63988 Federal Register / Vol. 79, No. 207 / Monday, October 27, 2014 / Notices 

17 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 7217(b). 

2 15 U.S.C. 78s(b). 

3The Board originally proposed in February 2012 

(‘‘Original Proposal’’) and reproposed in May 2013 

(‘‘Reproposal’’) what became the Proposed Rules. 

4See Release No. 34–72643 (July 18, 2014), 79 FR 

43163 (July 24, 2014). 

5 Ibid. 

6See letters to the Commission from Suzanne H. 

Shatto, dated July 23, 2014 (‘‘Shatto Letter’’); Tom 

Quaadman, Vice President, Center for Capital 

Markets Competitiveness, U.S. Chamber of 

Commerce, dated July 28, 2014 (‘‘Chamber Letter’’); 

and Deloitte & Touche LLP, dated August 11, 2014 

(‘‘Deloitte Letter’’). 

7Auditing Standard No. 12 defines a significant 

risk as a ‘‘risk of material misstatement that requires 

special audit consideration.’’ 

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/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change 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 Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE., 

Washington, DC 20549 on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Copies of such 

filing also will be available for 

inspection and copying at the principal 

office of the Exchange. All comments 

received will be posted without change; 

the Commission does 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 Number SR–BOX– 

2014–24, and should be submitted on or 

beforeNovember 17, 2014. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.17

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–25433 Filed 10–24–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73396; File No. PCAOB– 

2014–01] 

Public Company Accounting Oversight 

Board; Order Granting Approval of 

Proposed Rules on Auditing Standard 

No. 18, Related Parties, Amendments 

to Certain PCAOB Auditing Standards 

Regarding Significant Unusual 

Transactions, and Other Amendments 

to PCAOB Auditing Standards 

October 21, 2014. 

I. Introduction 

On July 10, 2014, the Public Company 

Accounting Oversight Board (the 

‘‘Board’’ or the ‘‘PCAOB’’) filed with the 

Securities and Exchange Commission 

(the ‘‘Commission’’), pursuant to 

Section 107(b) 1 of the Sarbanes-Oxley 

Act of 2002 (the ‘‘Sarbanes-Oxley Act’’) 

and Section 19(b) 2 of the Securities 

Exchange Act of 1934 (the ‘‘Exchange 

Act’’), proposed rules to adopt Auditing 

Standard No. 18, Related Parties, 

amendments to certain PCAOB auditing 

standards regarding significant unusual 

transactions, and other amendments to 

PCAOB auditing standards, including 

required procedures to obtain an 

understanding of a company’s financial 

relationships and transactions with its 

executive officers (collectively, the 

‘‘Proposed Rules’’).3 The Proposed 

Rules were published for comment in 

the Federal Register on July 24, 2014.4

At the time the notice was issued, the 

Commission designated a longer period 

to act on the Proposed Rules, until 

October 22, 2014.5 The Commission 

received three comment letters in 

response to the notice.6 This order 

approves the Proposed Rules. 

II. Description of the Proposed Rules 

Related party transactions, significant 

unusual transactions, and a company’s 

financial relationships and transactions 

with its executive officers are included 

together in the Proposed Rules because 

the PCAOB believes the auditor’s efforts 

in these areas are, in many ways, 

complementary. For example, the 

auditor’s efforts to identify and evaluate 

a company’s significant unusual 

transactions could identify information 

that indicates that a related party or 

relationship or transaction with a 

related party previously undisclosed to 

the auditor might exist. Likewise, 

obtaining an understanding of a 

company’s financial relationships and 

transactions with its executive officers 

also could identify information that 

indicates that a related party or 

relationship or transaction with a 

related party previously undisclosed to 

the auditor might exist. 

1. Related Parties 

Auditing Standard No. 18 will 

supersede AU section 334, Related 

Parties (‘‘AU sec. 334’’), which 

primarily contains the existing 

requirements for auditing relationships 

and transactions with related parties. 

AU sec. 334 provides guidance and 

examples of procedures for the auditor’s 

consideration in identifying and 

evaluating related party transactions. 

Auditing Standard No. 18 includes 

some auditing concepts and procedures 

from AU sec. 334, but is intended to 

strengthen auditor performance 

requirements for identifying, assessing, 

and responding to the risks of material 

misstatement associated with a 

company’s relationships and 

transactions with its related parties by, 

among other things, requiring the 

auditor to: 

• Perform specific procedures to 

obtain an understanding of the 

company’s relationships and 

transactions with its related parties, 

including obtaining an understanding of 

the nature of the relationships between 

the company and its related parties and 

of the terms and business purposes (or 

the lack thereof) of transactions 

involving related parties. The new 

procedures are required to be performed 

in conjunction with the auditor’s risk 

assessment procedures pursuant to 

Auditing Standard No. 12, Identifying 

and Assessing Risks of Material 

Misstatement. 

• Evaluate whether the company has 

properly identified its related parties 

and relationships and transactions with 

its related parties. In making that 

evaluation, the auditor performs 

procedures to test the accuracy and 

completeness of management’s 

identification, taking into account 

information gathered during the audit. If 

the auditor identifies information that 

indicates that undisclosed relationships 

and transactions with a related party 

might exist, the auditor is required to 

perform procedures necessary to 

determine whether undisclosed 

relationships or transactions with 

related parties in fact exist. 

• Perform specific procedures if the 

auditor determines that a related party 

or relationship or transaction with a 

related party previously undisclosed to 

the auditor exists. 

• Perform specific procedures 

regarding each related party transaction 

that is either required to be disclosed in 

the financial statements or determined 

to be a significant risk.7

• Communicate to the audit 

committee the auditor’s evaluation of 

the company’s identification of, 

accounting for, and disclosure of its 

relationships and transactions with 

related parties, and other significant 

matters arising from the audit regarding 


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Federal Register / Vol. 79, No. 207 / Monday, October 27, 2014 / Notices 63989 

8See AU secs. 316.66–.67. 

9The Proposed Rules describe ‘‘significant 

unusual transactions’’ as ‘‘significant transactions 

that are outside the normal course of business for 

the company or that otherwise appear to be unusual 

due to their timing, size, or nature.’’ 

10The PCAOB notes that the other amendments 

do not change the existing requirement in its risk 

assessment standards for the auditor to consider 

obtaining an understanding of compensation 

arrangements with senior management as part of 

obtaining an understanding of the company. Rather, 

the Board states that the population for the 

procedures required by the other amendments is the 

list of ‘‘executive officers,’’ as defined in Rule 3b– 

7 of the Exchange Act or included on Schedule A 

of Form BD, as applicable, while the existing 

requirement continues to apply to what may be a 

larger population of a company’s management. 17 

CFR 240.3b–7 and 17 CFR 249.501. 

11The term ‘‘emerging growth company’’ is 

defined in Section 3(a)(80) of the Exchange Act. 15 

U.S.C. 78c(a)(80). 

12On July 30, 2013, the Commission adopted 

amendments to Rule 17a–5 under the Exchange Act 

to require, among other things, that audits of 

brokers’ and dealers’ financial statements be 

performed in accordance with the standards of the 

PCAOB for fiscal years ending on or after June 1, 

2014. 17 CFR 240.17a–5. See Broker–Dealer 

Reports, Release No. 34–70073, (July 30, 2013), 78 

FR 51910 (August 21, 2013), available at http://

www.sec.gov/rules/final/2013/34-70073.pdf. 

13See Shatto Letter and Deloitte Letter. 

14See Shatto Letter, which also raised a number 

of other points with respect to brokers and dealers, 

but those points are outside the scope of the 

PCAOB’s Proposed Rules. 

15See Chamber Letter. 

the company’s relationships and 

transactions with related parties. 

2. Significant Unusual Transactions 

Existing auditing requirements 

regarding significant unusual 

transactions are principally contained in 

AU section 316, Consideration of Fraud 

in a Financial Statement Audit (‘‘AU 

sec. 316’’).8 Specifically, AU sec. 316 

requires the auditor, if he or she 

becomes aware of significant unusual 

transactions during the course of the 

audit, to gain an understanding of the 

business rationale of such transactions 

and consider whether that rationale 

suggests the transactions may have been 

entered into to engage in, or conceal, 

fraud. The amendments regarding 

significant unusual transactions are 

intended to improve AU sec. 316 and 

other PCAOB auditing standards by, 

among other things: 

• Requiring the auditor to perform 

procedures to identify significant 

unusual transactions; 

• Requiring the auditor to perform 

procedures to obtain an understanding 

of, and evaluate, the business purpose 

(or the lack thereof) of identified 

significant unusual transactions; and 

• Adding factors for the auditor to 

consider in evaluating whether 

significant unusual transactions may 

have been entered into to engage in 

fraudulent financial reporting or conceal 

misappropriation of assets. 

In addition to targeted enhancements 

to AU sec. 316, the amendments 

regarding significant unusual 

transactions would revise Auditing 

Standard No. 12 and Auditing Standard 

No. 13, The Auditor’s Responses to the 

Risks of Material Misstatement. These 

amendments include some changes 

intended to enhance the complementary 

linkages between the auditor’s work 

relating to significant unusual 

transactions and related party 

transactions. The amendments regarding 

significant unusual transactions also 

include conforming changes to other 

PCAOB auditing standards to provide 

for consistency in the use of the term 

‘‘significant unusual transactions’’ 

throughout the Board’s standards.9

3. Other Amendments 

Additional amendments are intended 

to provide for improved audit 

procedures in complementary areas, 

including requiring that the auditor 

perform procedures, as part of the 

auditor’s risk assessment, to obtain an 

understanding of the company’s 

financial relationships and transactions 

with its executive officers.10 These new 

procedures are intended to heighten the 

auditor’s attention to incentives or 

pressures for the company to achieve a 

particular financial position or 

operating result, recognizing the key 

role that a company’s executive officers 

may play in the company’s accounting 

decisions or in a company’s financial 

reporting. 

In response to requests for 

clarification received by the PCAOB as 

part of its comment process, the 

Proposed Rules explicitly provide that 

the auditor’s work relating to a 

company’s financial relationships and 

transactions with its executive officers 

does not include an assessment of the 

appropriateness or reasonableness of 

executive compensation arrangements. 

The Commission believes the PCAOB’s 

clarification is responsive and 

appropriate since such assessments 

would have resulted in a significant 

unintended change to the current 

objectives of the audit, which are 

focused on risks of material 

misstatement of the financial 

statements. 

In addition to the amendments 

relating to financial relationships and 

transactions with executive officers, the 

Board adopted amendments to revise 

other auditing standards to conform 

them to the Proposed Rules and, where 

appropriate, include new requirements 

that complement the Proposed Rules. 

For example, the Board adopted 

amendments to AU section 333, 

Management Representations (‘‘AU sec. 

333’’), to require a representation that 

management has made available to the 

auditor the names of all related parties 

and relationships and transactions with 

related parties. Additionally, among 

others, the Board adopted amendments 

to AU sec. 333 to require a written 

representation from management that 

there are no side agreements or other 

arrangements (either written or oral) 

undisclosed to the auditor. Other new 

requirements complement the 

requirements in the Proposed Rules 

through improvements to the auditor’s: 

(i) Communications with a predecessor 

auditor; (ii) procedures during the 

period subsequent to the balance-sheet 

date, but prior to the issuance of the 

financial statements; and (iii) 

procedures during reviews of interim 

financial information. 

The PCAOB has proposed application 

of its Proposed Rules to audits of all 

issuers, including audits of emerging 

growth companies (‘‘EGCs’’),11 as 

discussed in Section IV. below. The 

Proposed Rules also would apply to 

audits of SEC-registered brokers and 

dealers.12 The Proposed Rules would be 

effective for audits of financial 

statements for fiscal years beginning on 

or after December 15, 2014, including 

reviews of interim financial information 

within these fiscal years. 

III. Comment Letters 

As noted above, the Commission 

received three comment letters 

concerning the Proposed Rules. Two 

commenters expressed support for the 

Proposed Rules.13 One of these 

commenters also expressed a desire for 

an earlier effective date.14 The final 

commenter raised concerns regarding 

the substance of the PCAOB’s economic 

analysis and consideration of costbenefit analysis upon EGCs.15

1. Effective Date 

The PCAOB describes the rationale as 

to the effective date, which was 

established to allow for sufficient time 

for registered firms to incorporate the 

new requirements into methodologies, 

guidance, audit programs, and staff 

training. The Commission believes the 

Proposed Rules’ effective date is not 

unreasonable in order to provide 

sufficient time for proper 

implementation by registered firms. 

2. Economic Analysis 

One commenter raised concerns 

regarding the substance of the PCAOB’s 

economic analysis and its consideration 


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16See Section IV below for further information 

regarding the PCAOB’s EGC analysis. 

17See http://pcaobus.org/Standards/QandA/04- 

07-2010_APA_5.pdf 

18For examples of similar audit procedures and 

requirements, see footnote 86 on page A5–46 of the 

Final Rule Release. Additionally, Appendix 6 of the 

Final Rule Release compares certain significant 

differences between the objective and certain key 

requirements of the Proposed Rules and analogous 

standards of the IAASB and the ASB. 

of EGCs. The commenter stated that it 

expressed these concerns in previous 

comment letters to the PCAOB, and in 

its opinion, those concerns have not 

been considered or addressed by the 

PCAOB. This commenter’s principal 

concerns are addressed below. 

• In its comment letter on the 

Original Proposal, the commenter stated 

that the proposal did not contain a costbenefit analysis. 

The Board presented, and sought 

comment on, an economic analysis in 

the Reproposal. Further, in response to 

comments on the economic analysis 

provided in the Reproposal, the Board 

revised its analysis as presented in its 

release accompanying the Proposed 

Rules (‘‘Final Rule Release’’). 

• In its comment letter on the 

Reproposal, the commenter stated that 

the economic analysis was composed of 

a number of assertions that were generic 

and speculative in nature, and were not 

linked to the elements of the proposal. 

In the economic analysis provided in 

the Final Rule Release, the Board 

refined the analysis included with the 

Reproposal, including by linking the 

elements of the analysis closer to the 

elements of the Proposed Rules. 

Specifically, the Board’s refined 

analysis set forth: (1) A description of 

the need for the standard-setting, and 

how the Proposed Rules address the 

need; (2) the baseline to consider the 

economic impacts of the Proposed 

Rules; (3) the Board’s approach and 

consideration of alternatives; (4) the 

economic impacts of the Proposed Rules 

including benefits, costs, effects on 

different categories of audit firms and 

smaller companies, and responses to 

comments received on the economic 

analysis included with the Reproposal; 

and (5) economic considerations 

pertaining to audits of EGCs, including 

efficiency, competition and capital 

formation. The Board also 

acknowledged challenges in considering 

the economic impacts, such as the 

challenges of quantifying the economic 

impact of changes to audit standards, 

and explained how the Board addressed 

those challenges. 

• In its comment letter on the 

Reproposal, the commenter stated that 

the economic analysis fails to explicitly 

articulate any appropriate economic 

baseline against which to measure the 

proposed requirements’ likely economic 

impact. 

The Board presented an economic 

baseline within Appendix 5 of the Final 

Rule Release, which the Board used in 

its economic analysis as a benchmark 

for comparing against the Proposed 

Rules. The Board’s discussion of the 

baseline includes both existing 

requirements and current audit 

practices, where the latter is determined 

based on information from the Board’s 

oversight activities, including its 

inspection findings. The Board’s 

analysis of the baseline shows that audit 

practices associated with the areas 

addressed by the Proposed Rules are 

inconsistent across firms. 

• In its comment letter on the 

Reproposal, the commenter stated that 

the Reproposal contains no substantive 

analysis of the economic impact of the 

proposed requirements on EGCs, EGCs 

vis-a`-vis other companies, or companies 

generally. 

The economic analysis presented in 

the Final Rule Release presents the 

Board’s economic considerations of the 

Proposed Rules both for companies 

generally and specifically for EGCs. 

Broadly, the Board believes that the 

areas addressed by the Proposed Rules 

are challenging areas warranting 

additional audit effort and focus. The 

Board notes that EGCs will incur some 

incremental costs because costs may be 

disproportionately higher for smaller 

companies, including EGCs.16 However, 

the Board notes that EGCs may benefit 

more from the Proposed Rules because, 

as compared to non-EGCs, related party 

transactions are more common and 

there is a higher likelihood for control 

deficiencies, which may result in a 

higher risk of material misstatement 

associated with related party 

transactions. 

The analysis includes the relevant 

views of those who commented on the 

Reproposal on the economic effects of 

the Proposed Rules on EGCs. Further, 

the Board notes that the Proposed Rules 

are designed to mitigate cost impacts by 

aligning the auditor’s efforts with the 

risk assessment standards and providing 

opportunities for a scaled approach 

depending on the size and complexity 

of the company being audited. The 

Board states that this alignment with 

risk assessment allows auditors to 

integrate audit effort where appropriate 

and thereby avoid unnecessary audit 

effort. Finally, the Board’s analysis takes 

into account the view from certain 

commenters on the Reproposal that it 

may be more costly not to apply the 

Proposed Rules to audits of EGCs 

because it would require firms to 

maintain two audit methodologies. The 

Commission believes that the Board’s 

economic analysis reasonably addresses 

the comment raised, and as discussed 

further in Section IV, based on the 

analysis submitted, the Commission 

believes the information in the record is 

sufficient for the Commission to make 

the requested EGC determination in 

relation to the Proposed Rules. 

• In its comment letter on the 

Reproposal, the commenter stated that 

the Reproposal does not adequately 

address potential alternatives. 

The Final Rule Release discussed the 

Board’s consideration of alternatives to 

the Proposed Rules. In response to the 

commenter’s suggestion that the 

Reproposal did not discuss why PCAOB 

Staff Audit Practice Alert No. 5, Auditor 

Considerations Regarding Significant 

Unusual Transactions (‘‘Practice 

Alert’’),17 was inadequate, the Board 

stated that the Practice Alert was issued 

to remind auditors of the risks 

associated with significant unusual 

transactions and to compile selected, 

relevant requirements from existing 

PCAOB auditing standards into one 

document. Given that the Practice Alert 

only highlights circumstances for 

auditor consideration, it did not alter 

audit requirements with respect to 

significant unusual transactions. The 

Board concluded, based in part on the 

results of its oversight activities 

following the issuance of the Practice 

Alert, that it was appropriate to develop 

standards with more specific 

requirements to promote heightened 

scrutiny in the areas addressed by the 

Proposed Rules. Further, the Board 

stated that the need to improve the 

existing standards in these areas, 

including alignment with the Board’s 

risk assessment standards, cannot be 

adequately addressed through staff 

interpretations of existing standards. 

In response to the commenter’s 

statement that the Board did not analyze 

why it chose not to converge the 

Proposed Rules with similar standards 

of the International Auditing and 

Assurance Standards Board (‘‘IAASB’’) 

and the Auditing Standards Board of the 

American Institute of Certified Public 

Accountants (‘‘ASB’’), the Board states 

in its Final Rule Release that it 

considered the analogous standards of 

the IAASB and the ASB and 

incorporated a number of similar audit 

procedures and requirements that the 

Board believed were useful and 

appropriate.18 The Board, however, 

determined that the areas addressed by 

the Proposed Rules require heightened 

scrutiny, and, thus, the Proposed Rules 


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Federal Register / Vol. 79, No. 207 / Monday, October 27, 2014 / Notices 63991 

19For example, in the Board’s adopting release for 

its risk assessment standards it stated the following: 

‘‘[B]ecause the Board’s standards must be 

consistent with the Board’s statutory mandate, 

differences will continue to exist between the 

Board’s standards and the standards of the IAASB 

and ASB, e.g., when the Board decides to retain an 

existing requirement in PCAOB standards that is 

not included in IAASB or ASB standards. Also, 

certain differences are often necessary for the 

Board’s standards to be consistent with relevant 

provisions of the federal securities laws or other 

existing standards or rules of the Board. Also, the 

Board’s standards-setting activities are informed by 

and developed to some degree, in response to 

observations from its oversight activities.’’ 

See PCAOB Release No. 2010–004, August 5, 

2010, pp. A10–91—A10–92 (internal footnotes 

omitted). 

20See Release No. 34–63606 (December 23, 2010), 

75 FR 82417 (December 30, 2010) and Release No. 

34–68453 (December 17, 2012), 77 FR 75689 

(December 21, 2012). 

21See National Association of Manufacturers v. 

SEC, 748 F.3d 359, 369 (D.C. Cir. 2014) (stating that 

‘‘[a]n agency. . . need not conduct a ‘rigorous, 

quantitative economic analysis’ unless the statute 

explicitly directs it to do so’’), partially overruled 

on other grounds by American Meat Institute v. U.S. 

Department of Agriculture, 760 F.3d 18 (D.C. Cir. 

2014) (en banc). 

22Section 103(a)(3)(C) of the Sarbanes-Oxley Act, 

as amended by Section 104 of the JOBS Act. 

23One comment letter, as discussed above in 

Section III, was received relating to the PCAOB’s 

EGC analysis. See Chamber Letter. 

contain auditing requirements that are 

not reflected in the analogous standards 

of the IAASB and the ASB. Further, the 

Commission notes that the Board has 

received similar comments in the past 

and has thus previously addressed its 

consideration of the work of other 

standard-setters generally. 19 The 

Commission also addressed similar 

comments in connection with its 

consideration of other rules proposed by 

the PCAOB.20 As it relates to the 

Proposed Rules, the Commission notes 

the PCAOB’s efforts to consider the 

analogous standards of the IAASB and 

the ASB. Thus, while the Commission 

continues to encourage the PCAOB to 

consider the work of other standardsetters, there remain a variety of reasons 

why the Board’s standards may differ 

from the standards of the IAASB and 

ASB, and we believe the Board has 

provided a reasonable explanation for 

the differences here. 

• Finally, in its comment letter to the 

Commission, the commenter 

recommended ‘‘that the SEC return the 

[Proposed Rules] to the PCAOB for a 

cost benefit analysis that complies with 

the [Jumpstart Our Business Startups] 

Act and allows stakeholders to 

understand the costs and benefits . . .’’ 

Further, the commenter stated that the 

Proposed Rules add to audit complexity 

and raise doubt that the proposed 

requirements would be cost-benefit 

effective. 

The Commission notes that the Board 

provided a detailed qualitative analysis 

that took into account the views of 

commenters. As the Board explained, 

there was limited research and data 

available regarding economic costs and 

benefits of the Proposed Rules, making 

reliable quantification difficult. Further, 

as part of the Board’s process through its 

issuance of the Original Proposal and 

the Reproposal, the Board requested 

empirical data regarding costs and 

benefits specific to the Proposed Rules, 

and commenters did not provide any. 

The Commission observes that Section 

103(a)(3)(C) of the Sarbanes-Oxley Act, 

the relevant statutory provision added 

by the Jumpstart our Business Startups 

(‘‘JOBS’’) Act, does not require a 

detailed, quantitative cost-benefit 

analysis.21 Consistent with the 

responses to the commenter’s specific 

concerns enumerated above, the Board 

states that it designed the Proposed 

Rules to minimize complexity by 

aligning the auditor’s efforts with the 

risk assessment standards and providing 

opportunities for a scaled approach 

depending on the size and complexity 

of the company being audited. 

IV. The PCAOB’s EGC Request 

Section 103(a)(3)(C) of the SarbanesOxley Act provides that any additional 

rules adopted by the PCAOB subsequent 

to April 5, 2012 do not apply to the 

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.22 Having considered those 

factors, and as explained further herein, 

the Commission finds that applying the 

Proposed Rules to audits of EGCs is 

necessary or appropriate in the public 

interest. 

In proposing application of the 

Proposed Rules to audits of all issuers, 

including EGCs, the PCAOB requested 

that the Commission make the 

determination required by Section 

103(a)(3)(C). To assist the Commission 

in making its determination, the PCAOB 

prepared and submitted to the 

Commission its own EGC analysis. The 

PCAOB’s EGC analysis includes 

discussions of characteristics of selfidentified EGCs and economic 

considerations pertaining to audits of 

EGCs, including efficiency, competition, 

and capital formation. In its analysis, 

the Board states, among other things, 

that applying the Proposed Rules to the 

audits of EGCs may be particularly 

pertinent because of the characteristics 

of EGCs (e.g., potential for higher rates 

of material weaknesses in internal 

control, use of related party 

transactions, and substantial doubt 

about the company’s ability to continue 

as a going concern). In fact, the Board’s 

oversight activities have identified a 

significant number of findings regarding 

related party transactions in audits of 

financial statements of smaller public 

companies, which have characteristics 

that are similar to EGCs. 

The PCAOB’s EGC analysis was 

included in the Commission’s public 

notice soliciting comment on the 

Proposed Rules.23 Based on the analysis 

submitted, we believe the information 

in the record is sufficient for the 

Commission to make the requested EGC 

determination in relation to the 

Proposed Rules. The Commission also 

takes note, in particular, of the PCAOB’s 

approach to the Proposed Rules, which 

are intended to build upon existing 

requirements in the areas addressed by 

them; align with the auditor’s efforts in 

complying with the risk assessment 

standards; and provide opportunities for 

scaling based on the facts, 

circumstances, and risks of the 

particular company under audit. 

V. Conclusion 

The Commission has carefully 

reviewed and considered the Proposed 

Rules and the information submitted 

therewith by the PCAOB, including the 

PCAOB’s EGC analysis, and the 

comment letters received. In connection 

with the PCAOB’s filing and the 

Commission’s review. 

A. The Commission finds that the 

Proposed Rules are consistent with the 

requirements of the Sarbanes-Oxley Act 

and the securities laws and are 

necessary or appropriate in the public 

interest or for the protection of 

investors; and 

B. Separately, the Commission finds 

that the application of the Proposed 

Rules to EGC audits 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. 

It is therefore ordered, pursuant to 

Section 107 of the Sarbanes-Oxley Act 

and Section 19(b)(2) of the Exchange 

Act, that the Proposed Rules (File No. 

PCAOB–2014–01) be and hereby are 

approved. 

By the Commission. 

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–25432 Filed 10–24–14; 8:45 am] 

BILLING CODE 8011–01–P 


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