[Federal Register: August 5, 2008 (Volume 73, Number 151)]
[Notices]
[Page 45495-45505]
[DOCID:fr05au08-95]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58259; File No. PCAOB-2008-01]

Public Company Accounting Oversight Board; Notice of Filing of
Proposed Rule on Auditing Standard No. 6, Evaluating Consistency of
Financial Statements and Conforming Amendments

July 30, 2008.
    Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the
``Act''), notice is hereby given that on February 1, 2008, the Public
Company Accounting Oversight Board (the ``Board'' or the ``PCAOB'')
filed with the Securities and Exchange Commission (the ``Commission''
or ``SEC'') the proposed rule described in Items I and II below, which
items have been prepared by the Board. The Commission is publishing
this notice to solicit comments on the proposed rule from interested
persons.

I. Board's Statement of the Terms of Substance of the Proposed Rule

    On January 29, 2008, the Board adopted Auditing Standard No. 6,
Evaluating Consistency of Financial Statements, and amendments to the
Board's interim auditing standards (``the proposed rules''). The
proposed rules text is set out below.

Auditing Standard No. 6

Supersedes AU Secs. 420 and 9420

Evaluating Consistency of Financial Statements

Consistency and the Auditor's Report on Financial Statements

    1. This standard establishes requirements and provides direction
for the auditor's evaluation of the consistency of the financial
statements, including changes to previously issued financial
statements, and the effect of that evaluation on the auditor's report
on the financial statements.
    2. To identify consistency matters that might affect the report,
the auditor should evaluate whether the comparability of the financial
statements between periods has been materially affected by changes in
accounting principles or by material adjustments to previously issued
financial statements for the relevant periods.
    3. The periods covered in the auditor's evaluation of consistency
depend on the periods covered by the auditor's report on the financial
statements. When the auditor reports only on the current period, he or
she should evaluate whether the current-period financial statements are
consistent with those of the preceding period. When the auditor reports
on two or more periods, he or she should evaluate consistency between
such periods and the consistency of such periods with the period prior
thereto if such prior period is presented with the financial statements
being reported upon.\1\ The auditor also should evaluate whether the
financial statements for periods described in this paragraph are
consistent with previously issued financial statements for the
respective periods.\2\
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    \1\ For example, assume that a company presents comparative
financial statements covering three years and has a change in
auditors. In the first year in which the successor auditor reports,
the successor auditor evaluates consistency between the year on
which he or she reports and the immediately preceding year. In the
second year in which the successor auditor reports, the successor
auditor would evaluate consistency between the two years on which he
or she reports and between those years and the earliest year
presented.
    \2\ When a company uses retrospective application, as defined in
Statement of Financial Accounting Standards No. 154, Accounting
Changes and Error Corrections (``SFAS No. 154''), to account for a
change in accounting principle, the financial statements presented
generally will be consistent. However, the previous years' financial
statements presented with the current year's financial statements
will reflect the change in accounting principle and, therefore, will
appear different from those previous years' financial statements on
which the auditor previously reported. This standard clarifies that
the auditor's evaluation of consistency should encompass previously
issued financial statements for the relevant periods.

    Note: The term ``current period'' means the most recent year, or
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period of less than one year, upon which the auditor is reporting.

    4. The auditor should recognize the following matters relating to
the consistency of the company's financial statements in the auditor's
report if those matters have a material effect on the financial
statements:
    a. A change in accounting principle
    b. An adjustment to correct a misstatement in previously issued
financial statements.\3\
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    \3\ The term ``error,'' as used in SFAS No. 154, is equivalent
to ``misstatement,'' as used in the auditing standards.
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Change in Accounting Principle

    5. A change in accounting principle is a change from one generally
accepted accounting principle to another generally accepted accounting
principle when (1) there are two or more generally

accepted accounting principles that apply, or when (2) the accounting
principle formerly used is no longer generally accepted. A change in
the method of applying an accounting principle also is considered a
change in accounting principle.\4\
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    \4\ See SFAS No. 154, paragraph 2c.

    Note: A change from an accounting principle that is not
generally accepted to one that is generally accepted is a correction
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of a misstatement.

    6. The auditor should evaluate and report on a change in accounting
estimate effected by a change in accounting principle like other
changes in accounting principle.\5\ In addition, the auditor should
recognize a change in the reporting entity \6\ by including an
explanatory paragraph in the auditor's report, unless the change in
reporting entity results from a transaction or event. A change in
reporting entity that results from a transaction or event, such as the
creation, cessation, or complete or partial purchase or disposition of
a subsidiary or other business unit does not require recognition in the
auditor's report.
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    \5\ SFAS No. 154, paragraph 2e, defines a ``change in accounting
estimate effected by a change in accounting principle'' as ``a
change in accounting estimate that is inseparable from the effect of
a related change in accounting principle.''
    \6\ ``Change in reporting entity'' is a change that results in
financial statements that, in effect, are those of a different
reporting entity. See SFAS No. 154, paragraph 2f.
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    7. The auditor should evaluate a change in accounting principle to
determine whether--
    a. The newly adopted accounting principle is a generally accepted
accounting principle,
    b. The method of accounting for the effect of the change is in
conformity with generally accepted accounting principles,
    c. The disclosures related to the accounting change are
adequate,\7\ and
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    \7\ Newly issued accounting pronouncements usually set forth the
method of accounting for the effects of a change in accounting
principle and the related disclosures. SFAS No. 154 sets forth the
method of accounting for the change and the related disclosures when
there are no specific requirements in the new accounting
pronouncement.
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    d. The company has justified that the alternative accounting
principle is preferable.\8\
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    \8\ The issuance of an accounting pronouncement that requires
use of a new accounting principle, interprets an existing principle,
expresses a preference for an accounting principle, or rejects a
specific principle is sufficient justification for a change in
accounting principle, as long as the change in accounting principle
is made in accordance with the hierarchy of generally accepted
accounting principles. See SFAS No. 154, paragraph 14.
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    8. A change in accounting principle that has a material effect on
the financial statements should be recognized in the auditor's report
on the audited financial statements. If the auditor concludes that the
criteria in paragraph 7 have been met, the auditor should add an
explanatory paragraph to the auditor's report, as described in AU sec.
508, Reports on Audited Financial Statements. If those criteria are not
met, the auditor should treat this accounting change as a departure
from generally accepted accounting principles and address the matter as
described in AU sec. 508.

    Note: If a company's financial statements contain an investment
accounted for by the equity method, the auditor's evaluation of
consistency should include consideration of the investee. If the
investee makes a change in accounting principle that is material to
the investing company's financial statements, the auditor should add
an explanatory paragraph (following the opinion paragraph) to the
auditor's report, as described in AU section 508.

Correction of a Material Misstatement in Previously Issued Financial
Statements

    9. The correction of a material misstatement in previously issued
financial statements should be recognized in the auditor's report on
the audited financial statements through the addition of an explanatory
paragraph, as described in AU sec. 508.
    10. The accounting pronouncements generally require certain
disclosures relating to restatements to correct misstatements in
previously issued financial statements. If the financial statement
disclosures are not adequate, the auditor should address the inadequacy
of disclosure as described in AU sec. 431, Adequacy of Disclosure in
Financial Statements, and AU sec. 508.

Change in Classification

    11. Changes in classification in previously issued financial
statements do not require recognition in the auditor's report, unless
the change represents the correction of a material misstatement or a
change in accounting principle. Accordingly, the auditor should
evaluate a material change in financial statement classification and
the related disclosure to determine whether such a change also is a
change in accounting principle or a correction of a material
misstatement. For example, certain reclassifications in previously
issued financial statements, such as reclassifications of debt from
long-term to short-term or reclassifications of cash flows from the
operating activities category to the financing activities category,
might occur because those items were incorrectly classified in the
previously issued financial statements. In such situations, the
reclassification also is the correction of a misstatement. If the
auditor determines that the reclassification is a change in accounting
principle, he or she should address the matter as described in
paragraphs 7 and 8 and AU sec. 508. If the auditor determines that the
reclassification is a correction of a material misstatement in
previously issued financial statements, he or she should address the
matter as described in paragraphs 9 and 10 and AU sec. 508.

Amendments to PCAOB Auditing Standards

Auditing Standards

AU Sec. 328, ``Auditing Fair Value Measurements and Disclosures''

    Statement on Auditing Standards (``SAS'') No. 101, ``Auditing Fair
Value Measurements and Disclosures,'' (AU sec. 328, ``Auditing Fair
Value Measurements and Disclosures''), as amended, is amended as
follows:
    a. The text of footnote 4 to paragraph .19 is replaced with the
following: Statement of Financial Accounting Standard No. 157, Fair
Value Measurements, states that a change in valuation technique or its
application is appropriate if the change results in a measurement that
is equally or more representative of fair value in the circumstances.

AU Sec. 410, ``Adherence to Generally Accepted Accounting Principles''

    SAS No. 1, ``Codification of Auditing Standards and Procedures,''
section 410 (AU sec. 410, ``Adherence to Generally Accepted Accounting
Principles''), as amended, is amended as follows:
    a. Paragraph .02 is replaced with following paragraph, and the
reference to footnote 1 is moved to the end of the new paragraph .02.
    The fourth standard of reporting is:
    The report shall either contain an expression of opinion regarding
the financial statements, taken as a whole, or an assertion to the
effect that an opinion cannot be expressed. When an overall opinion
cannot be expressed, the reasons therefor should be stated. In all
cases where an auditor's name is associated with financial statements,
the report should contain a clear-cut indication of the character of
the auditor's work, if any, and the degree of responsibility the
auditor is taking.

AU Sec. 411, ``The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles''

    SAS No. 69, ``The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles'' (AU

sec. 411, ``The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles''), as amended, is amended as follows:
    a. The third sentence of paragraph .01 is replaced with the
following:
    The purpose of this section is to explain the meaning of ``present
fairly'' as used in the phrase ``present fairly * * * in conformity
with generally accepted accounting principles.'' In applying this
section, the auditor should look to the requirements of the Securities
and Exchange Commission for the company under audit with respect to the
accounting principles applicable to that company.
    b. Paragraphs .02, .05, .07, and .09-.18 are deleted.

AU Sec. 9411, ``The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles, Auditing Interpretations of
Section 411''

    Auditing Interpretation No. 3, ``The Auditor's Consideration of
Management's Adoption of Accounting Principles for New Transactions or
Events'' of the auditing interpretations of AU sec. 411 (AU sec.
9411.11-.15) is deleted.

AU Sec. 420, ``Consistency of Application of Generally Accepted
Accounting Principles,'' and AU Sec. 9420, ``Consistency of Application
of Generally Accepted Accounting Principles, Auditing Interpretations
of Section 420''

    SAS No. 1, ``Codification of Auditing Standards and Procedures,''
section 420 (AU sec. 420, ``Consistency of Application of Generally
Accepted Accounting Principles''), as amended, and the related auditing
interpretations (AU sec. 9420) are superseded by PCAOB Auditing
Standard No. 6, Evaluating Consistency of Financial Statements.

AU Sec. 431, ``Adequacy of Disclosure in Financial Statements''

    SAS No. 32, ``Adequacy of Disclosure in Financial Statements'' (AU
sec. 431, ``Adequacy of Disclosure in Financial Statements'') is
amended as follows:
    a. Footnote 1 is deleted.
    b. Paragraph .04 is deleted.

AU Sec. 508, ``Reports on Audited Financial Statements''

    SAS No. 58, ``Reports on Audited Financial Statements'' (AU sec.
508, ``Reports on Audited Financial Statements''), as amended, is
amended as follows:
    a. In Paragraph .03, footnote 2 is deleted.
    b. In Paragraph .11, item .11b is deleted; item .11c is reordered
as .11b; .11d is reordered as .11c; the paragraph references in .11c
(formerly .11d) to paragraphs .16 through .18 are replaced with
paragraph references .17A through .17E; and a new item .11d is added as
follows:
    ``A material misstatement in previously issued financial statements
has been corrected (paragraphs .18A through .18C).''
    c. Paragraphs .14-.15 are deleted, along with the preceding heading
``Departure From a Promulgated Accounting Principle,'' and the note
following the paragraph.
    d. The text of paragraph .16 is replaced with the following:
    The auditor should recognize the following matters relating to the
consistency of the company's financial statements in the auditor's
report if those matters have a material effect on the financial
statements:
    a. A change in accounting principle
    b. An adjustment to correct a misstatement in previously issued
financial statements
    e. Paragraphs .17-.18 and related footnotes 12 and 13 are replaced
with the following:

Change in Accounting Principle

    .17A As discussed in PCAOB Auditing Standard No. 6, Evaluating
Consistency of Financial Statements, the auditor should evaluate a
change in accounting principle to determine whether (1) the newly
adopted accounting principle is a generally accepted accounting
principle, (2) the method of accounting for the effect of the change is
in conformity with generally accepted accounting principles, (3) the
disclosures related to the accounting change are adequate, and (4) the
company has justified that the alternative accounting principle is
preferable.12 A change in accounting principle that has a
material effect on the financial statements should be recognized in the
auditor's report on the audited financial statements through the
addition of an explanatory paragraph following the opinion paragraph.
If the auditor concludes that the criteria in this paragraph have been
met, the explanatory paragraph in the auditor's report should include
identification of the nature of the change and a reference to the note
disclosure describing the change.

    12 The issuance of an accounting pronouncement that
requires use of a new accounting principle, interprets an existing
principle, expresses a preference for an accounting principle, or
rejects a specific principle is sufficient justification for a
change in accounting principle, as long as the change in accounting
principle is made in accordance with the hierarchy of generally
accepted accounting principles. See FASB Statement 154, paragraph
14.

    .17B Following is an example of an explanatory paragraph for a
change in accounting principle resulting from the adoption of a new
accounting pronouncement:
    As discussed in Note X to the financial statements, the company has
changed its method of accounting for [describe accounting method
change] in [year(s) of financial statements that reflect the accounting
method change] due to the adoption of [name of accounting
pronouncement].
    .17C Following is an example of an explanatory paragraph when the
company has made a change in accounting principle other than a change
due to the adoption of a new accounting pronouncement.
    As discussed in Note X to the financial statements, the company has
elected to change its method of accounting for [describe accounting
method change] in [year(s) of financial statements that reflect the
accounting method change].
    .17D The explanatory paragraph relating to a change in accounting
principle should be included in reports on financial statements in the
year of the change and in subsequent years until the new accounting
principle is applied in all periods presented. If the accounting change
is accounted for by retrospective application to the financial
statements of all prior periods presented, the additional paragraph is
needed only in the year of the change.
    .17E If the auditor concludes that the criteria in paragraph .17A
for a change in accounting principle are not met, the auditor should
consider the matter to be a departure from generally accepted
accounting principles and, if the effect of the change in accounting
principle is material, issue a qualified or adverse opinion.

Correction of a Material Misstatement in Previously Issued Financial
Statements

    .18A Correction of a material misstatement in previously issued
financial statements should be recognized in the auditor's report
through the addition of an explanatory paragraph following the opinion
paragraph.13 The explanatory paragraph should include (1) a
statement that the previously issued financial statements have been
restated for the correction of a misstatement in the respective period
and (2) a reference to the company's disclosure of the correction of
the misstatement. Following is an example of an appropriate explanatory
paragraph when there has been a correction of a

material misstatement in previously issued financial statements.
    As discussed in Note X to the financial statements, the 20X2
financial statements have been restated to correct a misstatement.

    13 The directions in paragraphs .68-.69 apply when
comparative financial statements are presented and the opinion on
the prior-period financial statements differs from the opinion
previously expressed.

    .18B This type of explanatory paragraph in the auditor's report
should be included in reports on financial statements when the related
financial statements are restated to correct the prior material
misstatement. The paragraph need not be repeated in subsequent years.
    .18C The accounting pronouncements generally require certain
disclosures relating to restatements to correct a misstatement in
previously issued financial statements. If the financial statement
disclosures are not adequate, the auditor should address the lack of
disclosure as discussed beginning at paragraph .41 and in AU sec. 431.
    f. Paragraph .50 is deleted.
    g. The text of paragraph .51 is replaced with the following:
    Departures from generally accepted accounting principles related to
changes in accounting principle. Paragraph .17A states the criteria for
evaluating a change in accounting principle. If the auditor concludes
that the criteria have not been met, he or she should consider that
circumstance to be a departure from generally accepted accounting
principles and, if the effect of the accounting change is material,
should issue a qualified or adverse opinion.
    h. In paragraph .52:
     The first three sentences of the paragraph are replaced
with the following:
    The accounting standards indicate that a company may make a change
in accounting principle only if it justifies that the allowable
alternative accounting principle is preferable. If the company does not
provide reasonable justification that the alternative accounting
principle is preferable, the auditor should consider the accounting
change to be a departure from generally accepted accounting principles
and, if the effect of the change in accounting principle is material,
should issue a qualified or adverse opinion. The following is an
example of a report qualified because a company did not provide
reasonable justification that an alternative accounting principle is
preferable:
     In the second sentence of the first paragraph of the
example report, the phrase ``for making this change'' is replaced with
the phrase ``that this accounting principle is preferable.''
    In the text of footnote 17, the first two sentences are deleted;
the word, ``However'' is deleted at the beginning of the third
sentence; the word ``because'' at the beginning of the third sentence
is capitalized; the phrase ``the middle paragraph'' is replaced with
``this paragraph;'' and the references to paragraphs ``.16 through
.18'' are replaced with references to paragraphs ``17A through 17E.''
    i. The text of paragraph .57 is replaced with the following:
    If the auditor issues a qualified or adverse opinion because the
company has not justified that an allowable accounting principle
adopted in an accounting change is preferable, as described in
paragraph .52, the auditor should continue to express that opinion on
the financial statements for the year of change as long as those
financial statements are presented and reported on. However, the
auditor's qualified or adverse opinion relates only to the accounting
change and does not affect the status of a newly adopted principle as a
generally accepted accounting principle.
    Accordingly, while expressing a qualified or adverse opinion for
the year of change, the independent auditor's opinion regarding the
subsequent years' statements need not express a qualified or adverse
opinion on the use of the newly adopted principle in subsequent
periods.
    j. In the text of footnote 19 to paragraph .59, ``(b)'' is added to
the beginning of the list of subsections.
    k. The first sentence of footnote 20 to paragraph .62 is deleted.
    l. In the second sentence of footnote 25 to paragraph .67, replace
the phrase ``section 420, Consistency of Application of Generally
Accepted Accounting Principles,'' with the phrase ``PCAOB Auditing
Standard No. 6, Evaluating Consistency of Financial Statements''.
    m. In the second sentence of paragraph .69:
     Item (c) is inserted as follows:
    (c) if applicable, a statement that the previously issued financial
statements have been restated for the correction of a misstatement in
the respective period,
     Item (c) is changed to (d)
     Item (e) is inserted as follows:
    (e) if applicable, a reference to the company's disclosure of the
correction of the misstatement,
     Item (d) is changed to (f) and the words ``the fact'' are
inserted at the beginning of the item.
    n. In the third sentence of paragraph .73, the word ``restated'' is
replaced with the word ``adjusted.''
    o. In paragraph .74:
     In the first sentence of the third text paragraph, the
word ``restated'' is replaced with the word ``adjusted,'' and the word
``restatement'' is replaced with the words ``the adjustments.''
     In the second sentence of the third text paragraph, the
word ``restatement'' is deleted, and the word ``his'' is replaced with
the words ``the auditor's.''

AU sec. 561, Subsequent Discovery of Facts Existing at the Date of the
Auditor's Report

    SAS No. 1, ``Codification of Auditing Standards and Procedures,''
section 561, ``Subsequent Discovery of Facts Existing at the Date of
Report,'' as amended, is amended as follows:
    a. The text of footnote 3 to paragraph .06 is replaced with the
following: See paragraphs 26 and 27 of Accounting Principles Board
Opinion No. 9 and paragraphs 25 and 26 of FASB Statement No. 154,
regarding disclosure of adjustments applicable to prior periods.

II. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rule

    In its filing with the Commission, the Board included statements
concerning the purpose of, and basis for, the proposed rule and
discussed any comments it received on the proposed rule. The text of
these statements may be examined at the places specified in Item IV
below. The Board has prepared summaries, set forth in sections A, B,
and C below, of the most significant aspects of such statements.

A. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rule

(a) Purpose
    Section 103(a) of the Act directs the Board, by rule, to establish,
among other things, ``auditing and related attestation standards * * *
to be used by registered public accounting firms in the preparation and
issuance of audit reports, as required by th[e] Act or the rules of the
Commission, or as may be necessary or appropriate in the public
interest or for the protection of investors.'' The Board proposed
certain changes to its auditing standards in response to two actions of
the Financial Accounting Standards Board (``FASB'').
    First, in May 2005, the FASB issued Statement of Financial
Accounting Standards (``SFAS'') No. 154, Accounting Changes and Error

Corrections,\9\ which superseded Accounting Principles Board (``APB'')
Opinion No. 20, Accounting Changes.\10\ SFAS No. 154 establishes,
unless impracticable, retrospective application as the required method
for reporting a change in accounting principle in the absence of
explicit transition requirements specific to a newly adopted accounting
principle. SFAS No. 154 also redefines the term ``restatement'' to
refer only to ``the process of revising previously issued financial
statements to reflect the correction of an error in those financial
statements.'' \11\ Under SFAS No. 154, therefore, the term
``restatement'' does not refer to changes made to previously issued
financial statements to reflect a change in accounting principle.
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    \9\ Financial Accounting Standards Board (``FASB''), Statement
of Financial Accounting Standards (``SFAS'') No. 154, Accounting
Changes and Error Corrections (2005) (``SFAS No. 154'').
    \10\ Accounting Principles Board (``APB'') Opinion No. 20,
Accounting Changes (1971). SFAS No. 154 also superseded SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements.
    \11\ See SFAS No. 154, paragraph 2j.
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    AU sec. 420, Consistency of Application of Generally Accepted
Accounting Principles, the Board's interim standard on the auditor's
responsibilities for evaluating the consistency of the application of
generally accepted accounting principles (``GAAP''), generally
reflected the provisions of APB Opinion No. 20, which was superseded by
SFAS No. 154. To better align the Board's standards with the new
accounting standard, the Board adopted a new auditing standard on
evaluating consistency, which will supersede AU sec. 420, and
conforming amendments to AU sec. 508, Reports on Audited Financial
Statements, of its interim auditing standards.
    Second, the FASB has also issued an exposure draft of a proposed
Statement of Financial Accounting Standards, The Hierarchy of Generally
Accepted Accounting Principles.\12\ The FASB's proposed standard would
incorporate the hierarchy found in the auditing standards into the
accounting standards. Historically, a description of the GAAP hierarchy
has resided only in the auditing standards. Because the GAAP hierarchy
identifies the sources of accounting principles and the framework for
selecting principles to be used in preparing financial statements, the
Board believed that these requirements are more appropriately located
in the accounting standards. Accordingly, the Board adopted amendments
to its auditing standards to remove the GAAP hierarchy.\13\
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    \12\ FASB, Proposed Statement of Financial Accounting Standards,
The Hierarchy of Generally Accepted Accounting Principles, Exposure
Draft (April 2005).
    \13\ If the amendments are approved by the SEC, the effective
date for the removal of the GAAP hierarchy from the auditing
standards will be 60 days after the standard and amendments are
approved by the SEC. The Board has coordinated with the FASB and
understands that the FASB intends to coincide the effective date of
its standard on the GAAP hierarchy with that of the PCAOB.
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    The proposed standard and amendments to the Board's interim
standards are intended to update and clarify the auditing standards in
light of SFAS No. 154 and the FASB's proposal on the GAAP hierarchy. In
particular, these updates and clarifications should enhance the clarity
of auditor reporting on accounting changes and corrections of
misstatements by distinguishing between these events.
(b) Statutory Basis
    The statutory basis for the proposed rule is Title I of the Act.

B. Board's Statement on Burden on Competition

    The Board does not believe that the proposed rules will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rules would apply
equally to all registered public accounting firms and their associated
persons.

C. Board's Statement on Comments on the Proposed Rule Received From
Members, Participants or Others

    The Board released the proposed rules for public comment in PCAOB
Release No. 2007-003 (April 3, 2007). A copy of PCAOB Release No. 2007-
003 and the comment letters received in response to the PCAOB's request
for comment are available on the PCAOB's Web site at http://
www.pcaobus.org. The Board received 11 written comments. The Board has
carefully considered all comments it has received. In response to the
written comments received, the Board has clarified and modified certain
aspects of the proposed rules, as discussed below.
Evaluating Consistency
    Under Auditing Standard No. 6, auditors are required to evaluate
the consistency of a company's financial statements and report on
inconsistencies. The new standard updates these requirements and aligns
them more closely with SFAS No. 154 \14\ by requiring the auditor's
report to recognize a company's correction of a material misstatement,
regardless of whether it involves the application of an accounting
principle. Based on a discussion at an October 2005 meeting of the
Board's Standing Advisory Group, the Board understands that this
requirement is consistent with current practice. The new standard
focuses on the auditor's responsibilities regarding events that warrant
recognition in the auditor's report on the financial statements--
changes in accounting principles and corrections of misstatements in
previously issued financial statements.\15\ The standard also clarifies
that the auditor's report should indicate whether an adjustment to
prior-period financial statements results from a change in accounting
principle or the correction of a misstatement.
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    \14\ Because SFAS No. 154 provides comprehensive, authoritative
accounting guidance on changes in accounting principle and
corrections of errors, Auditing Standard No. 6 omits the accounting
guidance that was included in AU sec. 420.
    \15\ AU sec. 420 also required recognition of those events.
However, it only required recognition in the auditor's report of the
correction of a misstatement involving an accounting principle. In
addition, unlike AU sec. 420, the new standard does not describe the
accounting changes that do not require recognition in the auditor's
report.
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Materiality
    There were several comments on materiality. Some commenters
suggested that the standard should specifically state that the auditor
need not recognize the correction of a misstatement that is immaterial
to the previously issued financial statements. Another suggested that
the standard should remind the auditor that professional judgment is
required to evaluate consistency. Another commenter said that
additional guidance on materiality as applied to individual matters in
the financial statements would be helpful in applying the standard.
Others suggested that clarity would be improved by inserting the word
``material'' in several places.
    In general, the Board's view is that the purpose of the standard is
to provide direction on evaluating consistency; for example, the
accounting periods the auditor should evaluate, the recognition in the
auditor's report of consistency matters prescribed by the accounting
standards, and the related audit reporting requirements. Because an
audit is predicated on the use of reasoned judgment and the
consideration of materiality in planning, performing, and reporting on
the audit, the Board does not believe it is necessary for this standard
to specifically direct the auditor to exercise judgment and apply
materiality. Further, materiality is a concept that is defined under
the federal

securities laws, and it is not the objective of this standard to alter
or interpret that concept.
    The Board did agree that clarity could be improved in some areas by
inserting the word ``material'' to modify the word ``misstatement.''
The Board added ``material'' to AU secs. 508.18A and B to be consistent
with paragraph 4 of Auditing Standard No. 6. However, AU sec. 508.18C
does not include ``material'' because that sentence summarizes the SFAS
No. 154 requirement for correcting a misstatement, which does not
directly mention materiality.
Periods Covered by the Evaluation of Consistency
    The new standard describes the scope of the required evaluation of
consistency in terms that are similar to the description in AU sec.
420. Under the new standard, when the auditor reports only on the
current period, the auditor should evaluate whether the financial
statements of the current period are consistent with those of the
preceding period. When the auditor reports on two or more years, the
auditor should evaluate whether the financial statements reported on
are consistent with each other and with the prior year's financial
statements, if presented. For example, assume that a company presents
comparative financial statements covering three years and has a change
in auditors. In the first year in which the successor auditor reports,
the successor auditor evaluates consistency between the year on which
he or she reports and the immediately preceding year. In the second
year in which the successor auditor reports, the successor auditor
would evaluate consistency between the two years on which he or she
reports and between those years and the earliest year presented. In
response to comments, the Board added this example to the final
standard.
    When a company uses retrospective application, as defined in SFAS
No. 154, to account for a change in accounting principle, the financial
statements presented generally will be consistent. However, the
previous years' financial statements presented with the current year's
financial statements will reflect the change in accounting principle
and, therefore, will appear different from those previous years'
financial statements on which the auditor previously reported. For
example, consider a company that adopts a new accounting standard in
2007 that requires retrospective application to 2006 and 2005. The
financial statements for 2006 and 2005 will be consistent, as presented
with 2007. However, the financial statements for the years 2006 and
2005 that were issued a year earlier will not reflect the retrospective
application and hence will not be consistent with 2007 and will be
different from the 2006 and 2005 financial statements that are
presented with 2007. The new standard clarifies that the auditor's
evaluation of consistency should encompass previously issued financial
statements for the relevant periods.
    Paragraph 3 of the proposed standard described the financial
statement periods covered by the evaluation of consistency. The third
sentence of that paragraph was intended to be a clarification of the
requirement in AU sec. 420.22 regarding the evaluation of two or more
years. However, some commenters found the third sentence of paragraph 3
to be confusing and recommended retaining the language in AU sec.
420.22, unless the Board had intended to change the auditor's
responsibilities for evaluating the consistency of GAAP. Because the
Board wanted to be clear that the auditor's responsibilities had not
changed, the Board decided to retain the original sentence from AU sec.
420.22, with some changes, instead of the proposed third sentence of
paragraph 3. The inserted sentence, adapted from AU sec. 420.22, reads
as follows (additions are in italics and deletions are in brackets):

    When the [independent] auditor reports on two or more periods
[years], he or she should evaluate [address the] consistency [of the
application of accounting principles] between such periods [years]
and the consistency of such periods [years] with the period [year]
prior thereto if such prior period [year] is presented with the
financial statements being reported upon.

The Board did not include the reference to ``the application of
accounting principles'' because paragraph 3 also relates to the
auditor's evaluation of a company's correction of a material
misstatement, regardless of whether it involves the application of an
accounting principle. The Board also used the word ``evaluate'' because
it describes the auditor's responsibilities consistently with the rest
of the paragraph.
    Two commenters suggested that the last sentence of proposed
paragraph 3, which described the auditor's responsibility to evaluate
whether the financial statements are consistent with previously issued
financial statements for the same period, was confusing and
unnecessary. These commenters suggested deleting the last sentence of
paragraph 3. In addition, one commenter suggested that paragraph 3 of
the proposed standard could be clarified by including the explanatory
language from the proposing release regarding retrospective application
under SFAS No. 154. As discussed above, the new standard is intended to
clarify that the auditor's evaluation of consistency should include an
evaluation of previously issued financial statements for the relevant
periods. Accordingly, the Board believed that the final sentence of
paragraph 3 is necessary. However, the Board agreed that including the
suggested explanatory language from the proposing release regarding
retrospective application would clarify the paragraph and has added
that language as a footnote to paragraph 3.
Reference to Application of Accounting Principles
    Consistent with the discussion above related to paragraph 3 of the
proposed standard, the Board also removed the reference to
``application of accounting principles'' from the first paragraph of
Auditing Standard No. 6. Because the auditor's evaluation of
consistency under this standard includes errors not involving an
accounting principle, the consistency evaluation is broader than that
described under the second standard of reporting. Accordingly, the
Board also removed the reference to the second standard of reporting
from paragraph 2 of Auditing Standard No. 6.
Change in Accounting Principle
    The new standard requires the auditor to evaluate a change in
accounting principle \16\ that has a material effect on the financial
statements to determine whether: (1) The newly adopted accounting
principle is a generally accepted accounting principle, (2) the method
of accounting for the effect of the change is in conformity with GAAP,
(3) the disclosures related to the accounting change are adequate, and
(4) the company justifies that the alternative accounting principle is
preferable,\17\ as required by SFAS No. 154.\18\ Under the amendments
to AU

sec. 508, if the four criteria are met,\19\ the auditor would recognize
the change in accounting principle in the auditor's report through the
addition of an explanatory paragraph consisting of an identification of
the nature of the change and a reference to the issuer's note
disclosure describing the change. If those criteria are not met, the
auditor would issue a qualified or adverse opinion.\20\
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    \16\ The proposed and final standards use the definition of a
change in accounting principle found in SFAS No. 154, paragraph 2c.
    \17\ In certain circumstances, SEC rules require issuers to file
a letter from the auditor indicating whether or not a change is to
an alternative accounting principle that is preferable. See Rule 10-
01(b)(6) of Regulation S-X, 17 CFR 210.10-01(b)(6).
    \18\ Under SFAS No. 154, the issuance of an accounting
pronouncement that requires use of a new accounting principle,
interprets an existing principle, expresses a preference for an
accounting principle, or rejects a specific principle is sufficient
justification for a change in accounting principle as long as the
change in accounting principle is made in accordance with the GAAP
hierarchy. See SFAS No. 154, paragraph 14.
    \19\ The auditor has substantially the same responsibility for
evaluating a change in accounting principle as under AU sec. 431,
Adequacy of Disclosure in Financial Statements, and paragraph .50 of
AU sec. 508, Reports on Audited Financial Statements. The language
in Auditing Standard No. 6 has, however, been updated to be
consistent with SFAS No. 154.
    \20\ This responsibility is substantially unchanged from AU sec.
508.51.
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    Some commenters recommended that the Board reconsider whether it
was necessary for the auditor to recognize in the audit report changes
that result when a company is required to adopt a newly issued
accounting standard. They indicated that the significance of a
company's discretionary change in accounting principle may be diluted
if the auditor recognizes both discretionary changes and those changes
in accounting principles required by a newly-issued standard in the
report. Another commenter suggested that the auditor should not be
required to include an explanatory paragraph in the audit report when
changes in accounting principle have been applied retrospectively
because, in such cases, the financial statements included in the filing
will appear consistent. As noted above, the Board believes that it is
important for investors to be informed when the prior year financial
statements presented with the current year are different from
previously issued financial statements. In addition, the Board believes
that the different language in the auditor's report for discretionary
changes and those required by a newly-issued standard provides
sufficient notification to investors of the general nature of the
change. Therefore, the Board adopted the requirement as proposed.\21\
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    \21\ In addition, one commenter suggested that the standard
include an example of a change in the method of applying an
accounting principle. The final standard, like the proposed
standard, notes that under SFAS No. 154 a change in the method of
applying an accounting principle is also a change in accounting
principle. While the Board believes that it is helpful for the
standard to reference the accounting requirement, it also believes
that it is not appropriate for the auditing standard to provide
accounting guidance.
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    One commenter suggested that the proposed standard deleted useful
information about a change in accounting principle that also involves a
change in an estimate. The proposed standard did not carry forward the
requirement of AU sec. 420.13 that the auditor should recognize in his
or her report a change in accounting principle that is inseparable from
a change in estimate. After considering this comment, the Board
concluded that the requirement in AU sec. 420.13 does result in useful
information being included in the auditor's report. Accordingly, the
Board updated the language in AU sec. 420 to reflect the term used in
SFAS 154, and included the requirement in Auditing Standard No. 6.\22\
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    \22\ The new standard uses the term ``change in accounting
estimate effected by a change in accounting principle,'' which is
defined in SFAS No. 154 as ``a change in accounting estimate that is
inseparable from the effect of a related change in accounting
principle.''
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    Some commenters asked the Board to clarify the reporting
requirement related to a change in reporting entity. According to AU
sec. 420.08, a change in reporting entity resulting from a transaction
or event, such as the creation, cessation, or complete or partial
purchase or disposition of a subsidiary or other business unit, does
not require that the auditor include an explanatory paragraph in the
auditor's report. Under the proposed standard, the auditor may have
been required to report on, for example, the disposition of a
subsidiary or business unit because SFAS No. 154 (and its predecessor,
APB Opinion No. 20) did not specifically exempt such a transaction from
the definition of a change in reporting entity. Generally, dispositions
or spin-offs have specific disclosure requirements in the accounting
standards and the Board did not intend to change practice and require
the auditor to report on these events through an explanatory paragraph.
Accordingly, the Board carried forward the requirement from AU sec.
420.08 regarding a transaction or event. In addition, the Board also
added a reference to paragraph 2f in SFAS No. 154, which describes a
change in reporting entity, as suggested by some commenters.
    In response to comments, the Board also modified paragraph 8 of the
proposed standard, which provided direction for reporting a change in
accounting principle. Some commenters noted that the proposed
conforming amendments to AU sec. 508.17 had a more clearly stated
version of the number of years that the auditor is required to include
an explanatory paragraph related to a change in principle than did
footnote 5 to paragraph 8. After considering the commenters'
recommendation that the language in the footnote be changed, the Board
decided that the footnote was not necessary because paragraph 8
referred the auditor directly to the reporting requirements in AU sec.
508. The Board therefore removed footnote 5 from the final standard.
Correction of a Material Misstatement in Previously Issued Financial
Statements
    Under Auditing Standard No. 6, the correction of a material
misstatement in previously issued financial statements (i.e., a
``restatement'') is recognized in the auditor's report through the
addition of an explanatory paragraph. Under the conforming amendments
to AU sec. 508, the explanatory paragraph in the auditor's report
regarding a restatement should include (1) a statement that the
previously issued financial statements have been restated for the
correction of a misstatement in the respective period and (2) a
reference to the company's disclosure of the correction of the
misstatement. The first statement in the explanatory paragraph
distinguishes restatements from adjustments to prior-period financial
statements resulting from changes in accounting principle. Previously,
the auditor's responsibilities for reporting on most restatements were
the same as for reporting on changes in accounting principle.
    One commenter suggested that the proposed standard did not clearly
explain whether corrections of an error not involving a principle would
require recognition in the auditor's report. Unlike the previous
requirement, the proposed standard did not distinguish between the
``correction of an error in principle'' and an ``error correction not
involving a principle.''\23\ Rather, the proposed standard required
recognition in the auditor's report of any correction of a material
misstatement, whether or not the error involved a principle. The Board
reconsidered the language and concluded that the requirement as
proposed was sufficiently clear. The new standard aligns the auditor's
reporting responsibilities with the accounting standards, which require
disclosure of all restatements, by requiring an explanatory paragraph
when the company has restated the financial statements.
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    \23\ This distinction previously was in paragraphs .12 and .16
of AU sec. 420, Consistency of Application of Generally Accepted
Accounting Principles.
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    Some commenters suggested that it would not improve clarity to have
the auditor's report include a statement that the financial statements
were restated

``to correct a material misstatement.'' They noted that SFAS No. 154
already defines a restatement as the revision of previously issued
financial statements to reflect the correction of an error. The Board
decided to retain the reporting requirement as proposed because it
clearly distinguishes corrections of misstatements from changes in
accounting principle. Also, the required reporting language regarding
restatements is more informative because it does not rely entirely on
the user's knowledge of the definition of ``restatement'' in the
accounting standard.\24\
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    \24\ Two commenters suggested that the standard include the
explanation from the release that the term ``error,'' as used in
SFAS No. 154, is equivalent to ``misstatement,'' as used in the
auditing standards. The Board agreed and has included that
explanation in the final standard.
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    One commenter also recommended that the auditor's explanatory
paragraph about the correction of a misstatement should contain
additional information. The commenter recommended that the explanatory
paragraph include a statement that (1) the previously issued auditor's
report should not be relied on because the previously issued financial
statements were materially misstated, and (2) the previously issued
report is replaced by the auditor's report on the restated financial
statements.
    The Board believes that the recommended additional language is not
necessary because existing PCAOB standards and rules of the SEC are
sufficient to inform users about misstatements in previously issued
financial statements. Specifically, AU sec. 561, Subsequent Discovery
of Facts Existing at the Date of the Auditor's Report, requires the
auditor to take specific action when he or she concludes that
information discovered after the financial statements have been issued
would have affected his or her report if the company had not reflected
the information in the financial statements and people are currently
relying or are likely to rely on the financial statements and auditor's
report. According to AU sec. 561.06, the auditor should advise the
company to make appropriate disclosure of the newly discovered facts
and their impact on the financial statements to persons who are known
to be currently relying or who are likely to rely on the financial
statements and the related auditor's report.\25\
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    \25\ AU sec. 561.06 also requires that if the effect on the
financial statements or auditor's report can promptly be determined,
disclosure should consist of issuing, as soon as practicable,
revised financial statements and auditor's report. If issuance of
the financial statements with an auditor's report for a later period
is imminent, a company is permitted to disclose the revision to the
financial statements instead of reissuing earlier statements. When
the effect on the financial statements cannot be determined without
a prolonged investigation, appropriate disclosure would consist of
notification that the financial statements and auditor's report
should not be relied on and that revised financial statements and
auditor's report will be issued upon completion of an investigation.
---------------------------------------------------------------------------

    A U.S. public company that is not a foreign private issuer under
SEC rules also is required to file a Form 8-K current report, if it
concludes that any previously issued financial statements should no
longer be relied upon because of an error in such financial
statements.\26\ If the auditor has notified the issuer that action
should be taken to prevent future reliance on a previously issued audit
report, the company also must disclose that information in the Form 8-
K.
---------------------------------------------------------------------------

    \26\ See Securities Exchange Act Rule 13a-11, 17 CFR 240.13a-11.
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Changes in Classification
    Auditing Standard No. 6 does not require the auditor's report to
recognize a change in classification \27\ in previously issued
financial statements, except for a reclassification that is also a
change in accounting principle or correction of a material
misstatement.\28\ Accordingly, the new standard clarifies that the
auditor should evaluate a material change in financial statement
classification and the related disclosure to determine whether such a
change is also a change in accounting principle or a correction of a
material misstatement. For example, in some circumstances, a change in
financial statement classification also may be the correction of a
misstatement. A restatement to correct the misclassification of an
account as short- or long-term or misclassification of cash flows would
be both a restatement and reclassification. Therefore, the auditor
should evaluate these matters as part of the evaluation of corrections
of misstatements. Under Auditing Standard No. 6, a classification
change that is also a change in accounting principle should be reported
on as a change in accounting principle, and a classification change
that is also a correction of a material misstatement should be reported
on by the auditor as a restatement.
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    \27\ AU sec. 420.17 also did not require recognition of a change
in financial statement classification in the auditor's report.
    \28\ SFAS No. 154 uses the term ``presentation'' in its
definition of an error in previously issued financial statements.
The directions in paragraph 11 of the new standard address the
auditor's responsibilities for changes in classification, which is
an element of the presentation and disclosure financial statement
assertion under the auditing standards. See, e.g., paragraph .08 of
AU sec. 326, Evidential Matter.
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    Some commenters recommended slight revisions to the first sentence
of paragraph 11 to clarify the auditor's responsibilities. The first
sentence stated that changes in classification in previously issued
financial statements do not require recognition in the auditor's
report. This seemed to conflict with the second sentence which required
the auditor to review a material change in classification and related
disclosure to determine whether such a change also is a change in
accounting principle or a correction of a material misstatement. The
Board agreed with the comments and modified the first sentence to state
that a change in classification does not require audit report
recognition unless the change represents the correction of a material
misstatement or a change in accounting principle. Additionally, in the
proposed standard, the Board used the word ``review'' to describe the
auditor's responsibility when there has been a material change in
financial statement classification. The Board concluded that the word
``evaluate'' better describes the auditor's responsibilities in this
area and is more consistent with the other requirements in Auditing
Standard No. 6. Accordingly, the Board replaced ``review'' with
``evaluate.''
Description of GAAP and Removal of the GAAP Hierarchy From the Auditing
Standards
    As discussed previously, the FASB has proposed to incorporate the
GAAP hierarchy into its own standards. The Board believes that it is
appropriate to locate the GAAP hierarchy in the accounting standards
rather than in the auditing standards. Thus, the Board amended its
interim standards to remove the GAAP hierarchy from the auditing
standards. These amendments do not change the principles in AU sec. 411
for evaluating fair presentation of the financial statements in
conformity with GAAP.
    Commenters strongly supported removing the GAAP hierarchy from the
auditing standards and stated that it was appropriate for the GAAP
hierarchy to be contained in the accounting standards. However, one
commenter observed that the proposed amendments contain significant
differences from the American Institute of Certified Public
Accountants' (``AICPA'') Auditing Standards Board's (``ASB'') proposed
amendment to AU sec. 411 of the ASB's standards.\29\
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    \29\ In addition, this commenter suggested that U.S. auditing
standard-setters should work together to achieve consistency on core
auditing standards that are used by almost all auditors of U.S.
entities. This commenter also suggested that if the Board continues
issuing its own standards for audits of public companies, it should
adopt alternative numbering/referencing schemes in order to reduce
confusion between its interim standards and the AICPA standards. The
Board is considering these comments as it seeks to make continuous
improvements to its standard-setting and other programs.

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    The Board believes that the amendments to AU sec. 411 are
consistent with the Board's objective of removing the GAAP hierarchy
from the auditing standards, and retaining, or providing, direction
necessary for audits of public companies. The significant differences
between the ASB's amendments to its AU sec. 411 and the Board's
amendments primarily are related to sources of GAAP for governmental
entities and direction on the application of accounting principles,
which the Board did not believe was appropriate for inclusion in the
proposed amendments. In addition, the Board deleted references to Rule
203 of the AICPA's Code of Professional Conduct. Rule 203 prohibits
auditors from expressing an opinion on financial statements that do not
conform to GAAP unless the auditor can demonstrate that due to unusual
circumstances the financial statements would have been misleading
without departing from GAAP. In 2003, when the Board adopted certain
AICPA rules and ASB standards as interim Board standards, the Board did
not adopt Rule 203. Consistent with that action, the proposed
amendments did not include a reference to Rule 203.
Section-by-Section Description of Amendments to the Interim Auditing
Standards
    In addition to proposing an auditing standard on evaluating
consistency of financial statements, the Board also proposed amendments
to other interim auditing standards and related interpretations. The
following sections describe key aspects and elements of the amendments
to the standards and interpretations, comments received, and changes
incorporated in the final amendments.
AU Sec. 410, Adherence to Generally Accepted Accounting Principles
    The Board proposed to delete AU sec. 410.02 which discussed the
meaning of ``generally accepted accounting principles'' and included
other matters that are addressed elsewhere in the standards. However,
some commenters suggested that, to improve clarity, AU sec. 410 should
retain the sentence in existing AU sec. 410.02 which states that the
``first standard is construed not to require a statement of fact by the
auditor but an opinion.''
    The Board agreed that, when viewed alone, the first standard of
reporting, contained in AU sec. 410.01, does not provide a complete
description of the auditor's responsibilities related to fair
presentation in conformity with GAAP. However, the first standard of
reporting combined with the fourth standard clearly indicates that the
auditor is providing a statement of an opinion and not a statement of
fact. The fourth standard of reporting provides that the auditor's
report shall contain either an expression of opinion regarding the
financial statements taken as a whole, or an assertion to the effect
that an opinion cannot be expressed. To emphasize that the first and
fourth reporting standards must be read together, the Board is
including the fourth standard of reporting in the final amendment to AU
sec. 410. However, as proposed, the prior statement on the meaning of
``generally accepted accounting principles'' has been deleted from AU
sec. 410.02.
AU Sec. 411, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles
    The Board proposed to delete AU sec. 411.02, which was a detailed
description of GAAP, and AU secs. 411.05, .07 and .09-.15, which
described the application of the GAAP hierarchy. The Board proposed to
replace the description of GAAP in AU 411.02, with a statement that
GAAP refers ``to the accounting principles recognized in the standards
of the Financial Accounting Standards Board or in the standards of any
other standard-setting body recognized by the U.S. Securities and
Exchange Commission.''
    However, commenters had concerns about the proposal. One commenter
noted that the SEC might allow companies to file a financial statement
prepared in conformity with international financial reporting standards
(``IFRS'') but not recognize the International Accounting Standards
Board, which issues IFRS, as a standard-setting body. Another commenter
suggested that to avoid potential confusion by users, the Board should
acknowledge that there are other sources of GAAP for entities other
than public companies.
    In response to these comments, the Board decided to modify its
proposed amendment of AU 411. It deleted AU sec. 411.02, which
described GAAP, and revised AU sec. 411.01 to indicate that the auditor
should look to the requirements of the SEC for the company under audit
to identify the accounting principles that are applicable to that
company. This change should also clarify that the standard is focused
only on the accounting principles that may be used for purposes of the
federal securities laws. Other accounting principles may apply to
financial statements prepared for other purposes or by entities that
are not issuers. The Board also modified AU 411.01 to better emphasize
that standard's focus on the meaning of the phrase ``present fairly.''
    Finally, as proposed, the Board eliminated AU secs. 411.16 and .17
which set an effective date and transition requirements that are no
longer applicable.
AU Sec. 420, Consistency of Application of Generally Accepted
Accounting Principles
    AU sec. 420 has been superseded by Auditing Standard No. 6,
Evaluating Consistency of Financial Statements. However, some
commenters suggested that parts of AU sec. 420 should have been
incorporated into Auditing Standard No. 6. Commenters suggested that
guidance on the objective of the consistency standard and the
relationship of consistency and comparability, matters that may not
affect consistency, and changes expected to have a material future
effect provided useful direction.
    The Board believes that it is unnecessary to include the preceding
direction. The proposed standard clarified that the auditor's report
should recognize only those matters that require recognition under the
existing auditing standards--i.e., a change in accounting principle or
the correction of a material misstatement. The Board does not believe
it is necessary to list in a standard those matters that do not require
recognition in the auditor's report. Also, the Board believes that
paragraph 1 clearly describes the objective of the standard. Paragraph
2 makes it clear that the standard considers comparability to be
between periods for the company under audit.
AU Sec. 431, Adequacy of Disclosure in Financial Statements
    AU sec. 431 describes the auditor's responsibilities for evaluating
the adequacy of disclosures in the financial statements. The amendments
address two technical matters relating to that section.
    Footnote 1 to AU sec. 431.03 is not consistent with the SEC's
independence rules regarding non-audit services and therefore has been
eliminated.

    AU sec. 431.04 is an application of the AICPA's Code of
Professional Conduct regarding the disclosure of confidential client
information. In 2003, when the Board adopted certain AICPA rules and
ASB standards as interim Board standards, the Board did not adopt Rule
301. Consistent with that action, the proposed amendments would
eliminate AU sec. 431.04.
    Some commenters expressed concerns that the proposed elimination of
AU sec. 431.04 would change the auditor's obligations, or reflected
Board policy, regarding the use of confidential client information in
connection with evaluating the adequacy of financial statement
disclosures. Those commenters generally recognized the limited nature
of AU sec. 431.04 and acknowledged that, since in 2003 the Board did
not adopt Rule 301, removing a portion of the interim standards based
on that rule was a conforming amendment. However, they were concerned
that the Board's action might be construed as minimizing the auditor's
responsibilities for maintaining the confidentiality of client
information.
    The Board is aware that many auditors have legal or professional
obligations to maintain the confidentiality of client information.
These requirements arise from the rules of state licensing
authorities,\30\ the rules of professional organizations such as the
AICPA and the International Federation of Accountants, and the laws of
some foreign jurisdictions. The Board's decision to omit Rule 301 from
its interim standards was based on a determination that incorporation
of that rule was not necessary to fulfill the Board's mandate under
Section 103(a)(1) and (3) of the Act. It did not reflect a decision
that auditor confidentiality requirements imposed by other authorities
were inappropriate. Similarly, in amending AU sec. 431, the Board seeks
neither to modify nor to detract from existing confidentiality
requirements.
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    \30\ For example, confidentiality requirements are included in
the provisions of the Uniform Accountancy Act, which has been
enacted in some form by many states.
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Interpretations of the Auditing Standards in AU 400 Sections
    The auditing interpretation in AU sec. 9420.52-.54 has been
incorporated into Auditing Standard No. 6 and therefore has been
eliminated, as proposed. The auditing interpretations in AU sec. 9411
and the remaining auditing interpretations in AU sec. 9420 are
addressed by the accounting standards and therefore also have been
eliminated as proposed.\31\
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    \31\ One commenter suggested that some of the auditing
interpretations should be retained because the guidance is still
relevant. The Board considered the view of this commenter but
decided to eliminate the interpretations because other auditing
standards provided the necessary direction regarding the matter
addressed in the interpretation, the interpretation dealt with items
not requiring recognition in the auditor's report, or the
interpretation was related to an accounting consideration of the
company.
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AU Sec. 508, Reports on Audited Financial Statements
    In general, the Board has adopted the amendments as proposed. The
amendments have conformed this interim auditing standard to Auditing
Standard No. 6 on evaluating consistency and the amendments to AU secs.
410 and 411, described above. For example, AU sec. 508.16 now
specifically identifies the matters related to consistency of the
company's financial statements that should be recognized in the
auditor's report. Similarly, AU sec. 508.17A provides the requirements
for evaluating consistency, that also is in paragraph 7 of Auditing
Standard No. 6. AU secs. 508.17B and C, and AU sec. 508.18A provide
separate requirements for reporting on changes in accounting principles
and restatements, as discussed previously.
    In addition, the amendments eliminate AU sec. 508.14-.15. Those
paragraphs were an application of AICPA Ethics Rule 203, which, as
previously noted, was not adopted as an interim standard by the
Board.\32\
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    \32\ One commenter expressed concern about deleting these
paragraphs and suggested that, if the Board's intent was to delete
all reference to the AICPA Code of Professional Conduct from the
Board's interim standards, the Board should indicate the
professional ethics that auditors should follow when conducting
audits according to PCAOB standards. The Board's Rules 3500T and
3600T describe the Board's interim ethics and independence
standards, respectively. These standards include certain provisions
from the AICPA's Code of Professional Conduct. In addition, the
Board has adopted ethics and independence rules concerning
independence, tax services, and contingent fees. See PCAOB Release
No. 2005-014 (July 26, 2005). State law and membership organizations
may impose additional requirements.
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    Finally, in light of the definitions in SFAS No. 154, the
amendments change references to ``restatements'' to the more general
term ``adjustments'' to refer broadly to changes to previously issued
financial statements that may result from either a correction of a
misstatement or a change in accounting principle.\33\
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    \33\ Some commenters suggested that certain other changes were
needed to AU sec. 508 or that certain amendments were not necessary.
For example, some commenters suggested eliminating AU sec. 508.57
and retaining the original terminology in AU secs. 508.73--.74. The
Board decided that some of the suggested changes would change
existing practice, such as the elimination of AU sec. 508.57, and
were outside the scope of this project. For the others, the Board
concluded that the amendments were consistent with the direction in
Auditing Standard No. 6. In addition, one commenter believed that
there were inconsistencies between the proposed amendments to AU
sec. 508 and Staff Questions and Answers, Adjustments to Prior-
Period Financial Statements Audited By a Predecessor Auditor.
However, the Board reviewed the Staff Questions and Answers and did
not agree that there were inconsistencies with the proposed
amendments to AU sec. 508.
---------------------------------------------------------------------------

References to APB Opinion No. 20
    In addition, the Board has adopted other amendments to update
references to APB Opinion No. 20, which was superseded by SFAS No. 154.
Accordingly the Board amended AU sec. 561, Subsequent Discovery of
Facts Existing at the Date of the Auditor's Report, footnote 3 to
paragraph .06, to reference paragraphs 25 and 26 of SFAS No. 154. For
AU sec. 328, Auditing Fair Value Measurements and Disclosures, footnote
4 to paragraph .19, the Board referenced paragraph 20 of SFAS No. 157,
Fair Value Measurements, which states that a change in valuation
technique or its application is appropriate if the change results in a
measurement that is equally or more representative of fair value in the
circumstances. This replaces a reference to the preferability
requirement in SFAS No. 157 because that requirement does not apply to
a change in a company's method for determining fair value. Paragraph 20
is the accounting guidance applicable to a company's change in method
for determining fair value.
Effective Date
    The standard and amendments will be effective 60 days after
approval by the SEC.

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

    Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Board consents, the Commission will:
    (a) By order approve such proposed rule; or
    (b) Institute proceedings to determine whether the proposed rule
should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and
arguments concerning the foregoing,

including whether the proposed rule is consistent with the requirements
of Title I of the Act. Comments may be submitted by any of the
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/pcaob.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number PCAOB 2008-01 on the subject line.

Paper Comments

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

All submissions should refer to File Number PCAOB 2008-01. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/pcaob/
shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule that are filed
with the Commission, and all written communications relating to the
proposed rule between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room, on official business days between
the hours of 10 a.m. and 3 p.m. Copies of such filing will also be
available for inspection and copying at the principal office of the
PCAOB. All comments received will be posted without change; we do not
edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File No. PCAOB-2008-01 and should be
submitted on or before August 26, 2008.

    By the Commission.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-17893 Filed 8-4-08; 8:45 am]

BILLING CODE 8010-01-P


Dearborn County Wind Rose Analysis  2000 Wind Speed and Wind Direction on 8 hour Ozone Exceedance Days   Taken from Indiana Michigan Electric Met. Tower Maximum 8 hour ozone concentration of 85 ppb ( Clinton Co.) Maximum 8 hour ozone concentration of 110 ppb ( Clinton Co.)

Maximum 8 hour ozone concentration of 97 ppb ( Clinton Co.) Maximum 8 hour ozone concentration of 106 ppb ( Greene Co.) Maximum 8 hour ozone concentration of 86 ppb ( Clinton Co.) Maximum 8 hour ozone concentration of 95 ppb ( Clinton Co.)

Maximum 8 hour ozone concentration of 85 ppb ( Clermont Co.) Maximum 8 hour ozone concentration of 87 ppb ( Montgomery Co.) Maximum 8 hour ozone concentration of 86 ppb ( Warren Co.) Maximum 8 hour ozone concentration of 98 ppb ( Clermont Co.)

Maximum 8 hour ozone concentration of 88 ppb ( Clermont Co.) Maximum 8 hour ozone concentration of 95 ppb ( Clinton Co.) Maximum 8 hour ozone concentration of 92 ppb ( Clinton Co.)