Federal Register / Vol. 73, No. 151 / Tuesday, August 5, 2008 / Notices 45495 

1For 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. 

2When 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. 

3The term ‘‘error,’’ as used in SFAS No. 154, is 

equivalent to ‘‘misstatement,’’ as used in the 

auditing standards. 

requestor should contact the Office of 

the Secretary by e-mail at 

HEARINGDOCKET@NRC.GOV, or by 

calling (301) 415–1677, to request a 

digital ID certificate and allow for the 

creation of an electronic docket. 

In addition to a request for hearing or 

petition for leave to intervene, written 

comments, in accordance with 10 CFR 

110.81, should be submitted within 

thirty (30) days after publication of this 

notice in the Federal Register to Office 

of the Secretary, U.S. Nuclear 

Regulatory Commission, Washington, 

DC 20555, Attention: Rulemaking and 

Adjudications. 

The information concerning this 

license application follows. 

NRC EXPORT LICENSE APPLICATION —DESCRIPTION OF MATERIAL

Name of applicant; date of 

application; date received; 

application No.; docket No. 

Material type Total quantity End use Recipient 

country 

Duratek Services, Inc. (a subsidiary of EnergySolutions); 

July 2, 2008; July 8, 2008; 

XW014; 11005756.

Class A radioactive waste in 

the form of contaminated 

dry active materials generated during refurbishment 

of a nuclear reactor pump 

and pump impeller from Ontario Power Generation’s 

Pickering Station.

Approximately 170 pounds 

(24 cubic feet) of dry active 

materials.

Storage or disposal by the 

original generator, as required or authorized by their 

regulator.

Canada. 

Dated this 24th day of July 2008 at 

Rockville, Maryland. 

For the Nuclear Regulatory Commission. 

Scott W. Moore, 

Deputy Director, Office of International 

Programs. 

[FR Doc. E8–17900 Filed 8–4–08; 8:45 am] 

BILLING CODE 7590–01–P 

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 currentperiod 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

Note: The term ‘‘current period’’ means the 

most recent year, or 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

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 


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4See SFAS No. 154, paragraph 2c. 

5SFAS 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. 

7Newly 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. 

8The 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. 

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

Note: A change from an accounting 

principle that is not generally accepted to 

one that is generally accepted is a correction 

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. 

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 

d. The company has justified that the 

alternative accounting principle is 

preferable.8

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 


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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. 

12The 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 


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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. 

13The directions in paragraphs .68–.69 

apply when comparative financial statements 

are presented and the opinion on the priorperiod 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 


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9Financial Accounting Standards Board 

(‘‘FASB’’), Statement of Financial Accounting 

Standards (‘‘SFAS’’) No. 154, Accounting Changes 

and Error Corrections (2005) (‘‘SFAS No. 154’’). 

10Accounting Principles Board (‘‘APB’’) Opinion 

No. 20, Accounting Changes (1971). SFAS No. 154 

also superseded SFAS No. 3, Reporting Accounting 

Changes in Interim Financial Statements. 

11See SFAS No. 154, paragraph 2j. 

12FASB, 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. 

14Because 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. 

15AU 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. 

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. 

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

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. 

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 


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16The 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). 

18Under 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 

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 


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in accordance with the GAAP hierarchy. See SFAS 

No. 154, paragraph 14. 

19The 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. 

20This responsibility is substantially unchanged 

from AU sec. 508.51. 

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. 

22The 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.’’

23This distinction previously was in paragraphs 

.12 and .16 of AU sec. 420, Consistency of 

Application of Generally Accepted Accounting 

Principles. 

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

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

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

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 spinoffs 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 priorperiod 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. 

Some commenters suggested that it 

would not improve clarity to have the 

auditor’s report include a statement that 

the financial statements were restated 


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24Two 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. 

25AU 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. 

26See Securities Exchange Act Rule 13a–11, 17 

CFR 240.13a–11. 

27AU sec. 420.17 also did not require recognition 

of a change in financial statement classification in 

the auditor’s report. 

28SFAS 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. 

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 

‘‘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

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

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. 

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. 

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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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. 

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 standardsetting 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. 


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45504 Federal Register / Vol. 73, No. 151 / Tuesday, August 5, 2008 / Notices 

30For example, confidentiality requirements are 

included in the provisions of the Uniform 

Accountancy Act, which has been enacted in some 

form by many states. 

31One 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. 

32One 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. 

33Some 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 PriorPeriod 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. 

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. 

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

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

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

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, 


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Federal Register / Vol. 73, No. 151 / Tuesday, August 5, 2008 / Notices 45505 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 15 U.S.C. 78s(b)(3)(A). 

4 17 CFR 240.19b–4(f)(6). 

5See Exchange Act Release No. 54919 (December 

12, 2006), 71 FR 75781 (December 18, 2006) 

(approving amendments to the program on a pilot 

basis to expire on July 31, 2007). 

6See Exchange Act Release No. 56109 (July 19, 

2007), 72 FR 41365 (July 27, 2007) (extending the 

pilot program through July 31, 2008). 

7See Exchange Act Release No. 54919, supra note 

1. 

8The Exchange understands that FINRA filed a 

similar proposed rule change that, if approved, 

would continue to provide a uniform approach with 

respect to portfolio margining. See (SR–FINRA–

2008–041). 

9 15 U.S.C. 78f(b). 

10 15 U.S.C. 78f(b)(5). 

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 rulecomments@sec.gov. 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 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–58243; File No. SR–CBOE–

2008–73] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Notice of Filing and 

Immediate Effectiveness of Proposed 

Rule Change Relating to Permanent 

Approval of the Customer Portfolio 

Margin Pilot Program 

July 29, 2008. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (‘‘Act’’

or ‘‘Exchange Act’’) 1 and Rule 19b–4 

thereunder,2 notice is hereby given that 

on July 8, 2008, Chicago Board Options 

Exchange, Incorporated (‘‘CBOE’’ or the 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III below, which Items have been 

substantially prepared by CBOE. CBOE 

has filed the proposal as a ‘‘noncontroversial’’ proposed rule change 

pursuant to Section 19(b)(3)(A) of the 

Act 3 and Rule 19b–4(f)(6) thereunder,4

which renders the proposed rule change 

effective upon filing with the 

Commission. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

CBOE proposes to make permanent 

the customer portfolio margin program 

codified in Exchange Rules 9.15(c)—

Delivery of Current Options Disclosure 

Documents, 12.4—Portfolio Margin, 

13.5—Customer Portfolio Margin 

Accounts, and 15.8A—Risk Analysis of 

Portfolio Margin Accounts. CBOE is not 

proposing any textual changes to its 

Constitution or Rules. The text of the 

proposed rule change is available on the 

Exchange’s website (http:// 

www.cboe.org/legal), at the Exchange’s 

Office of the Secretary and at the 

Commission’s Public Reference Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

CBOE included statements concerning 

the purpose of and basis for the 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item IV below. CBOE has prepared 

summaries, set forth in sections A, B, 

and C below, of the most significant 

aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The Exchange’s customer portfolio 

margining program, as previously 

approved by the Commission, allows 

broker-dealers, for eligible securities, to 

compute customer margin requirements 

based on a portfolio margining 

methodology.5 The portfolio margining 

program is operating under a pilot 

program that is scheduled to expire on 

July 31, 2008.6

Amendments to the rules effective 

April 2, 2007, made equities, equity 

options, narrow-based index options, 

unlisted derivatives and security futures 

eligible for portfolio margining.7 The 

Exchange believes it has had sufficient 

time to assess the operation of the pilot 

program and has not encountered any 

problems or difficulties relating to the 

pilot program since its inception. For 

this reason, the Exchange proposes that 

the Commission approve the pilot 

program on a permanent basis.8

2. Statutory Basis 

Because the portfolio margin pilot 

program has promoted greater 

reasonableness, accuracy and efficiency 

with respect to margin requirements and 

better aligns margin requirements with 

actual risk, the Exchange believes that 

this proposed rule change is consistent 

with Section 6(b) of the Exchange Act,9

in general, and furthers the objectives of 

Section 6(b)(5) of the Act 10 in 

particular, in that it is designed to 

perfect the mechanism of a free and 

open market, and to protect investors 

and the public interest. 


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