1205, which is being rescinded, does not explicitly address these
situations.) \240\ The final standard's approach was proposed in the
2017 SRC, reversing the restriction in the 2016 Proposal that would not
have permitted the division of responsibility in the audit of a company
whose applicable financial reporting framework differs from that of its
business unit.\241\ The Board believes the resulting approach is
practicable and balanced and adopted the provision substantially as
proposed in the 2017 SRC.
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    \240\ PCAOB staff analyzed Form 10-K and Form 20-F filings with
the SEC for the twelve-month period ended April 30, 2022. This
search identified 38 divided-responsibility opinions, three of which
the lead auditor divided responsibility with another auditor when
the company and a business unit prepared their financial statements
under different financial reporting frameworks. These filings did
not state which auditor audited the conversion adjustments.
    \241\ See 2017 SRC at 25-26.
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    Commenters on the 2017 SRC largely agreed with the revised
provision, although two commenters recommended revisions. One
recommended an additional requirement, that the lead auditor document
its basis for concluding that the auditor of the conversion adjustments
has sufficient knowledge of both reporting frameworks. Another
commenter asserted that the lead auditor's disclosure of another
auditor's audit of conversion adjustments could be misconstrued as a
disclaimer of responsibility for that work.
    With regard to the first commenter's recommendation, the Board
notes that a separate documentation requirement is unnecessary because
the lead auditor's compliance with the requirements relating to the
referred-to auditor's knowledge of the relevant requirements is already
required to be reflected in audit documentation under the existing
PCAOB standards.\242\ With regard to the second commenter's argument,
the Board notes that the required disclosure in the lead auditor's
report would clearly identify the auditor that has taken responsibility
for auditing the conversion adjustments and the PCAOB has inspection
and enforcement authority over both firms.
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    \242\ See, e.g., AS 1215.05a (providing that audit documentation
should ``[d]emonstrate that the engagement complied with the
standards of the PCAOB'').
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    Appendix B of AS 1206 provides examples of the introductory
paragraphs in the lead auditor's report when the conversion adjustments
are audited by the lead auditor (Example 3) and the referred-to auditor
(Example 4).
Lead Auditor's Course of Action When the Lead Auditor Is Unable To
Divide Responsibility Under AS 1206
    AS 1206.07 provides guidance for situations in which the lead
auditor is unable to divide responsibility with another accounting
firm. Such a situation may arise, for example, due to the lead
auditor's concerns about the qualifications of the referred-to auditor.
Concerns about the referred-to auditor's qualifications could encompass
both competence and PCAOB registration status. The lead auditor may
also have concerns about whether the referred-to auditor's audit was
performed in accordance with PCAOB standards if, for instance,
information comes to the lead auditor's attention that raises such
doubt.
    For situations in which the lead auditor is unable to divide
responsibility for the audit with another accounting firm, paragraph
.07 of AS 1206 describes the following alternatives for the lead
auditor's course of action:
     Planning and performing procedures with respect to the
portion

of the company's financial statements covered by the other accounting
firm's report that are necessary for the lead auditor to express an
opinion on the company's financial statements and, if applicable, ICFR;
     Appropriately qualifying or disclaiming the lead auditor's
report; \243\ or
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    \243\ AS 1206, in a note to paragraph .07b, requires the lead
auditor to state the reasons for departing from an unqualified
opinion and, when expressing a qualified opinion, disclose the
magnitude of the portion of the company's financial statements to
which the lead auditor's qualification extends. A footnote to AS
1206.07 refers to the relevant requirements of AS 3105 and Appendix
C of AS 2201.
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     Withdrawing from the engagement.
    A commenter requested that the standard state that the
circumstances described in AS 1206.07 exist in situations when the lead
auditor originally expected to divide responsibility with the referred-
to auditor but subsequently determined that it was no longer possible.
This commenter also stated that AS 1206.07, as proposed, limits the
lead auditor's course of action to the three options presented and
recommended that another option be added whereby the work would be
performed by another accounting firm.
    The Board agrees that AS 1206.07 applies only in situations when
the lead auditor originally expected to divide responsibility with
another accounting firm but subsequently determined that dividing
responsibility with that accounting firm was no longer possible.
Further, the Board notes that the course of action suggested by the
commenter (i.e., having another accounting firm perform the work) is
already available to the lead auditor under AS 1206.07a, as a lead
auditor that complies with the relevant requirements of PCAOB standards
is permitted to plan and perform procedures with respect to the
business unit itself, divide responsibility for that work with another
referred-to auditor, or supervise and assume responsibility for the
work of an other auditor.
    No further comments were received on this topic and the Board
adopted the requirement substantially as proposed.
Making Reference in the Lead Auditor's Report to the Referred-to
Auditor's Audit and Report
See Paragraphs .08 and .09 of AS 1206
Enhanced Requirements for Making Reference
    Paragraphs .08 and .09 of AS 1206 establish requirements for making
reference in the lead auditor's report to the audit and auditor's
report of the referred-to auditor.\244\ Because this rulemaking
generally carries forward, with certain modifications, AS 1205's
provisions for divided-responsibility audits, the requirements for
making reference in AS 1206 are similar to the analogous provisions of
AS 1205. For example, similar to AS 1205, AS 1206 requires that the
lead auditor's report (or reports, if the lead auditor chooses to issue
separate reports on the company's financial statements and internal
control over financial reporting):
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    \244\ In addition, Appendix B of AS 1206 includes examples of
reporting by the lead auditor (Examples 1 through 4). The Board's
consideration of certain aspects of the examples are discussed
below. In addition, the examples consider the requirements of AS
3101 and AS 3501. Those standards were approved by the SEC after the
issuance of the 2016 Proposal. See SEC Release No. 34-81916 (Oct.
23, 2017).
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     Indicate clearly, in the Opinion on the Financial
Statements and, if applicable, Internal Control over Financial
Reporting and Basis for Opinion sections, the division of
responsibility between the portion of the company's financial
statements and, if applicable, ICFR, covered by the lead auditor's own
audit and that covered by the audit of the referred-to auditor; \245\
and
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    \245\ See AS 1206.08a.
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     Disclose the magnitude of the portion of the company's
financial statements and, if applicable, ICFR, audited by the referred-
to auditor (or by each of the referred-to auditors if there is more
than one). This may be done by stating the dollar amounts or
percentages of total assets, total revenues, or other appropriate
criteria necessary to identify the portion of the company's financial
statements audited by each of the referred-to auditors.\246\
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    \246\ See AS 1206.08c. See also second note to AS 1206.01, which
states when there is more than one referred-to auditor, the lead
auditor must apply the requirements of AS 1206.03-.09 in relation to
each of the referred-to auditors individually.
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    If the report of the referred-to auditor includes an opinion other
than an unqualified opinion or includes explanatory language, AS 1206,
similar to AS 1205, requires that the lead auditor make reference in
the lead auditor's report to the departure from the unqualified opinion
and its disposition, or the explanatory language, or to both, unless
the matter is clearly trivial to the company's financial
statements.\247\ AS 1206 does not require that the lead auditor's
report make reference to critical audit matters (CAMs) of the referred-
to auditor, as each auditor must determine whether there are any CAMs
arising from its own audit under AS 3101.
---------------------------------------------------------------------------

    \247\ See AS 1206.09. See also note to paragraph .10 of AS 2810,
Evaluating Audit Results (describing ``clearly trivial'').
---------------------------------------------------------------------------

    A commenter questioned whether, under AS 1206.08c, the magnitude of
the portion of the company's financial statements audited by the
referred-to auditor needs to be disclosed for each referred-to auditor
individually. The commenter asserted that in practice the lead
auditors' reports generally disclose the magnitude of the referred-to
auditors' portions of the company's financial statements, and if
applicable ICFR, in combination (not for each referred-to auditor). The
commenter therefore recommended that the Board modify the requirement
in line with the commenter's understanding of current practice.
    The Board believes that the lead auditor's report should disclose
the magnitude of the portion of the company's financial statements and
if applicable, ICFR, individually for each referred-to auditor. In
addition to providing greater transparency to investors and other users
of the lead auditor's report about accounting firms involved in the
audit and their responsibilities, the individual disclosure approach is
not inconsistent with divided-responsibility reporting observed in
practice. Based on a staff analysis of SEC filings, most lead auditor
opinions that refer to multiple referred-to auditors disclose the
magnitude of the referred-to auditors' portions of the company's
financial statements individually.\248\ The amendments state in the
second note to AS 1206.01 that the requirements in paragraphs .03-.09
must be applied to each referred-to auditor individually.
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    \248\ PCAOB staff analyzed Form 10-K and Form 20-F filings with
the SEC for the twelve-month period ended April 30, 2022. This
search identified 38 divided-responsibility opinions, two of which
made reference to multiple-divided-responsibility audits. Both of
those opinions presented the magnitude disclosures disaggregated.
---------------------------------------------------------------------------

    The same commenter suggested replacing the proposed ``and'' (before
the phrase ``other appropriate criteria'') in the last sentence of AS
1206.08c with ``or'' to indicate that not all magnitude criteria need
to be disclosed. The Board agrees that under AS 1206 the magnitude may
be expressed by using the criteria listed in paragraph .08c, but does
not require using all criteria. Complying with AS 1206 involves using
criteria that are necessary to provide a clear and informative
disclosure in the lead auditor's report of the magnitude of the portion
of the company audited by the referred-to auditors, and that may
require disclosure of more than one criterion in some cases. To enhance
clarity, the Board replaced the term

``and'' with ``or'' as suggested by the commenter.
    The Board considered these comments and determined that the
remaining requirements were sufficiently clear and adopted them as
proposed.\249\
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    \249\ Paragraph .09 was modified from the version in the 2017
SRC by: using the terminology in AS 3101 (which was amended by the
PCAOB in 2017); adding a footnote reference to the relevant
requirements of AS 3101, AS 3105, and AS 2201; and referencing a
footnote in AS 1206.06 that addresses certain situations where the
referred-to auditor is not registered with the PCAOB (as discussed
above regarding conditions for dividing responsibility).
---------------------------------------------------------------------------

Identifying the Referred-to Auditor by Name
    To enhance the clarity of disclosure to investors and other users
of the lead auditor's report, the Board adopted a new requirement in AS
1206.08b to identify the referred-to auditor by name in the lead
auditor's report. SEC rules already require that the auditor's report
of the referred-to auditor be filed with the SEC, so the name of the
referred-to auditor is already made public.\250\
---------------------------------------------------------------------------

    \250\ See Rule 2-05 of Regulation S-X, 17 CFR 210.2-05.
---------------------------------------------------------------------------

    Three commenters on the 2016 Proposal and 2021 SRC objected to the
proposed disclosure, because the reader can obtain the referred-to
auditor's name from the referred-to auditor's report filed with the SEC
or from Form AP filed with the PCAOB.\251\ Having considered these
comments, the Board notes that the new provision--which builds on the
existing disclosure of referred-to auditor responsibilities in the lead
auditor's report, without imposing any significant compliance burden on
the lead auditor--will provide interested parties a more convenient
mechanism for obtaining names of the referred-to auditors, whose
responsibilities, but not names, have long been disclosed in the lead
auditor's report.
---------------------------------------------------------------------------

    \251\ Registered public accounting firms must report to the
Board on Form AP, pursuant to PCAOB Rule 3211, regarding the
participation of other public accounting firms in the audit. Form AP
disclosure applies to scenarios when responsibility for the audit is
divided.
---------------------------------------------------------------------------

Other Considerations Relating To Making Reference
    Some commenters on the Proposal and the 2017 SRC suggested
addressing, in the reporting examples provided in AS 1206, situations
in which the lead auditor issues separate reports on the financial
statements and ICFR. Having considered the comments received, the Board
included in the 2021 SRC an example of separate financial statement
reporting in Appendix B of AS 1206 (Example 2). The Board received no
comments on this example and adopted it as proposed. In addition, in
the 2021 SRC, the Board modified the reporting examples to reflect the
amendments to AS 3101 that were approved by the SEC after the issuance
of the 2017 SRC.\252\ The examples as adopted include these modified
examples.
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    \252\ See SEC Release No. 34-81916 (Oct. 23, 2017).
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Other Matters
Investee Financial Statements Audited by an Investee's Auditor
See Paragraphs .B1-.B2 of AS 1105
    In some audits, auditors other than the firm issuing the auditor's
report on the company's financial statements perform audit procedures
on the financial statements of the company's investees, for example,
for certain investments accounted for by the company under the equity
method (i.e., investees' auditors). Under AS 1205.14, the company's
auditor (i.e., investor's auditor) who uses the report of an investee's
auditor for the purpose of reporting on the investor's equity in
underlying net assets and its share of earnings or losses and other
transactions of the investee is in the position of a lead auditor \253\
using the work and reports of other auditors under AS 1205.
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    \253\ ``Principal auditor'' is used in AS 1205.
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    Under the amendments, in equity method investment situations, the
investor's auditor would look to the requirements of Appendix B of AS
1105, Audit Evidence, which describe the auditor's responsibilities for
obtaining sufficient appropriate evidence in situations in which the
valuation of an investment is based on the investee's financial
results.\254\ Thus, under the amendments, the investor's auditor would
be able, where appropriate, to use the work and report of the
investee's auditor.
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    \254\ See Appendix B of AS 1105. See also Auditing Accounting
Estimates, Including Fair Value Measurements and Amendments to PCAOB
Auditing Standards, PCAOB Release No. 2018-005 (Dec. 20, 2018).
---------------------------------------------------------------------------

    The amendments add to Appendix B of AS 1105 certain relevant
provisions currently included in AS 1205,\255\ to further guide
auditors in equity method investment circumstances. First, the
amendments refer to the independence of the investee's auditor as an
item for the investor's auditor to consider in determining whether the
investee's auditor's report is satisfactory. Under existing AS 1105.B1,
financial statements of the investee that have been audited by an
investee's auditor whose report is satisfactory to the investor's
auditor may constitute sufficient appropriate audit evidence. The
amendments add ``making inquiries as to the . . . independence of the
investee's auditor (under the applicable standards)'' (i.e., whether
the investee's auditor is independent of the investee) to the list of
procedures in AS 1105.B1 that the investor's auditor may consider
performing. AS 2101.06b requires the auditor to determine compliance
with independence and ethics requirements.\256\
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    \255\ See AS 1205.10.
    \256\ See SEC, Division of Corporation Finance, Financial
Reporting Manual, Topic 4, Section 4110.5, Independent Accountants'
Involvement (SEC staff guidance outlining the application of certain
PCAOB requirements in various filings with the SEC).
---------------------------------------------------------------------------

    Second, the amendments refer to the professional reputation or
independence of the investee's auditor as an item for the investor's
auditor to consider in determining whether it needs additional evidence
regarding the investee's financial results. Under existing AS 1105.B2,
if in the auditor's judgment additional evidence is needed concerning
the investment, the auditor should perform procedures to gather
evidence. The amendments add the investor's auditor's ``concerns about
the professional reputation or independence of the investee's auditor''
to the list of examples that may cause the investor's auditor to
conclude that additional evidence is needed.
    Because of a wide range of potential scenarios in practice
involving equity method investees, the amendments do not specify which
auditor should perform procedures to obtain additional evidence. Under
the facts and circumstances of a particular audit, the investor's
auditor may determine, for example, to use its own staff to perform
procedures or seek assistance from the investee's auditor and supervise
the investee's auditor's work under AS 1201. The amendments also
preserve the ability of the investor's auditor (afforded in the current
requirements) to divide responsibility for the audit with the
investee's auditor, where appropriate. In such situations, the new
standard AS 1206 would apply.
    Several commenters were supportive of the proposed amendments for
investee auditors, with some noting that the requirements provide a
reasonable approach, while not being too prescriptive to allow for the
investor auditor to make judgments. One commenter suggested that the
Board define the term ``investee auditor'' and clarify in the rule text
that the investee auditor is not considered an ``other auditor.'' This
commenter stated that this point is explicit in the release but

not apparent in the proposed amendments. Another commenter expressed
concern that the proposed terms and definitions in the rulemaking,
including the term ``investee's auditor,'' are fairly prescriptive and
may be out of date after the Board adopts a final standard.
    The Board considered these comments in adopting the amendments. The
term investee's auditor pertains to a concept that is not new and is
consistent with the terminology already in the standard,\257\ and the
Board does not believe that the term should be revised or eliminated.
With regard to the comment that the Board should define the term
investee auditor and clarify that the investee auditor is not
considered an other auditor, it is possible that an investor's auditor
may decide that it is able to supervise an investee's auditor under AS
1201, having considered the factors in AS 2101.12. In that situation,
the investee's auditor could be considered an other auditor under the
amendments.
---------------------------------------------------------------------------

    \257\ See AS 1105.B3, which uses the term ``investee auditor's
report.''
---------------------------------------------------------------------------

    Another commenter suggested that, in the situation involving an
investee's auditor, sufficient appropriate audit evidence cannot be
obtained through simple evaluation of sufficiency of the investee's
financial statements and results. This commenter suggested that
additional procedures may be required, such as the investor's auditor
obtaining an understanding of the investee's control environment as
well as performing an evaluation or assessment of prior audit risks and
business, financial, and market risks, including how those risks have
been managed by the investee. As noted in the 2021 SRC, unlike with the
supervision of other auditors by the lead auditor, the investor's
auditor may not be able to establish an arrangement with the investee's
auditor or investee management under which the investor's auditor would
inform, direct, and review work performed by the investee's auditor or
obtain information from investee management. Therefore, while obtaining
an understanding of the investee's control environment may be
beneficial in certain cases, access issues may prevent it.
    Further, the SEC staff has previously clarified that ICFR of an
equity method investee is not part of the investor's internal control
over financial reporting \258\ and therefore not part of the
assessments required under Sections 404(a) and 404(b) of the Sarbanes-
Oxley Act of 2002. Lastly, depending on the financial reporting
framework of the investee, financial and market risks may be required
to be disclosed within the financial statements. The Board believes
that these disclosure requirements, if complied with, should be
sufficient in some cases of equity method investees to contribute to an
investor's auditor obtaining sufficient appropriate evidence. The Board
agrees with the commenter that there may be situations in which further
understanding by the investor's auditor of ICFR or the risks of the
investee would be necessary. The Board notes that the amendments are
principles-based and can be used to appropriately determine the
necessary procedures for obtaining sufficient appropriate audit
evidence.
---------------------------------------------------------------------------

    \258\ See SEC Staff FAQ on https://www.sec.gov/info/accountants/controlfaq.htm--Question 2. Under this approach, while ICFR related
to an investee's financial reporting is out-of-scope, internal
control over financial reporting related to an investor's recording
of amounts associated with its investment is in-scope.
---------------------------------------------------------------------------

    A commenter requested clarification regarding a statement made in
the 2021 SRC that AS 2101.06b requires the investor's auditor to
determine compliance with independence and ethics requirements of the
investee's auditor. It is not the Board's intent to change practice
with these amendments, but it should be noted that the investor's
auditor remains responsible for determining compliance with
independence and ethics requirements for the entire audit, including
work performed by the investee's auditor. The Board believes that an
investor's auditor should determine whether the report of the
investee's auditor is satisfactory and may consider performing
procedures, such as making inquiries as to the investee's auditor's
independence in making this determination.
    Footnote 1 to AS 1105.B1 discusses procedures that the investor's
auditor may consider performing to determine whether the investee's
auditor's report is satisfactory. One commenter suggested replacing the
word ``visiting'' in the phrase ``visiting the investee's auditor''
with the phrase ``interacting (e.g., using video conferencing
technology or visiting the other auditor) with.'' \259\ The commenter
offered this alternate phrasing to recognize the current practice of
using technology for remote access. Having considered the comment, the
Board adopted the amendments as proposed. The word ``visiting'' should
not be interpreted as requiring a physical visit or as precluding a
virtual visit through the use of technology. Additionally, the Board
noted that the procedures in footnote 1 to AS 1105.B1 use the qualifier
``may consider performing;'' thus, the determination of the procedures
to perform is at the discretion of the investor's auditor.
---------------------------------------------------------------------------

    \259\ As proposed and as the Board adopted, footnote 1 to AS
1105.B1 states: ``In determining whether the report of the
investee's auditor is satisfactory for this purpose, the auditor may
consider performing procedures such as making inquiries as to the
professional reputation, standing, and independence of the
investee's auditor (under the applicable standards), visiting the
investee's auditor and discussing the audit procedures followed and
the results thereof, and reviewing the audit program and/or working
papers of the investee's auditor.'' (emphasis added).
---------------------------------------------------------------------------

    Another commenter opined that the amendments do not adequately
address the nature and extent of work to be performed by the investor's
auditor, including the lack of consideration of knowledge, skill, and
ability of the investee's auditor, and noted that the standard used
``reputation'' as a consideration in footnote 1 to AS 1105.B1. Access
to the investee's auditor is likely to impact an investor's auditor's
ability to evaluate the knowledge, skill, and ability of an investee's
auditor. In addition, under the circumstances, inquiries about the
reputation and standing of the investee's auditor \260\ may uncover
issues regarding the professional competence of the investee's auditor.
Two commenters raised the issue of non-coterminous year ends, which one
of the commenters characterized as ``a common problem,'' and noted a
lack of clarity about the nature and extent of work to be performed by
an investor's auditor in this situation, particularly with respect to
competence, independence, and oversight of an investee's auditor. One
of these commenters also raised the issue of differing reporting
frameworks and auditing standards.
---------------------------------------------------------------------------

    \260\ See footnote 1 to AS 1105.B1.
---------------------------------------------------------------------------

    The Board noted that the amendments are based on certain principles
relating to the auditor's responsibility for obtaining sufficient
appropriate audit evidence. The amendments are designed to be flexible,
considering a variety of situations that exist in practice involving an
investee's auditor. For example, in situations of non-coterminous year-
ends, U.S. GAAP and IFRS allow for a consistent time lag between the
fiscal year-ends of the investor and its equity method investees, which
time lag would be reflected in the financial statements of the
investor.\261\ The amendments

require obtaining sufficient appropriate audit evidence in support of
the investee's financial results, and provide examples of procedures
that may need to be performed in addition to reviewing the investee's
auditor's report. With regard to differing auditing standards, the
investor's auditor is responsible for planning and performing--in
compliance with PCAOB standards--the audit of the investor's financial
statements (and, if applicable, internal control over financial
reporting), including determining what constitutes sufficient
appropriate audit evidence.
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    \261\ See Financial Accounting Standards Board Accounting
Standards Codifications, Subtopic 323-10, Investments-Equity Method
and Joint Ventures, paragraph 10-35-6. See also International
Accounting Standards Board International Accounting Standard 28,
Investments in Associates and Joint Ventures, paragraph 34.
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    After considering all of these comments, the Board adopted the
amendments as proposed.
Audit Documentation
See Paragraphs .18-.19 to AS 1215
    Under existing AS 1215.18, the office of the firm issuing the
auditor's report is responsible for ensuring that all audit
documentation sufficient to meet the relevant requirements is prepared
and retained.
    As noted above, the amendments reinforce existing responsibilities
of the other auditor to perform work with due care and in compliance
with PCAOB standards. Specifically with respect to audit documentation,
an amendment to AS 1215.18 reiterates that other auditors must comply
with existing documentation requirements, specifically paragraphs
.04-.17 of AS 1215, including with respect to the audit documentation
that the other auditor provides or makes accessible to the office
issuing the auditor's report. Additionally, the amendments to AS
1215.18-.19 conform terminology relating to the use of the newly
defined term ``other auditor.'' \262\
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    \262\ See discussion above. In footnote 4 of AS 1215.18, the
final amendments do not include the proposed phrase ``in certain
circumstances'' after the words ``other related documents'' because
it is superfluous.
---------------------------------------------------------------------------

    A commenter on the 2021 SRC was supportive of the changes proposed
in AS 1215.18 while another commenter suggested that the term ``other
offices of the firm'' be revised in paragraphs .18-.19 to use another
term to clarify that this concept should be applied to offices that are
not the office of the firm issuing the auditor's report. The Board
considered this comment and determined that the requirements proposed
are sufficiently clear, and adopted the requirements as proposed.
Engagement Quality Review--Amendment to AS 1220
See Paragraph .10a of AS 1220
    Existing PCAOB standards specify certain procedures the engagement
quality reviewer should perform in evaluating the significant judgments
made by the engagement team and the related conclusions reached in
forming the overall conclusion on the engagement and in preparing the
engagement report.\263\ In addition, the amendments to AS 1220 require
the engagement quality reviewer, in an audit involving other auditors
or referred-to auditors, to evaluate the engagement partner's
determination that the participation of the engagement partner's firm
is sufficient for the firm to carry out the responsibilities of a lead
auditor and to report as such on the company's financial statements
and, if applicable, ICFR.\264\
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    \263\ See AS 1220.09.
    \264\ The corresponding requirements for the engagement partner
are in AS 2101.06A-.06C. The amendments added a reference to these
requirements and to the definitions of lead auditor, other auditor,
and referred-to auditor in AS 2101, in a footnote to AS 1220.10a.
---------------------------------------------------------------------------

    Some commenters supported the amendment, while others opposed it,
contending that the sufficiency-of-participation determination is not
always a significant judgment and thus does not always warrant
evaluation by the engagement quality reviewer. Having considered the
comments received, the Board adopted the requirement as proposed.
Although determining the sufficiency of a firm's participation in the
audit might not always be difficult or complicated, the decision that
the firm can serve as lead auditor is always a significant judgment
because it affects whether it is appropriate for the firm to issue the
audit report.\265\ Therefore, evaluating the sufficiency-of-
participation determination is important for the engagement quality
reviewer's conclusion about whether the lead auditor's report is
appropriate in the circumstances of a particular audit.\266\
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    \265\ See AS 2101.06A.
    \266\ See AS 1220.12.
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Conforming Amendments and Other Relevant Considerations
    This section discusses conforming amendments and other
considerations where significant comment was received as part of this
rulemaking. The proposed rule text includes conforming amendments
discussed in this section and other conforming amendments to PCAOB
auditing standards, auditing interpretations, attestation standards,
rules, and Form AP.
Communications With Audit Committees
See Paragraph .10e of AS 1301
    The 2021 SRC proposed to conform terminology in paragraph .10d of
AS 1301, Communications with Audit Committees, with new definitions. In
particular, the standard would have used ``other auditors'' in lieu of
``independent public accounting firms or persons, who are not employed
by the auditor.'' Upon further consideration, the Board determined that
the proposed amendment might not be consistent with the original intent
of the requirement to communicate all participants in the audit to the
audit committee.\267\
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    \267\ See Auditing Standard on Communications with Audit
Committee and Related Amendments to PCAOB Standards, PCAOB Release
No. 2012-004 (Aug. 15, 2012).
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    The change proposed in the 2021 SRC could have excluded, for
example, individuals who work at shared service centers and are
supervised by an other auditor, as these individuals would be subsumed
by the replacement term ``other auditor.'' To avoid unintended
outcomes, the Board did not amend AS 1301.10d.
    Separately, the Board made a conforming change to AS 1301.10e to
add ``referred-to auditors'' to the phrase ``if significant parts of
the audit are to be performed by other auditors.'' The 2017 SRC \268\
restored the existing phrase in AS 1301.10e, ``if significant parts of
the audit are to be performed by [other auditors],'' that would have
been removed by the 2016 Proposal. No subsequent comment was received
in this area, and the Board adopted the amendment to AS 1301.10e as
proposed in the 2017 SRC.
---------------------------------------------------------------------------

    \268\ See 2017 SRC at 37.
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Certain Required Interactions With the Referred-to Auditor
See Paragraph .53 of AS 2401
    The amendments to paragraph .53 of AS 2401, Consideration of Fraud
in a Financial Statement Audit, conform terminology by replacing
``other independent auditor'' with ``other auditors or referred-to
auditors.'' The amendments also replace ``subsidiaries, divisions or
branches'' with ``locations or business units, where applicable.''
Further, the amendments include two new footnotes that refer to the
definitions of ``engagement team'' and ``referred-to auditor'' in
Appendix A of AS 2101, as well as clarify the term

``business units,'' used in the revised paragraph.
    A commenter stated that this amendment would go beyond current
practice for the division of responsibility. Having considered the
commenter's view, the Board adopted the amendments to AS 2401
substantially as proposed.\269\ The Board believes that the amendment
does not substantively change the example in AS 2401.53, but merely
updates the terminology, aligning it with other amendments in this
release.
---------------------------------------------------------------------------

    \269\ The final amendments include ``locations or business
units, where applicable,'' instead of only the term ``business
units.''
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Amendments Relating to Certain Inquiries and Procedures Concerning
Another Auditor
    Several PCAOB standards refer to AS 1205.10-.12 when describing
certain inquiries and procedures concerning another auditor \270\ whose
audit report is used as audit evidence in the audit of a company's
financial statement (such as the audit report of a service auditor or
predecessor auditor). In the majority of these circumstances, the
auditor whose report is used in this manner is neither supervised by
the lead auditor under AS 1201 nor serving as another independent
auditor under AS 1205.\271\
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    \270\ Such inquiries include inquiring about professional
reputation and reviewing the work of another auditor.
    \271\ Under rescinded AS 1205, for these circumstances the
auditor who uses the audit may be in a position analogous to that of
a principal auditor. See, e.g., AS 1205.14.
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    These amendments are amending the standards that refer to rescinded
AS 1205.10-.12 by incorporating the relevant statements from those
paragraphs into the text of the standards, as was the approach in the
2016 Proposal. The Board discussed comments received on the 2016
Proposal in the 2017 SRC and made no modifications to the proposed
amendments.\272\
---------------------------------------------------------------------------

    \272\ See 2017 SRC at 35.
---------------------------------------------------------------------------

    A commenter on the 2021 SRC believed that the conforming amendment
to AS 2601.19 would result in a change to the meaning and related user
auditor performance requirement. This commenter suggested revisions to
the language to highlight that the user auditor ``may give
consideration to'' performing the procedures. The Board believes that
the conforming amendment does not change the meaning of the
requirement, and that it is sufficiently clear.\273\ The amendment
states that ``the user auditor should consider performing one or more
of the [listed] procedures.'' This language is incorporated in several
locations, e.g., AS 2201.B23; paragraphs .18-.19 of AS 2601,
Consideration of an Entity's Use of a Service Organization; footnote 8
to paragraph .12 of AS 2610, Initial Audits--Communications Between
Predecessor and Successor Auditors; and AS 3105.55.
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    \273\ The Board does not view the phrase ``should give
consideration'' in existing AS 2601.19 as being different from
``should consider,'' which is the terminology used in auditing and
related professional practice standards as defined in PCAOB Rule
3101.
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    The Board adopted the amendments as proposed.
Rescinding AI 10, Part of the Audit Performed by Other Independent
Auditors: Auditing Interpretations of AS 1205
    The amendments (i) rescind AI 10, the auditing interpretations of
AS 1205; and (ii) carry forward, with modifications, as an amendment to
AS 2110, a provision in AI 10 that the other accounting firm should
consider inquiring of the lead auditor about matters that may be
significant to the other accounting firm's own audit (e.g., executive
compensation arrangements).\274\
---------------------------------------------------------------------------

    \274\ See AI 10.04-.07; see also new paragraph .11A to AS 2110
in this document. The modifications address the format and
terminology.
---------------------------------------------------------------------------

    Situations in which the lead auditor divides responsibility for the
audit with a referred-to auditor are governed by the new standard, AS
1206. The new standard requires, among other things, that the lead
auditor communicate with the referred-to auditor and determine that
audit procedures are properly performed, in coordination with the
referred-to auditor, with respect to the consolidation or combination
of the financial statements of the business units audited by the
referred-to auditor into the company's financial statements. For
situations in which the lead auditor supervises the work of the other
accounting firm, the other auditor's inquiry of the lead auditor is
addressed by existing standards.\275\ For situations in which the lead
auditor divides responsibility for the audit with the other accounting
firm, an amendment to AS 2110 carries forward, with modifications, the
existing requirement in AI 10 for the referred-to auditor's inquiries
of the lead auditor as to matters that may be significant to the
referred-to auditor's own audit.\276\
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    \275\ See, e.g., AS 2110.49-.51, which require discussion among
engagement team members throughout the audit about significant
matters affecting risks of material misstatement.
    \276\ The Board corrected a footnote number in paragraph .28A of
AS 2110. This footnote was incorrectly numbered as 16A in a previous
rulemaking release, Amendments to Auditing Standards for Auditor's
Use of the Work of Specialists, PCAOB Release No. 2018-006 (Dec. 20,
2018), and it is being changed to 16C to reflect correct sequential
numbering of footnotes. This change does not affect the content of
the footnote.
---------------------------------------------------------------------------

    Some commenters on the 2016 Proposal viewed rescinding AI 10 as
appropriate, and some others suggested carrying forward all or certain
portions of the guidance in AI 10, including the amendment the Board is
making to AS 2110. A commenter on the 2021 SRC stated that the
conforming amendment to AS 2110.11A was not consistent with the
provisions of existing AS 1205.10 since, it asserted, AS 2110.11A goes
beyond current practice. The Board rescinded AI 10, as originally
proposed. The AI 10 direction for the lead auditor is based on the
limited procedures in AS 1205, which the Board rescinded. The provision
addressed to the referred-to auditor in AI 10.04-.07 was carried
forward to AS 2110.11A, as noted above.\277\
---------------------------------------------------------------------------

    \277\ In addition to the new paragraph, .11A, in AS 2110, see
above for technical amendments to (i) AS 2110.13 and .28A (changing
the numbering of two footnotes, to eliminate duplication) and (ii)
AS 2110.64 (adding a footnote reference to AS 2101.11 and .12, to
highlight relevant existing requirements for multi-location
engagements).
---------------------------------------------------------------------------

Interim Reviews
See Paragraphs .18b, .39-.40, and .52 of AS 4105
    The Board adopted conforming amendments to AS 4105, Reviews of
Interim Financial Information. The 2016 Proposal included conforming
amendments to that standard \278\ and requested comment on whether
additional changes to the standards were needed for reviews of interim
financial information that involve other auditors or referred-to
auditors.\279\ Three commenters who responded to this question briefly
expressed support for addressing interim reviews in the amendments but
did not specify any recommended changes. Another commenter stated that
any additional requirements should be scalable because the scope of an
interim review is substantially less than that of an audit.
---------------------------------------------------------------------------

    \278\ See 2016 Proposal at A3-32.
    \279\ See Question 58 in the 2016 Proposal at A4-62.
---------------------------------------------------------------------------

    The 2017 SRC discussed the comments received on this topic, stated
the Board's intent to adopt conforming amendments to AS 4105, and asked
for any additional comment.\280\ No further comments were submitted on
this topic in response to the 2017 SRC or 2021 SRC.
---------------------------------------------------------------------------

    \280\ See 2017 SRC at 36.
---------------------------------------------------------------------------

    Having considered the comments received, the Board adopted
conforming amendments to AS 4105 to appropriately reflect changes to
other

PCAOB standards in this rulemaking and preserve the scalable approach
to interim reviews. The conforming amendments have been revised from
the form in which they were proposed in 2016. As adopted, footnote 11
to AS 4105.18b clarifies that, if an accountant (i.e., auditor) who
conducts a review of interim financial information obtains a report
from another accountant engaged to conduct a review of interim
financial information of significant components of the reporting entity
or its other business units, the accountant that obtains the report is
ordinarily in a position similar to that of, as applicable, (i) a lead
auditor that obtains the results of the work of an other auditor (see
generally AS 1201 (audit supervision) and AS 2101 (audit planning)) or
(ii) an investor's auditor that obtains a report from an investee's
auditor (see generally Appendix B of AS 1105 (audit evidence)).
Application to Audits of Brokers and Dealers
    The amendments, if approved by the SEC, will apply to audits of
brokers and dealers as defined in Sections 110(3)-(4) of Sarbanes-
Oxley.\281\ The proposing releases solicited comment on such
applicability. No commenters opposed, and several commenters supported,
applying the amendments to audits of brokers and dealers. In response
to the 2021 SRC, one commenter said that it was not aware of any strong
arguments that would indicate that the audits of brokers and dealers
should be excluded from the application of the proposed amendments, and
the commenter expressly supported applying the proposed amendments to
audits of brokers and dealers. One commenter said that it did not
believe that the revisions discussed in the 2021 SRC presented specific
issues regarding audits of brokers and dealers.
---------------------------------------------------------------------------

    \281\ For attestation engagements in conjunction with Exchange
Act Rule 17a-5, 17 CFR 240.17a-5, the supervision requirements of
Attestation Standard No. 1, Examination Engagements Regarding
Compliance Reports of Brokers and Dealers, or Attestation Standard
No. 2, Review Engagements Regarding Exemption Reports of Brokers and
Dealers, apply to the supervision of the work of other auditors. See
Standards for Attestation Engagements Related to Broker and Dealer
Compliance or Exemption Reports Required by the U.S. Securities and
Exchange Commission and Related Amendments to PCAOB Standards, PCAOB
Release No. 2013-007, at A4-30 (Oct. 10, 2013).
---------------------------------------------------------------------------

    As the Board noted in the 2016 Proposal, the auditing standards
that currently govern the use of other auditors and referred-to
auditors in audits of brokers and dealers are the same as those for
audits of issuers. The application of the amendments to audits of
brokers and dealers will continue this approach.
    Staff analysis of PCAOB inspections data for audits of brokers and
dealers indicates that there are no brokers or dealers that are
currently issuers, although some of the largest brokers and dealers are
subsidiaries of issuers. Information from PCAOB inspections and from
annual reports filed by registered firms indicates that other auditors
played a substantial role \282\ in a small number of audits of brokers
and dealers.\283\ Further, information obtained by PCAOB staff has not
identified any audits of brokers and dealers in which the lead auditor
divided responsibility for the audit with another accounting firm.
---------------------------------------------------------------------------

    \282\ See PCAOB Rule 1001(p)(ii) (defining the phrase ``play a
substantial role in the preparation or furnishing of an audit
report'').
    \283\ Firms that conduct non-issuer audits in accordance with
PCAOB standards, including audits of brokers and dealers reporting
under Exchange Act Rule 17a-5, are not required to file a report on
Form AP regarding such audits. See Staff Guidance: Form AP, Auditor
Reporting of Certain Audit Participants, and Related Voluntary Audit
Report Disclosure Under AS 3101, The Auditor's Report on an Audit of
Financial Statements When the Auditor Expresses an Unqualified
Opinion (Dec. 17, 2021), at 3. Thus, unlike in the case of audits of
issuers (including EGCs), Form AP data on the extent of use of other
auditors and referred-to auditors in audits of brokers and dealers
is not available.
---------------------------------------------------------------------------

    The Board's determination that the amendments will apply to audits
of brokers and dealers is based on the observation that auditing plays
a key role in enhancing the reliability of financial information
provided by brokers and dealers, which is important to investor
protection. The audit of brokers and dealers is intended to mitigate
problems related to information asymmetry between customers of brokers
and dealers, who use the services of brokers and dealers to invest in
securities and other financial instruments, and management of brokers
and dealers, who prepare financial information. This information
asymmetry between customers and management of brokers and dealers may
be significant. Customers of brokers and dealers are likely to be
numerous, geographically distributed, and not expert in the management
or operation of brokers and dealers. This information asymmetry makes
the role of auditing important in enhancing the reliability of
financial information. In addition, the audit of brokers and dealers
may also help attenuate information asymmetry between management of
brokers and dealers and other users of financial statements, such as
counterparties and regulatory authorities.
    The amendments are not expected to have a widespread impact on the
audits of brokers and dealers that are not subsidiaries of issuers,
since there are likely few instances in which such audits involve the
use of other auditors. However, in those instances in which other
auditors are used, the expected improvements in audit quality described
above will benefit the customers of the broker or dealer, along with
investors and the capital markets. Because of the scalability of the
risk-based requirements, the costs of performing the procedures are
unlikely to be disproportionate to the benefits of the procedures.
Effective Date
    The Board has determined that the amendments will take effect,
subject to approval by the SEC, for audits of financial statements for
fiscal years ending on or after December 15, 2024.
    In the proposing releases, the Board sought comment on the amount
of time auditors would need before the proposed amendments would become
effective, if adopted by the Board and approved by the SEC. A number of
commenters on the 2021 SRC recommended that the Board provide an
effective date at least two years after Board adoption and SEC
approval. Some preferred, if SEC approval were to occur in the last
half or quarter of the year, an effective date at least three years
afterwards. In support of the time needed before effectiveness,
commenters offered that audit firms will need enough time to implement
the amended standards throughout the firm (such as through methodology,
tools, guidance, quality control system changes, and training) and to
discuss and coordinate implications of the amendments with other
auditors and referred-to auditors. Some commenters also stated that
because the amendments relate to matters that occur at the beginning of
the audit, the implementation needs to occur before the beginning of
the fiscal year of the financial statements to be audited.
    The Board recognized the preferences expressed by commenters. It
also appreciated the efforts already undertaken by many audit firms to
raise their standards of practice in advance of the adoption of these
amendments. The effective date the Board adopted is designed to provide
all auditors with a reasonable period of time to implement the
amendments, without unduly delaying the intended benefits resulting

from these improvements to PCAOB standards.\284\
---------------------------------------------------------------------------

    \284\ See Auditing Accounting Estimates, Including Fair Value
Measurements and Amendments to PCAOB Auditing Standards, PCAOB
Release No. 2018-005 (Dec. 20, 2018) (providing an effective date
approximately one year after PCAOB adoption); Amendments to Auditing
Standards for Auditor's Use of the Work of Specialists, PCAOB
Release No. 2018-006 (Dec. 20, 2018) (same).
---------------------------------------------------------------------------

D. Economic Considerations and Application to Audits of Emerging Growth
Companies Economic Analysis

    The Board is mindful of the economic impacts of its standard
setting. This economic analysis describes the economic baseline,
economic need, expected economic impacts of the amendments, and
alternative approaches considered. Because there are limited data and
research findings available to estimate quantitatively the economic
impacts of the amendments, the Board's economic discussion is
qualitative in nature. However, where practicable, the analysis
incorporates quantitative information, including analysis of Form AP
data and PCAOB inspections findings.
    The Board sought information relevant to the economic analysis over
the course of this rulemaking.\285\ To the extent that commenters
expressed views related to the economic analysis, commenters generally
found the economic analysis in the 2016 Proposal and the discussion of
economic topics in the 2017 and 2021 SRCs to be reasonable. Commenters
did not provide additional quantitative data or research that could be
used in the analysis. The Board considered all comments received and
has developed the following economic analysis that evaluates the
expected benefits and costs of the final amendments, discusses
potential unintended consequences, and facilitates comparison to
alternative actions considered.
---------------------------------------------------------------------------

    \285\ See 2016 Proposal at 30-49; 2017 SRC at 42; 2021 SRC at
62.
---------------------------------------------------------------------------

Baseline
    The discussion above describes current PCAOB standards that apply
specifically when other auditors and referred-to auditors participate
in an audit and the influence of other standard setters on audit
practice in this area. This section expands on that discussion by
describing the economic baseline against which the impact of the
amendments can be considered. Specifically, this section:
     Discusses the extent of the use of other auditors and
referred-to auditors by analyzing data in AuditorSearch, which is the
PCAOB's public Form AP database.\286\
---------------------------------------------------------------------------

    \286\ See https://pcaobus.org/resources/auditorsearch. See also
Improving the Transparency of Audits: Rules to Require Disclosure of
Certain Audit Participants on a New PCAOB Form and Related
Amendments to Auditing Standards, PCAOB Release No. 2015-008 (Dec.
15, 2015). Form AP provides information on other accounting firms,
but not individual accountants at those firms. Hence, the terms
``other auditors'' and ``referred-to auditors'' in the analysis
presented in this section refer only to accounting firms.
---------------------------------------------------------------------------

     Summarizes auditing practices related to the use of other
auditors and referred-to auditors, including PCAOB staff analysis of
audit firm methodologies and data on deficiencies in audits that
involve other auditors.
     Provides a concise survey of academic research on the use
of other auditors and its impact on audit quality.
Extent of the Use of Other Auditors and Referred-to Auditors
    As discussed in the 2016 Proposal, many companies have significant
operations in jurisdictions outside the country or region of the lead
auditor.\287\ Audits of such multinational businesses often require the
participation of accounting firms other than the lead auditor and can
often involve multiple other firms.\288\ The use of other auditors is
also more prevalent in audits of larger companies audited by larger
accounting firms.\289\ In addition, work performed by other auditors
can comprise a significant share of a given audit.\290\
---------------------------------------------------------------------------

    \287\ See 2016 Proposal at 6.
    \288\ See id. at 6 note 4.
    \289\ See id. at 7.
    \290\ See id. at 6-7 and note 5 (noting that in audits selected
by the PCAOB for inspection in 2013 and 2014 that involved other
auditors, the other auditors audited on average between one-third
and one-half of the total assets and total revenues of the company
being audited).
---------------------------------------------------------------------------

    Observations in the 2016 Proposal regarding the use of other
auditors and referred-to auditors are confirmed by more specific
information that the PCAOB has subsequently received and made available
to the public on its website. After June 30, 2017, registered public
accounting firms began to report certain information about the
participation of other accounting firms in audits on PCAOB's Form AP.
Figures 2, 3, and 4 present staff analysis of Form AP filings between
January 1, 2021, and December 31, 2021, and update similar information
presented in the 2021 SRC.\291\
---------------------------------------------------------------------------

    \291\ See 2021 SRC at 49-55 (providing data based on Form AP
filings in 2020). The analysis of Form AP data presented in Figures
2, 3, and 4 is limited to issuers other than investment company
vehicles and employee benefit plans.

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

[GRAPHIC] [TIFF OMITTED] TN01JY22.002

    The statistics presented in Figure 2 describe the percentage of
issuer audits that use other firms and the maximum number of other
firms used in an individual audit, based on 2021 Form AP filings. The
results are largely consistent with the 2020 Form AP data presented in
the 2021 SRC and indicate that other firms are involved in many audits
of issuers.
---------------------------------------------------------------------------

    \292\ Global network firms (``GNFs'') are the member firms of
the six global accounting firm networks that include the largest
number of PCAOB-registered non-U.S. firms (BDO International Ltd.,
Deloitte Touche Tohmatsu Ltd., Ernst & Young Global Ltd., Grant
Thornton International Ltd., KPMG International Cooperative, and
PricewaterhouseCoopers International Ltd.). The discussion in this
release uses ``U.S. GNF'' to refer to a GNF member firm based in the
United States, and ``non-U.S. GNF'' to refer to a GNF member firm
based outside the United States. Non-affiliate firms (``NAFs'') are
both U.S. and non-U.S. accounting firms registered with the Board
that are not GNFs. Some of the NAFs belong to international
networks.
    \293\ Disclosures on Form AP include the name, extent of
participation, and headquarters location of an other accounting firm
that participated in an audit and contributed 5% or more of the
total audit hours. For firms that contributed less than 5% of the
total audit hours, the number of firms and their aggregate extent of
participation is disclosed. Form AP reporting is required not only
in situations when an other accounting firm performed part of an
audit under AS 1201 or AS 1205, but also when the personnel of an
other accounting firm, but not the firm itself, was involved in the
lead auditor's audit. See Form AP, Item 3.2 (Note) (providing that
an other accounting firm participated in the lead auditor's audit
for Form AP reporting purposes if any of its principals or
professional employees was subject to supervision under AS 1201).
Thus, not all of the audits in the table may have involved, and not
all of the firms in the table may have been, other auditors that
performed part of the audit under AS 1205 or were themselves
supervised under AS 1201.
---------------------------------------------------------------------------

    Overall, other firms are involved in about 26 percent of all issuer
audit engagements.\294\ Their use is especially

common in audits performed by firms that are members of global
networks; about 39 percent of U.S. GNF engagements and about 58 percent
of non-U.S. GNF engagements involved the use of other firms. In
comparison, only about seven percent of U.S. NAF and 13 percent of non-
U.S. NAF audit engagements involved other firms.
---------------------------------------------------------------------------

    \294\ The 2021 SRC presented data showing that other firms were
involved in about 30 percent of all issuer audit engagements. See
2021 SRC at 51. The change from 30 percent in the 2021 SRC to 26
percent in this release appears to be mostly due to the recent
increase in special purpose acquisition company audits, which rarely
involve the participation of other firms. Between 2018 (the first
full year of Form AP data) and 2020 (the year presented in the 2021
SRC), the percentage of audits that use other firms remained
relatively stable.
---------------------------------------------------------------------------

    When analyzed from the perspective of the domicile of the issuer,
other firms are involved in about 23 percent of audit engagements of
issuers domiciled in the U.S., and about 41 percent of audit
engagements of issuers domiciled outside the U.S. Alternately, when
analyzed by issuer size, other firms are involved in about 68 percent
of Fortune 500 issuer audits and about 57 percent of large accelerated
filer audits.\295\ In contrast, only about 36 percent of accelerated
filer audits and about 12 percent of non-accelerated filer audits
involved the use of other firms.
---------------------------------------------------------------------------

    \295\ For an explanation of accelerated filer criteria, see
https://www.sec.gov/corpfin/secg-accelerated-filer-and-large-accelerated-filer-definitions.
---------------------------------------------------------------------------

    Some issuer audits involve many other firms, particularly when the
issuer is large. For example, the audit of one Fortune 500 issuer
involved 27 other firms and the audit of one large accelerated filer
involved 63. By contrast, the maximum number of other firms used on an
audit of an accelerated filer and a non-accelerated filer was somewhat
lower, at 14 and 21 other firms, respectively. The maximum number of
other firms used is highest for issuer audits conducted by GNFs. For
example, one non-U.S. GNF audit involved 63 other firms and one U.S.
GNF audit used 27. Non-affiliated firms can also use multiple other
firms when conducting issuer audits; on one audit a non-U.S. NAF used
17 other firms and one U.S. NAF audit involved 10.
[GRAPHIC] [TIFF OMITTED] TN01JY22.003

    The statistics shown in Figure 3 describe how often more than one
other firm is used when an audit involves such use, based on 2021 Form
AP filings. The results are largely consistent with the 2020 Form AP
data presented in the 2021 SRC and indicate that when other firms are
used, it is common that multiple other firms are used.\296\ For
example, among all issuer audits involving the use of other firms,
about 61 percent involved two or more other firms, about 28 percent
involved five or more, about 11 percent involved ten or more, and about
two percent involved twenty or more. When examined by the domicile of
the issuer, the results are similar.
---------------------------------------------------------------------------

    \296\ Form AP data also indicates that when multiple other
auditors are used, it is common for the other auditors to be located
in multiple countries outside the lead auditor's country.

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

    When examined by audit firm type, the data shows that GNFs tend to
use more other firms than NAFs do. For example, in issuer audits
conducted by U.S. GNFs that involved other firms, about 66 percent
involved two or more other firms, about 32 percent involved five or
more, about 11 percent involved ten or more, and about one percent
involved twenty or more. Similarly, in audit engagements of issuers
conducted by non-U.S. GNFs that involved other firms, about 71 percent
involved two or more other firms, about 31 percent involved five or
more, about 16 percent involved ten or more, and about four percent
involved twenty or more. By contrast, in audit engagements of issuers
conducted by U.S. NAFs that involved other firms, only about 19 percent
involved two or more other firms, and about two percent involved five
or more. In audit engagements of issuers conducted by non-U.S. NAFs
that involved other firms, about 34 percent involved two or more other
firms, and about five percent involved five or more.
[GRAPHIC] [TIFF OMITTED] TN01JY22.004

    The statistics presented in Figure 4 describe the share of audit
work performed by other firms, based on 2021 Form AP filings. The other
firms' share of total audit hours provides a simple measure of the
significance of their work, but may not reflect the level of risk
associated with that work. The results are largely consistent with the
2020 Form AP data presented in the 2021 SRC and show that work
performed by other firms can, however, account for a significant share
of the audit. To illustrate this finding, consider the following data
regarding the frequency with which other firms' hours exceeded a
relatively lower (10 percent of total audit hours) and relatively
higher (30 percent) threshold of other auditor involvement.
---------------------------------------------------------------------------

    \297\ Using a higher threshold of other firms' involvement (50
percent of total audit hours) would further reduce the percentages
reported in Figure 4. Specifically, in audits of issuers that
involved other firms, other firms performed more than 50 percent of
total audit hours in about six percent of all issuer audits, about
two percent of U.S. GNF audits, about 16 percent of non-U.S. GNF
audits, about four percent of U.S. NAF audits, and about 29 percent
of non-U.S. NAF audits.

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

    Looking first at the relatively lower threshold of involvement, in
audits of issuers that involved other firms, other firms performed more
than 10 percent of total audit hours in about 52 percent of all issuer
audits, about 52 percent of U.S. GNF audits, about 58 percent of non-
U.S. GNF audits, about 37 percent of U.S. NAF audits, and about 63
percent of non-U.S. NAF audits. When examined by the domicile of the
issuer, other firms performed more than 10 percent of the total audit
hours in about 48 percent of audits of issuers domiciled in the U.S.,
and about 61 percent of audits of issuers domiciled outside the U.S.
    Turning to the relatively higher threshold of involvement, in
audits of issuers that involved other firms, other firms performed more
than 30 percent of the total audit hours in about 19 percent of all
issuer audits, about 13 percent of U.S. GNF audits, about 34 percent of
non-U.S. GNF audits, about 18 percent of U.S. NAF audits, and about 41
percent of non-U.S. NAF audits. Other firms performed more than 30
percent of the total audit hours in about 12 percent of audits of
issuers domiciled in the U.S., and about 35 percent of audits of
issuers domiciled outside the U.S.
Auditing Practice Related to the Use of Other Auditors and Referred-to
Auditors
PCAOB Staff Analysis of Audit Methodologies
    PCAOB staff has reviewed the methodologies of firms related to the
use of other auditors and referred-to auditors. Specifically, the staff
compared methodologies of GNFs and methodologies commonly used by
smaller U.S. firms to current PCAOB standards and the amendments. The
staff performed this analysis to understand the extent to which firms
would need to update their methodologies to implement the amendments
and new standard.
    In general, the staff observed that the methodologies of larger
firms already incorporate some of the concepts included in the
amendments and new standard. For example, methodologies of larger firms
increasingly emphasize the responsibility of the lead auditor for
overseeing the work of other auditors using a risk-based approach. Some
larger firms have also made changes to their audit methodologies in
recent years to encourage a greater level of supervision by the lead
auditor, such as more frequent and comprehensive communications with
other auditors and review of other auditors' work papers in areas of
significant risk. Larger firms have also continued to issue practice
alerts, templates, and other guidance to emphasize that the lead
auditor should be sufficiently involved in the work of other auditors.
Smaller U.S. firms' methodologies generally do not require the lead
auditor to perform or consider supervisory procedures beyond the
requirements of AS 1205.
    The staff's analysis of audit methodologies also identified
variation in the extent to which larger firms have already incorporated
the amendments and new standard in their methodologies. For example,
the staff observed that some larger firms' methodologies do not yet
incorporate the amendments to supervisory procedures in multi-tiered
audits or the amendments to AS 1220 regarding engagement quality
reviews. Similarly, many firms may need to revise their approaches to
determining whether the firm's participation in an audit is sufficient
for it to serve as lead auditor.
    Commenters on the 2016 Proposal who addressed audit methodologies
regarding the use of other auditors and referred-to auditors generally
agreed that the Proposal accurately described existing audit practices.
Some of those commenters indicated that many firms, particularly larger
and mid-size firms, have updated their methodologies to comply with the
relevant standards of the PCAOB, IAASB, and ASB. Another commenter
indicated that firms utilize a range of approaches to group audits to
address the varied business structures of their audit clients.
    A commenter on the 2021 SRC observed the increased use of
technology in auditing, which accelerated in response to the global
COVID-19 pandemic. Some stated that, as a result of the use of
technology, audit firms increasingly digitize their documentation and
are able to communicate more efficiently. Others observed that the
increased use of technology has permitted the remote performance of
audit work, and that physical location is not as important as it was
previously. One commenter noted changes in the management of audits,
including the increased use of shared service centers and the existence
of more complex group audit structures. Some commenters, however,
stated that they had not seen significant changes in auditor practices
related to the use of other auditors.
Deficiencies in Audits Involving Other Auditors
    Previous discussion in this release describes observations from
recent PCAOB inspections and PCAOB and SEC enforcement cases related to
the work of other auditors and lead auditors. This section supplements
the discussion by describing data regarding deficiencies in work
performed by other auditors (or ``referred work engagements'').
    Over the last decade, PCAOB inspections staff has observed Part I.A
deficiencies \298\ in roughly 25 to 45 percent of referred work
engagements selected for review. As shown in Figure 5, following a peak
deficiency rate in 2012 and 2013 of approximately 40 percent,
deficiency rates declined and have remained relatively consistent since
then at approximately 30 percent.
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    \298\ A Part I.A deficiency is identified through inspection and
included in a PCAOB inspection report when it is ``of such
significance that the Board believes that the firm, at the time it
issued its audit report, had not obtained sufficient appropriate
audit evidence to support its opinion on the issuer's financial
statements and/or ICFR.'' See PCAOB, PCAOB Inspection Procedures:
What Does the PCAOB Inspect and How Are Inspections Conducted?,
available at https://pcaobus.org/oversight/inspections/inspection-procedures.

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[GRAPHIC] [TIFF OMITTED] TN01JY22.005

Academic Research on the Use of Other Auditors
    As discussed above, audits involving other auditors often use other
auditors located in different countries, and may use multiple other
auditors, particularly in audits of multinational companies. Academic
research on the challenges of distributed work (but not exclusively on
auditing) finds that coordination and communication problems may arise
when: (i) work is conducted by teams distributed across cities,
countries, or continents; (ii) there are differences in language,
culture, or regulation; or (iii) teamwork is required that involves a
number of interdependent activities.\299\
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    \299\ See 2016 Proposal at 29-30 and notes 61-64; see also 2021
SRC at 55 and note 147.
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    If the cost to the auditor of overcoming these challenges (e.g.,
through additional supervision of other auditors) exceeds the lead
auditor's perception of the benefits of doing so (e.g., in terms of
reduced risks of litigation, reputational loss, and regulatory
sanction, as a result of improving audit quality), then audit quality
may suffer.\300\ The impact on audit quality could be especially
significant because the lead auditor makes important decisions about
how the audit is performed, including whether the lead auditor performs
a sufficient portion of the audit to issue the audit report.
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    \300\ See 2016 Proposal at 29 note 61.
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    Although relatively few empirical studies have explicitly examined
the relationship between the use of other auditors and audit quality,
several papers have been published recently that shed light on this
issue. This growing body of research suggests that there is a
relationship between the use of other auditors and audit quality, and
that the facts and circumstances of the audit may be influential in
determining whether this is a positive or negative relationship.\301\
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    \301\ See 2016 Proposal at 29 note 61; see also 2021 SRC at 56
notes 148-149 (citing academic research); see also Elizabeth Carson,
Roger Simnett, Ulrike Th[uuml]rheimer, and Ann Vanstraelen,
Involvement of Component Auditors in Multinational Group Audits:
Determinants, Audit Quality, and Audit Fees (2022) (accepted for
publication in Journal of Accounting Research; available at https://doi.org/10.1111/1475-679X.12418) (``[I]nvolvement of component
auditors benefits audit quality as long as the principal auditor
conducts a substantial amount of work. Once the involvement of
component auditors exceeds a certain level, audit quality
decreases.'').
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Need
    This section discusses the problem that the amendments are intended
to address and explains how the amendments are expected to address it.
Specifically, an incentive problem may arise from information
asymmetries between investors and the lead auditor and between the lead
auditor and other auditors, among other factors. The amendments will
help address the problem by increasing the accountability of the lead
auditor and requiring a more uniform, risk-based approach to the lead
auditor's planning and supervision of the work of other auditors. The
amendments aim to clarify and strengthen the lead auditor's planning
and supervisory requirements to provide lead auditors with better
direction and a stronger regulatory incentive to more consistently
produce high quality audits when using other auditors. The amendments
will increase the lead auditor's involvement in, and evaluation of, the
work of other auditors, enhance the ability of the lead auditor to
prevent or detect deficiencies in the work of other auditors, and
facilitate improvements in the quality of the work of other auditors.
Problem To Be Addressed
    As discussed in the 2016 Proposal, incentive problems may arise
from information asymmetry between investors and the lead auditor.\302\
Specifically, in audits involving other auditors, a market failure
\303\ may be caused, at least in part, by an information asymmetry
between investors and the lead auditor regarding the lead auditor's
effort in supervising other auditors. Investors, for example, may be
uncertain about the procedures performed by the lead auditor to oversee
the work of other auditors, leading to uncertainty about audit quality
and the risks associated with the use of other auditors. The
uncertainty may reduce public confidence in financial information,
decrease the efficiency of capital allocation decisions, and increase
the cost of capital.\304\
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    \302\ See 2016 Proposal at 30-33 and notes 66-73.
    \303\ The term ``market failure'' refers to a situation in which
markets fail to function efficiently. See 2016 Proposal at 31 note
67.
    \304\ See 2016 Proposal at 37 note 78.
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    Because of this information asymmetry and other factors such as
cost considerations, the lead auditor may not be adequately motivated
to (i) gather information about the competence of, and work performed
by,

the other auditor, or (ii) monitor and review (i.e., adequately
supervise) the other auditor's work, leading to a moral hazard
problem.\305\
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    \305\ The term ``moral hazard'' refers to a situation in which
an agent could take actions (such as not putting forth sufficient
effort) that are difficult for the principal to monitor and would
benefit the agent at the expense of the principal. See 2016 Proposal
at 31 note 69; Amendments to Auditing Standards for Auditor's Use of
the Work of Specialists, PCAOB Release No. 2018-006 (Dec. 20, 2018),
at 40-42.
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    Further, as discussed in the 2021 SRC, incentive problems may also
arise from information asymmetry between lead auditors and other
auditors.\306\ For example, as described in the 2016 Proposal, under
current standards lead auditors may not have sufficient access to
information regarding the work performed by other auditors.\307\ Other
auditors also may not be sufficiently incentivized to perform
sufficient and appropriate audit procedures. A commenter on the 2021
SRC agreed that information asymmetry may exist between auditors.
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    \306\ See 2021 SRC at 61.
    \307\ See 2016 Proposal at 19-21.
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How the Amendments Will Address the Need
    The amendments are expected to increase the accountability of the
lead auditor and require a more uniform, risk-based approach to the
lead auditor's oversight of other auditors. Specifically, the
amendments rescind AS 1205 and amend AS 2101 and AS 1201 to apply in
all situations in which the lead auditor involves other auditors. The
amendments include additional risk-based requirements to provide the
lead auditor with more specificity and clarity about the lead auditor's
supervisory responsibilities.
    Strengthening the performance requirements for lead auditors can
augment the lead auditor's incentive to monitor the performance of
other auditors through adequate supervision of other auditors' work. By
addressing more clearly the responsibilities of the lead auditor (e.g.,
for planning the audit and supervising other auditors), the amendments
position the lead auditor to align the incentives and auditing
behaviors of other auditors with investors' interests in reducing the
risks of material misstatement in the financial statements. In
particular, the amendments should incentivize lead auditors to
anticipate potential problems that may arise in their relationships
with other auditors and take action to address such matters. Investors
should form expectations of audit quality under the more standardized
and improved supervisory framework, and thus should have greater
certainty about the lead auditor's approach to supervision and the
quality of the audit.\308\ Additionally, by adding specificity and
reducing ambiguity regarding the lead auditor's responsibilities, the
amendments address risks arising from potential systematic, welfare-
decreasing auditor and investor errors in judgment.\309\
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    \308\ See 2016 Proposal at 35 note 75 (citing academic
research).
    \309\ See 2021 SRC at 61 note 175.
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    Examples of amendments that are expected to strengthen and clarify
the performance requirements for lead auditors and augment their
incentive to monitor the performance of other auditors include the
following:
     In audits involving other auditors, the amendments to AS
2101 and AS 1220 will enhance the requirements related to the
engagement partner's assessment of whether his or her firm performs
sufficient work on the audit to warrant serving as lead auditor, and
the engagement quality reviewer's evaluation of that assessment. In
addition, in audits that involve work performed by other auditors
regarding locations or business units, the lead auditor's involvement
(through planning and performing audit procedures and supervising other
auditors) will be required to be commensurate with the risks of
material misstatement associated with those locations or business
units. The amendments also describe the actions that the lead auditor
should take with respect to each other auditor to determine compliance
with independence and ethics requirements. Further, the amendments have
specific requirements regarding the lead auditor's responsibilities
with respect to the other auditors' knowledge, skill, and ability.
     Currently, lead auditors can apply two different
approaches: supervising the other auditors' work under AS 1201 or using
the work and reports of other auditors under AS 1205. Under the
amendments, AS 1205 will be rescinded, and lead auditors will be
required to supervise other auditors under the amended AS 1201 when
they assume responsibility for the other auditors' work.
    The amendments to AS 1201 provide additional direction to the lead
auditor on how to apply the principles-based provisions of the standard
to the supervision of other auditors. For example, the amendments
require the lead auditor to: (i) inform other auditors of the scope of
their work and, with respect to such work requested, the identified
risks of material misstatement, tolerable misstatement, and clearly
trivial amounts (if determined); (ii) obtain and review the other
auditor's written description of procedures to be performed, and
discuss with, and communicate in writing to, the other auditor any
needed changes to the planned procedures; (iii) obtain and review a
written affirmation from the other auditor as to whether the other
auditor has performed work in accordance with the lead auditor's
instructions, and, if it has not, a description of the nature of, and
an explanation of the reasons for, the instances where work was not
performed in accordance with the instructions, including (if
applicable) a description of the alternative work performed; (iv)
direct other auditors to provide specified documentation regarding work
performed; and (v) determine whether the other auditor performed the
work as instructed and whether additional audit evidence needs to be
obtained.\310\
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    \310\ The amendments for the planning and supervision of other
auditors also include provisions, in AS 1201 and AS 2101, that are
designed to make the standard scalable for multi-tiered audits in
which the lead auditor may seek assistance from a first other
auditor in supervising second other auditors.
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Economic Impacts
    This section discusses the expected benefits and costs of the
amendments and potential unintended consequences. Overall, the
magnitude of the benefits and costs is likely to be affected by the
extent to which other auditors are involved in audits, including the
number of other auditors used and the amount of time spent by other
auditors. Benefits and costs are also likely to be affected by the
nature of the work and the risks involved in the work performed by
other auditors, because more complex work and work in areas of greater
risk will likely require greater supervisory efforts by the lead
auditor. In addition, benefits and costs are likely to be affected by
the degree to which accounting firms have already adopted audit
practices that are similar to those the amendments will require.
Overall, the Board expects that the benefits of the amendments will
justify any costs and unintended negative effects.
Benefits
    As discussed above, the amendments are expected to benefit
investors and the public by mitigating information asymmetries between
investors and the lead auditor and between the lead auditor and other
auditors. The new requirements should strengthen the

supervision of other auditors, which in turn should improve audit
quality and increase the likelihood that auditors detect material
misstatements in the financial statements and material weaknesses in
internal controls over financial reporting. Improving the quality of
audits and financial reporting can reduce investors' uncertainty about
the information being provided in company financial statements, foster
increased public confidence in the financial markets, and enhance
capital formation. In particular, improving the quality of the
information available to financial markets can increase the efficiency
of capital allocation decisions and decrease the cost of capital.\311\
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    \311\ See 2016 Proposal at 37 note 78.
---------------------------------------------------------------------------

    Specifically, the amendments address audit deficiencies of other
auditors that continue to be observed in practice (see Figure 5 above)
and provide more transparency to investors about how lead auditors
supervise other auditors by increasing the accountability of the lead
auditor and introducing a more uniform, risk-based approach to the lead
auditor's supervision of other auditors. The amendments require the
lead auditor to determine the sufficiency of its participation in the
audit based on quantitative and qualitative factors and be better
informed about the qualifications and performance of the other auditor.
The amendments also increase the requirements for the lead auditor to
monitor and review (i.e., supervise) the work of other auditors.
    Investors also may benefit from the amendments indirectly. For
example, under existing standards, the auditor is required to
communicate to the audit committee its overall audit strategy,
significant risks, and results of the audit, including work performed
by other auditors, among other things.\312\ Because of the lead
auditor's enhanced involvement in the work of other auditors, the
quality of communications with audit committees could also be enhanced,
specifically as it relates to risks of material misstatements in the
financial statements related to the component(s) of the company audited
by the other auditor(s). Such enhanced discussions with the audit
committee could improve the audit committee's oversight of the audit by
highlighting areas where audit committees and companies should increase
attention to ensure the quality of their financial statements,
including related disclosures. This increased attention by audit
committees and companies could result in higher quality financial
reporting, which benefits investors.
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    \312\ See paragraphs .09-.24 of AS 1301, Communications with
Audit Committees.
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    The Board expects that the amendments will lead to improved
supervision of other auditors' work and an increase in audit quality.
Auditors also may benefit from the amendments due to the reduced risk
of failure to detect material misstatements. As a result, associated
costs such as the risk of litigation, regulatory sanction, or
reputational loss faced by auditors could decrease.
    Some commenters provided information responding to the discussion
of potential benefits to investors and other financial statement users.
One commenter said that many of the changes contemplated in the 2016
Proposal would improve the quality of audits involving other auditors
and benefit investors. Another commenter stated that the proposed
changes should decrease the overall likelihood of misstatement by
enhancing the verification process of information relied upon by other
auditors, and therefore should serve as added safeguards for investors
and the general public through their ability to rely on the financial
statement data and related disclosures. Another commenter said that the
proposed amendments would provide more transparency about audits
involving other auditors and would therefore benefit investors and the
public. Similarly, in response to the 2021 SRC, commenters agreed that
the amendments would enhance audit quality and protect the interests of
investors. These comments are consistent with the benefits identified
in this section.
Costs
    The Board recognizes that imposing new requirements may result in
additional costs to auditors and the companies they audit.
    Auditors may incur certain fixed costs (costs that are generally
independent of the number of audits performed) related to implementing
the amendments. These include costs to update audit methodologies and
tools, and to prepare training materials and conduct training. Large
firms are likely to update methodologies using internal resources,
whereas small firms are more likely to purchase updated methodologies
from external vendors.\313\ The costs to update methodologies likely
depend on the extent to which the new requirements have already been
incorporated in the firms' current methodologies. For firms that have
implemented supervisory procedures like those required by the
amendments, the costs of updating methodologies may be lower than for
firms that currently do not have such procedures. Larger accounting
firms, which often perform audits involving other auditors, will likely
take advantage of economies of scale by distributing fixed costs over a
larger number of audit engagements. Smaller accounting firms, which
less often perform audits that involve other auditors, will likely
distribute their fixed costs over fewer audit engagements.
---------------------------------------------------------------------------

    \313\ See 2016 Proposal at 38.
---------------------------------------------------------------------------

    In addition, auditors may incur certain engagement-level variable
costs related to implementing the amendments. For example, to implement
the additional requirements, both lead auditors and other auditors may:
     Increase the number of engagement team members and
engagement quality reviewer assistants; or
     Increase the amount of time incurred by the existing team
members and engagement quality reviewers and their assistants.\314\
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    \314\ The 2016 Proposal also mentioned the potential additional
costs incurred by traveling to a company's locations or business
units at which audit procedures are to be performed. See 2016
Proposal at 38. As remote work and virtual meetings became more
common in recent years, these costs may be less significant.
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    The magnitude of the variable costs likely depends on several
factors. For firms that have required greater lead auditor involvement
and already have applied some of the new requirements in practice, the
variable costs may be lower than for firms that currently require less
lead auditor involvement. The variable costs are also likely to be
affected by the nature of the engagement, including the extent of
involvement of other auditors (e.g., the number of other auditors used
and the amount of time spent by other auditors), and the level of risk
associated with the audit work performed by other auditors. Finally,
the total variable costs are related to the number of audits using
other auditors.
    Since the total fixed and variable costs of the amendments likely
depend on the interaction of all the factors discussed above, it is not
clear whether these costs, as a percentage of total audit costs, will
be greater for larger or for smaller accounting firms.
    For audits in which the lead auditor divides responsibility for the
audit with another accounting firm, the anticipated impact of the
amendments on the lead auditor's costs is not likely to be significant.
Currently, about 40 audits per year involve divided responsibility, and
the amendments to PCAOB

standards that apply to those scenarios are not as significant as other
amendments.
    In addition to auditors, companies being audited may also incur
costs related to the amendments, both directly and indirectly.
Companies could incur direct costs from engaging with or otherwise
supporting the auditor performing the audit. For example, some
companies could face costs of producing documents and responding to
additional auditor requests for audit evidence, due to more rigorous
evaluation of audit evidence by lead and other auditors. To the extent
that auditors incur higher costs to implement the amendments and are
able to pass on at least part of the increased costs through an
increase in audit fees, companies could incur an indirect cost.\315\
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    \315\ See 2016 Proposal at 40 note 80.
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    In response to the 2016 Proposal, one commenter agreed that the
incremental cost due to the 2016 Proposal is likely to be limited
because some accounting firms already had implemented many aspects of
the 2016 Proposal in their methodology and/or in practice, and because
of the risk-based approach taken in the 2016 Proposal. Another
commenter stated that audit firms not already complying with the
requirements would experience higher costs, but most firms already
performed audits under GAAS standards, and for them the increased costs
would not be prohibitive. In response to the 2021 SRC, two commenters
described potential increased costs when the lead auditor and other
auditor are part of the same network. The commenters suggested that the
potential increased costs would be caused by the inability to
sufficiently leverage common systems of quality control, resulting in
unnecessary effort to understand the other auditor's audit procedures.
As discussed in the 2017 and 2021 SRCs, however, affiliation through a
network does not automatically provide the lead auditor with an
understanding of the other affiliates' processes and experience.\316\
One commenter recommended the PCAOB consider the difficulties
encountered and resources used by firms in complying with PCAOB
standards, AICPA AU-Cs, and IAASB ISAs. The Board's considerations are
discussed below.
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    \316\ See 2017 SRC at 14; 2021 SRC at 24.
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Potential Unintended Consequences
    In addition to the benefits and costs discussed above, the
amendments could have unintended economic impacts. The 2016 Proposal
described a number of potential unintended consequences, resulting in
public comments on those topics and others. This section discusses the
potential unintended consequences as well as the Board's consideration
of such consequences in adopting the amendments.\317\ The discussion
also addresses, where applicable, factors that mitigate the potential
consequences, including revisions to the proposed amendments reflected
in the amendments the Board is adopting and the existence of other
countervailing factors.
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    \317\ In addition to the potential unintended consequences
discussed in this section, potential results of certain other
aspects of the proposed amendments were described by some commenters
as ``unintended.'' These and other comments are discussed in
elsewhere in this release in conjunction with the following aspects
of the final amendments: the sufficiency-of-participation
determination for serving as the lead auditor; other auditors'
compliance with independence and ethics requirements; other
auditors' knowledge, skill, and ability; informing other auditors of
their responsibilities; directing other auditors to perform certain
supervisory procedures in a multi-tiered audit; and dividing
responsibility for the audit.
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Accountability of Other Auditors
    Unlike AS 1205, AS 1201 does not contain a statement that ``the
other auditor remains responsible for the performance of his own work
and for his own report.'' Thus, it is possible that the other auditor
could feel less accountable given that the amendments focus the
responsibility for providing direction and supervision of the other
auditor on the lead auditor. If this occurred, audit quality could
decrease.
    Commenters expressed differing views on the 2016 Proposal's
potential impact on other auditors' accountability. Several commenters
stated that the proposed amendments would not diminish other auditors'
overall accountability. Other commenters stated that if the amendments
are applied correctly, the lead auditor's supervision should hold the
other auditors to a higher level of overall accountability and improve
the overall quality of other auditors' work.
    Other commenters expressed concern that the 2016 Proposal did not
include the statement in AS 1205.03 about other auditors'
responsibility. Omitting this provision, in their view, may be
interpreted as a reduction in the responsibility and accountability of
other auditors, which could have adverse effects on audit quality. Some
commenters recommended retaining the existing provision or including an
analogous requirement to address the other auditors' responsibility.
    To mitigate this potential negative consequence, AS 1015 is being
amended to emphasize that the other auditors are responsible for
performing their work with due professional care.\318\ This amendment
was proposed in the 2017 SRC and supported by commenters. Notably,
under the amended standards, the other auditor remains responsible for
performing its assigned work with due professional care and otherwise
in conformance with PCAOB standards. This responsibility is reflected
in the auditor documentation the other auditor must prepare regarding
the work performed, including written affirmation to the lead auditor
regarding whether the other auditor performed its work in accordance
with the lead auditor's instructions, including applicable PCAOB
standards. In addition, the other auditor's work is subject to greater
oversight by the lead auditor under the amended standards, which will
reduce the other auditor's opportunities for performing insufficient
work without detection. Finally, the other auditor's work continues to
be subject to PCAOB oversight activities due to its participation in
the audit.
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    \318\ The PCAOB's underlying standards governing the work of
other auditors and referred-to auditors will similarly continue to
apply to their work.
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Time of Lead Auditor
    Because lead auditor personnel will be required to perform
additional supervisory responsibilities, such team members might have
less time to perform other work on the same engagement. This could
potentially reduce the likelihood that the auditor detects material
misstatements in the portion of the financial statements for which the
lead auditor performs procedures and could potentially lead to
inefficient allocation of audit resources. Several commenters on the
2016 Proposal agreed that this potential unintended consequence could
arise, adding that the increased planning and supervisory effort
required of the lead auditor could also leave less time for the lead
auditor to consider important issues.
    The Board's inclusion of risk-based supervision requirements in the
amended standards is intended to mitigate the possibility that the lead
auditor will neglect work it intends to perform because of the
attention it devotes to other auditors. In particular, the additional
supervisory procedures required for the lead auditor's supervision of
work performed by other auditors are intended to provide the lead
auditor with a basis for concluding whether the financial statements
are free of material misstatement. Thus, under the amended standards,
the lead auditor

should be focusing its efforts on audit areas with the greatest risk of
material misstatement to the financial statements, whether those areas
are audited by the lead auditor directly or by an other auditor under
the lead auditor's supervision. Further, as lead auditor personnel gain
experience and become more efficient in applying the new requirements
related to other auditors, the likelihood that the lead auditor
misallocates its time and resources should decrease.
Involvement by Other Auditors
    In response to (i) the potential costs or any practical
difficulties of supervising other auditors under the amended standards
or (ii) the sufficiency-of-participation requirements, the lead
auditor, in some circumstances, may decrease the share of work
performed by other auditors and increase the share of its own work.
While this may be an efficient and effective response in certain
circumstances, limiting other auditors' involvement in the engagement
may negatively affect audit quality to the extent the other auditors
possess knowledge of important country-specific information. Two
commenters on the 2016 Proposal agreed that this unintended consequence
may arise.
    This potential outcome, however, would be contrary to the following
requirements in PCAOB standards:
     ``Engagement team members should be assigned to tasks and
supervised commensurate with their level of knowledge, skill, and
ability so that they can evaluate the audit evidence they are
examining.'' \319\
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    \319\ AS 1015.06.
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     ``The knowledge, skill, and ability of engagement team
members with significant engagement responsibilities should be
commensurate with the assessed risks of material misstatement.'' \320\
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    \320\ Paragraph .05a of AS 2301, The Auditor's Responses to the
Risks of Material Misstatement.
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     Firms are required to have policies and procedures in
place that provide reasonable assurance that the firm will undertake
``only those engagements that the firm can reasonably expect to be
completed with professional competence.'' \321\
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    \321\ Paragraph .15a of QC 20, System of Quality Control for a
CPA Firm's Accounting and Auditing Practice.
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    In addition, legal restrictions in some countries that prohibit a
foreign auditor from providing professional services in the country
could limit a foreign lead auditor's ability to take on more work and
assign less work to other auditors in the country. The Board
anticipates that lead auditors will find the appropriate balance
between the lead auditor and other auditor involvement in the audit as
accounting firms gain experience in implementing the new requirements
and seek to maximize the effectiveness and efficiency of audit
engagements.
Occurrence of Divided Responsibility
    Some auditors who currently use an other auditor's work under AS
1205 may view compliance with the supervision requirements of AS 1201
(as amended) as too costly and decide instead to divide responsibility
for the audit. Several commenters on the 2016 Proposal agreed that this
unintended consequence may arise, although some of them added that the
likelihood was low. There are limited research findings available
regarding the division of responsibility,\322\ and it is not clear how
an increase in audits with divided responsibility would affect audit
quality. To provide transparency about such situations, the amendments
require that, in a divided-responsibility scenario, the lead auditor
disclose in its audit report: (i) the part of the audit that is
performed by another accounting firm; (ii) the magnitude of the portion
of the company's financial statements audited by the referred-to
auditor; (iii) the referred-to auditor's name; and (iv) which auditor
(lead or referred-to) has audited the conversion adjustments when the
financial statements of the company and its business unit are prepared
using different financial reporting frameworks.\323\
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    \322\ See 2016 Proposal at 42 and note 84; see also Juan Mao,
Michael Ettredge, and Mary Stone, Group Audits: Are Audit Quality
and Price Associated with the Lead Auditor's Decision to Accept
Responsibility?, 39(2) Journal of Accounting and Public Policy 1
(2020) (examining whether a lead auditor's disclosure of its choice
to accept or decline (i.e., divide) responsibility for the work of
another firm is associated with differences in audit fees or audit
quality, and finding that ``[l]ead auditors accepting responsibility
charge higher audit fees but provide audits of no higher quality,
and possibly of even lower quality'').
    \323\ See paragraphs AS 1206.06d and .08. Rule 2-05 of
Regulation S-X, 17 CFR 210.2-05, includes requirements regarding
filing the referred-to auditor's report with the SEC.
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Impact on Smaller Firms
    The amendments will likely have an economic impact on audits
performed by smaller firms that use other auditors. This is because
smaller firms (i) are less likely to perform today the procedures
described in the amendments and (ii) generally lack the economies of
scale to distribute the additional fixed costs over many audits.\324\
The 2016 Proposal also noted that additional supervisory requirements
could decrease competition in the audit market for audits involving
other auditors if smaller firms are less able to compete with larger
firms.\325\
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    \324\ See discussion above.
    \325\ See 2016 Proposal at 43.
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    Several commenters on the 2016 Proposal agreed that this unintended
consequence may arise. One commenter stated that, for smaller firms,
complying with the proposed supervisory responsibilities may increase
costs to such an extent that some smaller firms may exit the market for
audits involving other auditors. Another commenter said that it would
be harder for smaller firms than for larger firms to meet the proposed
threshold for serving as lead auditor.
    However, as discussed above, staff analysis using Form AP data
shows that smaller firms already perform relatively fewer audits that
involve other accounting firms than larger firms, and when they do,
they use fewer other accounting firms.\326\ Thus, any impact on
competition in the overall audit market is likely to be relatively
small.
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    \326\ See Figures 2 and 3 above.
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    The Board's risk-based and scalable approach to designing the
amendments is also intended to maintain a level playing field for all
auditors choosing to involve other auditors in their audit, regardless
of their size. Scalability is a characteristic of policy that typically
refers to circumstances where requirements are general enough (e.g.,
principles-based) to be adapted effectively and efficiently under
different facts and circumstances. Risk-based requirements are usually
scalable because the necessary level of audit effort varies depending
on the level of complexity and risk. Thus, risk-based requirements are
likely to be relatively efficient (or at least not inefficient),
because the auditor's incentives and discretion are likely to result in
costs being incurred primarily in circumstances involving a
corresponding, and potentially larger, risk-mitigation benefit to
investors.\327\ Under the amendments, the lead auditor would be
required to determine the extent of supervision of other auditors based
on, among other things, the nature of work, and risk of material
misstatement.
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    \327\ See 2017 SRC at 40.
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Benefit From Additional Requirements
    It is possible that some audits (e.g., those previously conducted
under AS 1205) will not benefit from the new requirements. This could
occur, for example, on very simple low-risk audits that involve highly
qualified other auditors. In such circumstances, the

lead auditor could incur incremental costs to comply with the
additional planning and supervisory requirements in the amended
standards without yielding a corresponding benefit to audit quality.
    This inefficient outcome is mitigated by the risk-based and
scalable aspects of the amended standards, which rely on the lead
auditor to make judgments about the nature and extent of supervision of
other auditors based on risks. The Board anticipates that as lead
auditors gain experience implementing the new requirements, they will
make appropriate judgments that are efficient and effective at
achieving the desired level of audit quality. The Board received no
comments on this potential unintended consequence described in the 2016
Proposal.
Alternatives Considered
    The development of this rulemaking involved the consideration of a
number of alternative approaches to address the problems described
above. This section explains (i) why standard setting is preferable to
other policy-making approaches, such as providing interpretive guidance
or enhancing inspection or enforcement efforts; (ii) other standard-
setting approaches that were considered; and (iii) key policy choices
made by the Board in determining the details of the standard-setting
approach in this rulemaking.
Why Standard Setting Is Preferable to Other Policy-Making Approaches
    The Board's policy tools include alternatives to standard setting,
such as issuing additional interpretive guidance or an increased focus
on inspections or enforcement of existing standards. The Board
considered whether providing guidance or increasing inspection or
enforcement efforts would be effective corrective mechanisms to address
concerns with the supervision of other auditors and the sources of
information asymmetry discussed above. The Board concluded that
interpretive guidance, inspections, or enforcement actions alone would
be less effective in achieving the Board's objectives than in
combination with amending the auditing standards. Interpretive guidance
inherently provides additional information about existing standards.
Inspections and enforcement actions take place after insufficient audit
performance (and potential investor harm) has occurred. Devoting
additional resources to guidance, inspections, and enforcement
activities without improving the relevant performance requirements for
auditors would, at best, focus auditors' performance on existing
standards and would not gain the benefits associated with improving the
standards. Two commenters expressed support for an approach that
includes standard setting.\328\ The Board's approach reflects its
conclusion that standard setting is needed to fully achieve the
benefits resulting from improvement in audits involving multiple
auditors.
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    \328\ These commenters also suggested improving the
practicability of proposed requirements by allowing the lead auditor
to seek assistance from other auditors in supervising the audit to a
greater extent than the Board proposed. In response to these and
other comments, the Board made a number of changes in the 2021 SRC
to address the practicability concern, including in connection with
multi-tiered audits.
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Other Standard-Setting Alternatives Considered
    The Board also considered certain standard-setting approaches,
including: (i) retaining the existing framework but requiring the lead
auditor to disclose which standard (AS 1201 or AS 1205) governs the
relationship between the lead auditor and other auditors; (ii) amending
AS 1205 or extending the approach in that standard to cover all
arrangements involving other auditors and referred-to auditors; (iii)
developing a new standard, in addition to the Board's risk assessment
standards, that would address all arrangements with other auditors and
referred-to auditors; or (iv) amending existing standards to address
the oversight of multi-location audit engagements generally (including
multi-location engagements performed by a single firm), in addition to
amending the standards to address the auditor's use of other auditors
and referred-to auditors.
Disclosing Which Standard Applies Under Existing Framework
    The Board considered but is not adopting a requirement that the
lead auditor disclose, in the audit report or elsewhere, whether the
lead auditor applied AS 1205 or AS 1201 in its oversight of the other
auditor. Such a disclosure approach would not achieve the benefits of
applying AS 1201 (as amended) to all audits that involve other
auditors, and inconsistencies between firms in their approaches to the
oversight of other auditors would remain.
    From an economic perspective, it is more efficient and effective to
address the reasons for change described above by amending existing
auditing standards on supervision than by disclosing which standard
applies. The amendments directly address the lead auditor's incentives,
whereas disclosing which one of the standards (before the amendments)
applies would do so indirectly at best. For disclosure to sufficiently
change the lead auditor's incentives, investors would need to apply
significant market pressure on auditors to improve their supervisory
procedures beyond requirements in PCAOB standards (before the
amendments). This approach seems unlikely given the wide dispersion of
share ownership among investors and the costs of engaging in collective
action.
Amending AS 1205
    The Board considered, but is not adopting, two alternative
approaches that would amend rather than rescind AS 1205. The first
approach would have amended AS 1205 to strengthen its oversight
requirements but otherwise retained the existing two-standard framework
in which an engagement involving other auditors could be governed by
either AS 1205 or AS 1201, depending on the circumstances of the
engagement. The second approach would have amended AS 1205 to extend
its application to all arrangements involving other auditors and
referred-to auditors such that AS 1201 would no longer apply.
    The Board determined that the risk-based supervision approach in AS
1201 promotes a more appropriate involvement by the lead auditor than
the approach in AS 1205. The supervisory approach in AS 1201 requires
that the level of supervision be commensurate with the associated
risks, and that would apply to the supervision of the other auditors'
work. From an economic perspective, the risk-based approach, which is
now a well-established and understood auditing practice, requires the
lead auditor to take into account the facts and circumstances of an
audit engagement to inform a variety of resource allocation decisions,
including the nature, timing, and extent of its supervision of other
auditors. This approach enables the lead auditor to better align its
supervisory effort with the level of risk, focusing more attention on
the riskiest areas of the audit and thus provide more risk mitigation
benefit to investors. Similarly, the other auditors' communication of
important and relevant information to the lead auditor allows the lead
auditor to make better-informed decisions regarding the work of the
other auditor.
    In contrast, AS 1205 employs an approach that allows the lead
auditor to use the work of other auditors based on the performance of
certain limited procedures that are not explicitly required to be
tailored for the associated

risks. Thus, the approach of AS 1205 would not address the problems
described in this release as effectively as the supervisory approach of
AS 1201.
Developing a New Standard for All Arrangements with Other Auditors and
Referred-to Auditors
    The Board also considered developing a new, separate standard to
govern all arrangements with other auditors and referred-to auditors.
In that regard, some commenters suggested the PCAOB align a new
standard with the relevant standards of other standard setters such as
the IAASB. Although the IAASB has a separate standard for group audits,
ISA 600, the Board believes that adopting a separate standard in its
auditing standards is not necessary for most audits in which the lead
auditor uses the work of other auditors. (The Board is, however,
adopting a separate standard, AS 1206, to govern divided-responsibility
audits, which are relatively uncommon.) Specifically, the existing
standard on supervision, AS 1201, which is integrated with the Board's
other risk assessment standards, already includes principles-based
requirements that apply to audits involving other auditors in
situations not covered by AS 1205.
    Extending the requirements of AS 1201 to all situations involving
other auditors and adding to AS 1201 more specific requirements for
supervising the other auditor's work is a more efficient way to
incorporate these requirements into the existing framework of PCAOB
auditing standards. In addition, as discussed above, some commenters
supported the Board's objective of establishing requirements for using
other auditors' work that are risk-based and more closely aligned with
the Board's risk assessment standards than existing standards.
Accordingly, this rulemaking takes an integrated approach that involves
enhancing the existing standard through targeted amendments that impose
certain requirements on the lead auditor, rather than creating an
entirely new standard.
Amending To Address Oversight of Multi-Location Engagements
    The Board considered, but is not adopting, amendments to existing
standards that would apply to oversight of multi-location audit
engagements generally (including multi-location engagements performed
by a single firm), in addition to amendments that apply to the
auditor's use of other auditors and referred-to auditors. The Board is
not adopting such amendments because existing PCAOB auditing standards
already specifically address multi-location engagements.\329\
Additional requirements for these audits, along with requirements for
supervising other auditors, could create unnecessary complexity and
redundancy with existing requirements. Finally, the Board through its
oversight has seen less cause for concern regarding single-firm multi-
location engagements compared to audits involving other auditors.
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    \329\ Requirements for multi-location engagements are
specifically addressed in risk assessment standards adopted by the
Board in 2010 and in certain other standards. See, e.g., AS 2101; AS
2105, Consideration of Materiality in Planning and Performing an
Audit; AS 2110, Identifying and Assessing Risks of Material
Misstatement; AS 2301. See also AS 2401, Consideration of Fraud in a
Financial Statement Audit; Paragraphs A60-A67 of AS 1215, Appendix
A: Background and Basis for Conclusions; AS 6115, Reporting on
Whether a Previously Reported Material Weakness Continues to Exist.
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Key Policy Choices
    Given a preference for amending AS 1201, the Board considered
different approaches to addressing key policy issues.
Sufficiency of the Lead Auditor's Participation
    To increase the likelihood that a lead auditor is meaningfully
involved in the audit, the amendments require that the lead auditor
determine the sufficiency of its participation in each audit that
involves other auditors or referred-to auditors.\330\ Sufficient
participation by the lead auditor is required so that the work of all
audit participants is properly planned and supervised, the results of
the work are properly evaluated, and the lead auditor is in a position
to conclude that the financial statements are presented fairly in all
material respects. In evaluating the alternative approaches, the Board
weighed the practical implications of specific criteria or conditions
on the efficiency and effectiveness of the audit. The Board also
evaluated, among other things, relevant information from its oversight
activities and views from Standing Advisory Group (SAG) members.\331\
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    \330\ See paragraphs .06A-.06C of AS 2101.
    \331\ See SAG Meeting Archive (May 18, 2016; Dec. 1, 2016; May
24, 2017; Nov. 30, 2017), available at https://pcaobus.org/about/advisory-groups/archive-advisory/standing-advisory-group/sagmeetingarchive. Transcripts of the relevant portions of SAG