The SEC has approved the PCAOB’s new standard that modernizes the auditor’s confirmation process, stating that it is “necessary or appropriate” in the public interest or for investor protection, which is the board’s sole mission.
As the securities market regulator, the SEC oversees the board, and substantive changes to its audit standards must be first approved by the commission before they become effective.
The PCAOB in late September unanimously voted to adopt the new confirmation standard. The standard is in Release No. 2023-008, The Auditor’s Use of Confirmation, and Other Amendments to PCAOB Standards.
The final standard is intended to better reflect today’s business environment and the increasing use of sophisticated technology that was not available when the existing standard was written three decades ago. The board is also strengthening confirmation procedures to better help prevent fraud. (See PCAOB Modernizes Audit Standard for Confirmation in the September 29, 2023, edition of Accounting & Compliance Alert.)
“This should promote investor protection by enhancing the quality of audits,” the SEC stated in Release No. 34-99060, Order Granting Approval of Auditing Standard Governing the Auditor’s Use of Confirmation, published on December 1, 2023.
Before making the decision, the SEC in October first sought comments on the PCAOB’s final standard, and only two Big Four firms and one individual CPA submitted comment letters.
The letters supported the revised confirmation standard and encouraged the commission staff to support the PCAOB’s plans to monitor implementation, do a post-implementation review, and monitor changes in technology that may affect application of the standard.
The SEC said that it is important to monitoring implementation, and the commission staff work closely with the PCAOB as part of their oversight responsibilities.
“As part of that oversight, Commission staff will keep itself apprised of the PCAOB’s activities for monitoring the implementation of the Amendments and update the Commission, as necessary,” the release states. “Additionally, one commenter made suggestions for expanded explanations and examples. The adopting release addresses the points raised by the commenter.”
The SEC said that it also agrees with the board that the revised confirmation standard should apply to audits of emerging growth companies (EGCs), which get a host of exemptive or scaled requirements depending on the rules.
A company gets EGC classification if it has total annual gross revenues of less than $1.235 billion during its most recently completed fiscal year and, as of December 8, 2011, had not sold common equity securities under a registration statement. The company continues to be an EGC for the first five years after an initial public offering unless: its total annual gross revenues are $1.235 billion or more; it has issued more than $1 billion in non-convertible debt in the past three years; or it becomes a large accelerated filer, which has public float of more than $700 million.
The benefits will outweigh the costs, and the standard is expected to promote the credibility of EGC financial statements. Moreover, the SEC said that it agrees with the board’s analysis that improved audit quality of EGCs potentially create a larger increase to the price efficiency of the companies by providing investors with more accurate information. This helps investors make more informed decisions. In turn, this will facilitate capital raising.
In a statement, PCAOB Chair Erica Williams thanked the SEC.
“This new standard will help protect investors, as audit procedures that involve the use of confirmation are part of nearly every audit, and confirmation can be a vital tool to help auditors detect fraud,” said Williams. “The new standard, which replaces a standard that had not been significantly updated in twenty years, is also a big step forward as the Board continues to execute its strategic goal of modernizing PCAOB standards.”
The standard will become effective for audits of financial statements for fiscal years ending on or after June 15, 2025.
Learn more about Thomson Reuters’ secure online confirmation platform here.
This article originally appeared in the December 5, 2023, edition of Accounting & Compliance Alert, available on Checkpoint.
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