|SEC Approves PCAOB Auditing Standard No. 16 - Communications with Audit Committees|
Yesterday, the SEC issued an order approving new Auditing Standard No. 16, Communications with Audit Committees (“AS 16”). AS 16 was previously approved by the Public Company Accounting Oversight Board (“PCAOB”) at an open meeting held on August 15, 2012. As we noted in our August client alert reporting on this new standard (available here), AS 16 retains most of the preexisting communication requirements, but also adds a number of new topics that the auditor must discuss with the audit committee and requires that the auditor seek specific responses from the audit committee when discussing certain topics. In response to comments, the SEC also clarified that the new standard will apply to audits of foreign private issuers. Significantly, the SEC concurred with the PCAOB that AS 16 will apply to emerging growth companies (“ECGs”) and will be effective for fiscal periods beginning on and after December 15, 2012.
The Commission’s review of AS 16 also marked the first time that it has had an opportunity to address the JOBS Act provision that says PCAOB rules and standards adopted subsequent to April 5, 2012 will not apply to audits of EGCs unless the Commission determines that the application of such additional requirements is “necessary or appropriate in the public interest, after considering the protection of investors and whether the action will promote efficiency, competition, and capital formation.” Here, the Commission found that applying the new standard to EGCs is “necessary or appropriate in the public interest.” In reaching this conclusion, the Commission gave some clues as to how it will apply this test but did not spell out an exhaustive list of factors that it will consider in making this determination in the future. Rather, it appears the Commission’s review of the EGC test will be facts and circumstances driven. In this instance, the Commission relied, among other things, on the EGC analysis provided by the PCAOB, which included discussion of: (1) the background and reasons for the new standard; (2) the PCAOB’s approach to developing the new standard, including consideration of alternatives; (3) key changes and improvements from existing audit committee communication requirements; and (4) characteristics of EGCs and economic considerations. The Commission also responded to comments submitted by the U.S. Chamber of Commerce and rejected the notion that the EGC determination carries with it a “presumption” that new PCAOB requirements should not apply to audits of EGCs. In addition, the Commission stated that it was not required to conclude that a proposed PCAOB rule or standard would be “less costly” for EGC audits than for other issuer audits.