
Commission in its own determination. The PCAOB's analysis was included
in the Commission's notice of the Proposed Rules which provided an
opportunity for the public, including the commenter, to submit comments
on the analysis.\41\ The PCAOB also supplemented the record with
additional information after comments were received. As noted above,
based on the analysis submitted, the comments received, and the PCAOB's
response, we believe the information in the record is sufficient for us
to make the EGC determination.
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    \41\ In addition, the commenter acknowledged that the JOBS Act
was signed into law after the PCAOB's second comment period closed.
The PCAOB did not re-expose the Proposed Rules again as part of its
standard-setting process to seek public input on whether application
of the Proposed Rules to EGC audits would be necessary or
appropriate in the public interest, after considering the protection
of investors, and whether the action will promote efficiency,
competition, and capital formation.

     Fifth, the commenter believes that the inspection
findings cited in the PCAOB's EGC analysis do not provide any
indication whether any of the audit committee communication failures
involved the audits of EGCs. The commenter also criticizes the
relevance of the PCAOB's citation to four year old research that
indicated that audit committee oversight was having a positive
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impact on the overall quality of audits.

    In its EGC analysis, the PCAOB cited its inspection findings as one
input into its decision to bring together in one place audit committee
communication requirements; \42\ and in its letter to the Commission,
the PCAOB reiterated this point. The Commission believes it was
appropriate for the PCAOB to consider its inspection findings in
developing the Proposed Rules.
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    \42\ See 77 FR 57441.
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    As to the PCAOB's reference in its EGC analysis to research, the
Commission believes it was wholly appropriate for the PCAOB to
highlight the relationship between audit committee communications and
overall audit quality and improved financial reporting, given the
relevance of the quality of financial reporting to considerations of
efficiency and capital formation. It does not appear that the PCAOB was
referencing the research identified by the commenter to justify the
Proposed Rules themselves or was attempting to use research
inconsistently or opportunistically to support its views. Rather, the
PCAOB noted, citing to other research, that improved financial
reporting quality promotes efficiency and capital formation. The PCAOB
explained that the results of one of the studies cited in its EGC
analysis supported its view that audit committee oversight of the
auditor improves audit quality and financial reporting quality. The
PCAOB then went on to discuss additional findings from its outreach and
research that improved interaction between, and information shared,
between the auditor and the audit committee enhances audit committee
oversight and auditor performance.

IV. Conclusion

    The Commission has carefully reviewed and considered the Proposed
Rules and the information submitted therewith by the PCAOB, including
the

PCAOB's EGC analysis, the comment letters received, and the PCAOB's
response. In connection with the PCAOB's filing and the Commission's
review,
    A. The Commission finds that the Proposed Rules are consistent with
the requirements of the Sarbanes-Oxley Act and the securities laws and
are necessary or appropriate in the public interest or for the
protection of investors; and
    B. Separately, the Commission finds that the application of the
Proposed Rules to EGC audits is necessary or appropriate in the public
interest, after considering the protection of investors and whether the
action will promote efficiency, competition, and capital formation.
    It is therefore ordered, pursuant to Section 107 of the Act and
Section 19(b)(2) of the Exchange Act, that the Proposed Rules (File No.
PCAOB-2012-01) be and hereby are approved.

    By the Commission.
Elizabeth M. Murphy.
Secretary.
[FR Doc. 2012-30739 Filed 12-20-12; 8:45 am]
BILLING CODE 8011-01-P