49886 Federal Register / Vol. 82, No. 207 / Friday, October 27, 2017 / Notices 

responsible for FINRA’s performance under this 

regulatory services agreement. See id. 

28See id. 

29See id. 

30See id. 

31See id. 

32 15 U.S.C. 78f(b)(5). 

33 15 U.S.C. 78s(b)(2). 

34 17 CFR 200.30–3(a)(12). 

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

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

3The Board originally issued a concept release on 

these matters in 2011. See Concept Release on 

Possible Revisions to PCAOB Standards Related to 

Reports on Audited Financial Statements and 

Related Amendments to PCAOB Standards, PCAOB 

Release No. 2011–003 (June 21, 2011) (‘‘PCAOB 

Concept Release’’), available at https://pcaobus.org/ 

Rulemaking/Docket034/Concept_Release.pdf. In 

2013, the Board issued a proposed rule. See 

Proposed Auditing Standards—The Auditor’s 

Report on an Audit of Financial Statements When 

the Auditor Expresses an Unqualified Opinion; The 

Auditor’s Responsibilities Regarding Other 

Information in Certain Documents Containing 

Audited Financial Statements and the Related 

Auditor’s Report; and Related Amendments to 

PCAOB Standards, PCAOB Release No. 2013–005 

(August 13, 2013) (‘‘PCAOB Proposal’’), available at 

https://pcaobus.org/Rulemaking/Docket034/ 

Release_2013-005_ARM.pdf. The Board issued a reproposal in 2016. See Proposed Auditing 

Standard—The Auditor’s Report on an Audit of 

Financial Statements When the Auditor Expresses 

an Unqualified Opinion and Related Amendments 

to PCAOB Standards, PCAOB Release No. 2016–003 

(May 11, 2016) (‘‘PCAOB Re-proposal’’), available 

at https://pcaobus.org/Rulemaking/Docket034/ 

Release-2016-003-ARM.pdf. 

4See Release No. 34–81187 (July 21, 2017), 82 FR 

35396 (July 28, 2017) available at https://

www.sec.gov/rules/pcaob/2017/34-81187.pdf. 

5See id. 

6Copies of the comment letters received on the 

Commission order noticing the Proposed Rules are 

available on the Commission’s Web site at https:// 

www.sec.gov/comments/pcaob-2017-01/ 

pcaob201701.htm. 

(6) The Exchange or FINRA, on behalf 

of the Exchange, or both, will 

communicate as needed regarding 

trading in the Shares with other markets 

and other entities that are members of 

the ISG, and the Exchange or FINRA, on 

behalf of the Exchange, or both, may 

obtain trading information regarding 

trading in the Shares from such markets 

and other entities. In addition, the 

Exchange may obtain information 

regarding trading in the Shares from 

markets and other entities that are 

members of ISG or with which the 

Exchange has in place a comprehensive 

surveillance sharing agreement.28

(7) Prior to the commencement of 

trading, the Exchange will inform its 

ETP Holders in an Information Bulletin 

of the special characteristics and risks 

associated with trading the Shares. 

Specifically, the Information Bulletin 

will discuss the following: (1) The 

procedures for purchases and 

redemptions of Shares in creation units 

(including noting that Shares are not 

individually redeemable); (2) NYSE 

Arca Rule 9.2–E(a), which imposes a 

duty of due diligence on its ETP Holders 

to learn the essential facts relating to 

every customer prior to trading the 

Shares; (3) how information regarding 

the IIV is disseminated; (4) the 

requirement that ETP Holders deliver a 

prospectus to investors purchasing 

newly issued Shares prior to or 

concurrently with the confirmation of a 

transaction; (5) the possibility that 

trading spreads and the resulting 

premium or discount on the Shares may 

widen as a result of reduced liquidity of 

gold trading during the Core and Late 

Trading Sessions after the close of the 

major world gold markets; and (6) 

trading information.29

(8) All statements and representations 

made in this filing regarding (a) the 

description of the portfolio or reference 

assets, (b) limitations on portfolio 

holdings or reference assets, or (c) the 

applicability of Exchange listing rules 

specified in this rule filing shall 

constitute continued listing 

requirements for listing the Shares of 

the Trust on the Exchange.30

(9) The issuer has represented to the 

Exchange that it will advise the 

Exchange of any failure by the Trust to 

comply with the continued listing 

requirements and, pursuant to its 

obligations under Section 19(g)(1) of the 

Act, the Exchange will monitor for 

compliance with the continued listing 

requirements. If the Trust is not in 

compliance with the applicable listing 

requirements, the Exchange will 

commence delisting procedures under 

NYSE Arca Rule 5.5(m).31

This approval order is based on all of 

the Exchange’s representations— 

including those set forth above and in 

Amendment No. 1—and the Exchange’s 

description of the Trust. 

For the foregoing reasons, the 

Commission finds that the proposed 

rule change, as modified by Amendment 

No. 1, is consistent with Section 6(b)(5) 

of the Act 32 and the rules and 

regulations thereunder applicable to a 

national securities exchange. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Exchange Act,33

that the proposed rule change (SR– 

NYSEArca–2017–98), as modified by 

Amendment No. 1 be, and it hereby is, 

approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.34

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2017–23371 Filed 10–26–17; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–81916; File No. PCAOB– 

2017–01] 

Public Company Accounting Oversight 

Board; Order Granting Approval of 

Proposed Rules on the Auditor’s 

Report on an Audit of Financial 

Statements When the Auditor 

Expresses an Unqualified Opinion, and 

Departures From Unqualified Opinions 

and Other Reporting Circumstances, 

and Related Amendments to Auditing 

Standards 

October 23, 2017. 

I. Introduction 

On July 19, 2017, 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’’), a proposal to adopt AS 3101, The 

Auditor’s Report on an Audit of 

Financial Statements When the Auditor 

Expresses an Unqualified Opinion and 

related amendments to other auditing 

standards (collectively, the ‘‘Proposed 

Rules’’).3 The Proposed Rules were 

published for comment in the Federal 

Register on July 28, 2017.4 At the time 

the notice was issued, the Commission 

extended to October 26, 2017 the date 

by which the Commission should take 

action on the Proposed Rules.5 The 

Commission received approximately 50 

comment letters in response to the 

notice.6 This order approves the 

Proposed Rules, which we find to be 

consistent with the requirements of the 

Sarbanes-Oxley Act and the securities 

laws and necessary or appropriate in the 

public interest or for the protection of 

investors. 

II. Description of the Proposed Rules 

On June 1, 2017, the Board adopted 

AS 3101, The Auditor’s Report on an 

Audit of Financial Statements When the 

Auditor Expresses an Unqualified 

Opinion, which replaces portions of AS 

3101, Reports on Audited Financial 

Statements, and re-designates the 

remaining portions of AS 3101 as AS 

3105, Departures from Unqualified 

Opinions and Other Reporting 

Circumstances. The Proposed Rules will 

require that the auditor provide new 

information about the audit that is 

intended to make the auditor’s report 


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7The term ‘‘emerging growth company’’ is 

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

U.S.C. 78c(a)(80)). See also Inflation Adjustments 

and Other Technical Amendments Under Titles I 

and III of the JOBS Act, SEC Rel. 33–10332 (Mar. 

31, 2017), 82 FR 17545 (Apr. 12, 2017), available 

at https://www.sec.gov/rules/final/2017/33- 

10332.pdf. 

8 If the broker or dealer is an issuer, the 

requirement to communicate CAMs would apply. 

more informative and relevant to 

investors and other financial statement 

users, as discussed further below. 

A. Changes to PCAOB Standards 

The Proposed Rules retain the pass/ 

fail opinion of the existing auditor’s 

report but make significant changes to 

the existing auditor’s report, including 

the following: 

• Critical audit matters (‘‘CAMs’’). 

The Proposed Rules require the auditor 

to communicate in the auditor’s report 

any CAMs arising from the current 

period’s audit or state that the auditor 

determined that there are no CAMs. 

• A CAM is defined as any matter 

arising from the audit of the financial 

statements that was communicated or 

required to be communicated to the 

audit committee and that: 

(1) Relates to accounts or disclosures 

that are material to the financial 

statements; and 

(2) involved especially challenging, 

subjective, or complex auditor 

judgment. 

• In determining whether a matter 

involved especially challenging, 

subjective, or complex auditor 

judgment, the auditor should take into 

account, alone or in combination, the 

following factors, as well as other 

factors specific to the audit: 

• The auditor’s assessment of the 

risks of material misstatement, 

including significant risks; 

• The degree of auditor judgment 

related to areas in the financial 

statements that involved the application 

of significant judgment or estimation by 

management, including estimates with 

significant measurement uncertainty; 

• The nature and timing of significant 

unusual transactions and the extent of 

audit effort and judgment related to 

these transactions; 

• The degree of auditor subjectivity in 

applying audit procedures to address 

the matter or in evaluating the results of 

those procedures; 

• The nature and extent of audit effort 

required to address the matter, 

including the extent of specialized skill 

or knowledge needed or the nature of 

consultations outside the engagement 

team regarding the matter; and 

• The nature of audit evidence 

obtained regarding the matter. 

• The communication of each CAM 

within the auditor’s report includes: 

• Identifying the CAM; 

• Describing the principal 

considerations that led the auditor to 

determine that the matter is a CAM; 

• Describing how the CAM was 

addressed in the audit; and 

• Referring to the relevant financial 

statement accounts or disclosures. 

• For each matter arising from the 

audit of the financial statements that (a) 

was communicated or required to be 

communicated to the audit committee, 

and (b) relates to accounts or disclosures 

that are material to the financial 

statements, the auditor must document 

whether or not the matter was 

determined to be a CAM (i.e., involved 

especially challenging, subjective, or 

complex auditor judgment) and the 

basis for such determination. 

• Additional Changes to the Auditor’s 

Report. The Proposed Rules also include 

a number of other changes to the 

auditor’s report that are primarily 

intended to clarify the auditor’s role and 

responsibilities related to the audit of 

the financial statements, provide 

additional information about the 

auditor, and make the auditor’s report 

easier to read. These include: 

• Auditor tenure—a statement 

disclosing the year in which the auditor 

began serving consecutively as the 

company’s auditor; 

• Independence—a statement 

regarding the requirement for the 

auditor to be independent; 

• Addressee—the auditor’s report 

will be addressed to the company’s 

shareholders and board of directors or 

equivalents (additional addressees are 

also permitted); 

• Amendments to basic elements— 

certain standardized language in the 

auditor’s report has been changed, 

including adding the phrase ‘‘whether 

due to error or fraud,’’ when describing 

the auditor’s responsibility under 

PCAOB standards to obtain reasonable 

assurance about whether the financial 

statements are free of material 

misstatement; and 

• Standardized form of the auditor’s 

report—the opinion will appear in the 

first section of the auditor’s report, and 

section titles have been added to guide 

the reader. 

The amendments to other PCAOB 

standards include: 

• AS 3105, Departures from 

Unqualified Opinions and Other 

Reporting Circumstances to (1) require 

the communication of CAMs in certain 

circumstances; (2) revise certain 

terminology to align with AS 3101 of 

the Proposed Rules; and (3) amend the 

illustrative reports for the basic 

elements of AS 3101 of the Proposed 

Rules and the required order of certain 

sections of the auditor’s report; 

• AS 1220, Engagement Quality 

Review to require the engagement 

quality reviewer to evaluate the 

engagement team’s determination, 

communication, and documentation of 

CAMs; 

• AS 1301, Communications with 

Audit Committees to require the auditor 

to provide to and discuss with the audit 

committee a draft of the auditor’s report; 

• AS 2201, An Audit of Internal 

Control Over Financial Reporting That 

Is Integrated with An Audit of Financial 

Statements to conform the example 

auditor’s report with the example 

auditor’s report on the financial 

statements in AS 3101 of the Proposed 

Rules; 

• AS 2820, Evaluating Consistency of 

Financial Statements to include the 

existing reporting requirements and 

illustrative explanatory language related 

to a change in accounting principle or 

a restatement that is currently in AS 

3105; and 

• AS 4105, Reviews of Interim 

Financial Information to include the 

basic elements of AS 3101 of the 

Proposed Rules, where applicable. 

B. Applicability 

Critical Audit Matters 

Under the Proposed Rules, 

communication of CAMs in the 

auditor’s report is not required for 

audits of emerging growth companies 

(‘‘EGCs’’); 7 brokers and dealers 

reporting under Exchange Act Rule 17a– 

5; 8 investment companies other than 

business development companies 

(‘‘BDCs’’); and employee stock purchase, 

savings, and similar plans. 

Additional Changes to the Auditor’s 

Report 

The additional changes to the 

auditor’s report contained in the 

Proposed Rules apply for all audits 

performed under PCAOB standards, 

including audits of EGCs, as discussed 

in Section IV below. 

C. Effective Date 

The Proposed Rules would be 

effective as follows: 

a. All paragraphs of the Proposed 

Rules, except the paragraphs related to 

CAMs in AS 3101 of the Proposed Rules 

(paragraphs .11 through .17) and 

amendments related to those 

paragraphs: All audits of fiscal years 

ending on or after December 15, 2017; 

and 

b. All paragraphs related to CAMs in 

AS 3101 of the Proposed Rules 


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9See supra footnote 6. 

10See Section 107(b)(3) of the Sarbanes-Oxley 

Act. The Sarbanes-Oxley Act also specifies that the 

provisions of Section 19(b) of the Exchange Act 

shall govern the proposed rules of the Board. See 

Section 107(b)(4) of the Sarbanes-Oxley Act. 

Section 19 of the Exchange Act covers the 

registration, responsibilities, and oversight of selfregulatory organizations. Under the procedures 

prescribed by the Sarbanes-Oxley Act and Section 

19(b)(2) of the Exchange Act, the Commission must 

either approve or disapprove, or institute 

proceedings to determine whether the proposed 

rules of the Board should be disapproved; and these 

procedures do not expressly permit the Commission 

to amend or supplement the proposed rules of the 

Board. 

11See e.g., Letter from Council of Institutional 

Investors, August 8, 2017 (‘‘CII Letter’’); Letter from 

Hermes Investment Management, August 18, 2017 

(‘‘Hermes Letter’’), Letter from CFA Institute, 

August 24, 2017 (‘‘CFA Institute Letter’’). 

(paragraphs .11 through .17) and 

amendments related to those 

paragraphs: 

• For audits of large accelerated filers: 

Fiscal years ending on or after June 30, 

2019; and 

• For audits of all other companies to 

which the requirements apply: Fiscal 

years ending on or after December 15, 

2020. 

III. Comment Letters 

The Commission’s comment period 

on the Proposed Rules ended on August 

18, 2017. The Commission received 

approximately 50 comment letters from 

investors and investor associations, 

accounting firms, issuers and issuer 

organizations, and others.9 Most 

commenters generally supported the 

Board’s objective to improve the 

auditor’s report to make it more 

informative and relevant to financial 

statement users. Commenters’ views 

varied on the nature and extent of 

specific changes, particularly those 

related to CAMs. Investors and investor 

associations were supportive of the 

Proposed Rules, including 

communication of CAMs, and 

encouraged adoption without delay. 

Larger accounting firms were generally 

supportive but raised certain practical 

concerns and asked for guidance during 

the implementation phase, a safe-harbor 

related to CAMs, or postimplementation reviews. A number of 

other commenters raised questions and 

concerns about the Proposed Rules and 

their application and recommended the 

Commission not approve the Proposed 

Rules in their current form. These 

concerns generally relate to: (1) 

Usefulness of the information in CAMs; 

(2) the auditor’s role as the potential 

source of original information about the 

company in CAMs; (3) the potential 

impact of CAMs on the role of the audit 

committee and the communication 

among the audit committee, 

management, and the auditor; (4) the 

potential liability impact of CAMs; (5) 

the economic analysis of CAMs; (6) 

practicability matters related to CAMs; 

(7) disclosure of auditor tenure in the 

auditor’s report; (8) the effective dates of 

the Proposed Rules; and (9) 

implementation efforts. 

As background, for several years, the 

Board has been considering changes to 

the auditor’s report, throughout which 

the Board has, in various settings and 

formats, considered commenters’ 

concerns on such changes. In June 2011, 

the Board issued the PCAOB Concept 

Release to solicit comment on a number 

of potential changes to the auditor’s 

report. The Board also held a public 

roundtable in September 2011 to obtain 

additional insight on the alternatives 

presented in the PCAOB Concept 

Release. 

After considering the results of its 

outreach and comments on the PCAOB 

Concept Release, in August 2013, the 

Board issued the PCAOB Proposal that 

included, among other things, new 

requirements for auditors to 

communicate CAMs, as well as 

additional changes to the auditor’s 

report. In April 2014, the Board held a 

public meeting to obtain further input 

on the PCAOB Proposal from a diverse 

group of investors and other financial 

statement users, preparers, audit 

committee members, auditors, and 

others. 

In May 2016, the Board issued the 

PCAOB Re-proposal that modified the 

PCAOB Proposal in several respects in 

response to feedback received. In 

particular, the PCAOB Re-proposal 

modified the source, definition, and 

communication requirements for CAMs. 

Throughout the rulemaking process, 

the Board received comments from 

investors and investor associations that 

consistently stressed the importance 

and value to them of additional 

communication from the auditor. In 

particular, commenters indicated that 

tailored, audit-specific information from 

the auditor’s point of view would 

reduce information asymmetries and 

make the auditor’s report more relevant 

and useful, a view which also was 

shared by at least one of the larger 

accounting firms. Based on these 

comments and its own analysis, the 

Board concluded that requiring auditors 

to provide more information about the 

audit through the communication of 

CAMs will benefit investors and other 

market participants. 

As further explained below, the Board 

also made changes in the Proposed 

Rules to address the significant 

comments received on the PCAOB 

Proposal and the PCAOB Re-proposal. 

In particular, the Board sought to 

balance the potential benefits of CAM 

communications with the concerns 

expressed by some commenters about 

potential consequences, including: The 

auditor’s role as the potential source of 

original information about the company; 

the potential impact of CAMs on the 

role of the audit committee and 

communication among the audit 

committee, management, and the 

auditor; and the potential liability 

impact of CAMs. To balance among 

these competing factors, the Board, 

among other things, limited the source 

of CAMs to matters communicated or 

required to be communicated to the 

audit committee, added a materiality 

component to the definition of a CAM, 

and narrowed the definition of a CAM 

to only those matters that involved 

especially challenging, subjective, or 

complex auditor judgment. In its release 

accompanying the Proposed Rules, the 

Board acknowledged that a variety of 

claims can be raised related to the 

statements in the auditor’s report and 

that litigation is inherently uncertain. 

The Board also stated that it will 

monitor the Proposed Rules after 

implementation for any unintended 

consequences. 

The Sarbanes-Oxley Act requires us to 

determine whether the Proposed Rules 

are consistent with the requirements of 

the Sarbanes-Oxley Act and the 

securities laws or are necessary or 

appropriate in the public interest or for 

the protection of investors.10 In making 

this determination, we have considered 

the comments received by the 

Commission as well as the feedback 

received and modifications made by the 

PCAOB throughout its rulemaking 

process. The discussion below 

addresses the significant points raised 

in the comment letters received by the 

Commission, which were generally 

consistent with the comments the 

PCAOB received during its 

deliberations. 

A. Usefulness of the Information in 

CAMs 

A number of commenters provided 

feedback related to the potential 

usefulness of CAMs. Comments from 

investors and investor associations 

consistently indicated they would find 

CAM communications to be beneficial 

in understanding the audit.11 One 

commenter stated that CAMs will 

provide tailored, audit-specific 

information directly from the auditor’s 

point of view and should provide 

insights that will add to the mix of 

information that could be used in 

investors’ capital allocation and voting 


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12See CII Letter. 

13See id. 

14See Letter from J. Robert Brown Jr., et. al., 

August 21, 2017 (‘‘J. Robert Brown Jr. Letter’’) 

15See Letter from California State Teachers’ 

Retirement System, August 23, 2017. 

16See Letter from California Public Employees’ 

Retirement System, August 18, 2017 (‘‘CalPERS 

Letter’’). 

17See id. 

18See CFA Institute Letter. 

19See Letter from Ernst & Young LLP, August 18, 

2017 (‘‘EY Letter’’). 

20See id. 

21See Letter from Deloitte & Touche LLP, August 

18, 2017 (‘‘Deloitte Letter’’). 

22See e.g., Letter from Aetna Inc. et al., August 

18, 2017 (‘‘Aetna Letter’’); Letter from Quest 

Diagnostics Inc., August 15, 2017 (‘‘Quest Letter’’); 

Letter from Northrop Grumman Corporation, 

August 18, 2017 (‘‘Northrop Grumman Letter’’); 

Letter from New York City Bar, August 18, 2017 

(‘‘New York City Bar Letter’’); Letter from Davis 

Polk & Wardell LLP, August 18, 2017 (‘‘Davis Polk 

Letter’’); Letter from Robert N. Waxman, August 19, 

2017 (‘‘Robert Waxman Letter’’). 

23See e.g., Aetna Letter; Letter from Society for 

Corporate Governance, August 18, 2017 (‘‘Society 

for Corporate Governance Letter’’). 

24See e.g., Society for Corporate Governance 

Letter; Letter from Sullivan & Cromwell LLP, 

August 18, 2017 (‘‘Sullivan & Cromwell Letter’’). 

We discuss commenters’ concerns regarding the 

auditor’s role as the potential source of original 

information in section III.B below. 

25See e.g., Davis Polk Letter; Quest Letter. 

26 17 CFR 229.503(c). 

decisions.12 This commenter also stated 

a belief that CAMs will benefit 

investors, particularly institutional 

investors, in engaging with management 

and the audit committee and in voting 

on the ratification of the auditor.13

Another commenter noted that CAMs 

will reduce the information asymmetry 

between investors and auditors, which 

in turn should reduce the information 

asymmetry between investors and 

management about the company’s 

financial performance.14 One 

commenter noted that, from its 

perspective as a long-term investor, the 

communication of CAMs would provide 

an augmented basis from which 

investors can more fully understand 

challenging, subjective, or complex 

auditor judgment.15 Another commenter 

stated that, through CAMs, investors 

would have more information from 

which to make investment decisions.16

The same commenter noted that, as it 

indicated in comment letters to the 

PCAOB, the inclusion of CAMs would 

enhance transparency, relevance, 

reliability, and credibility in audits.17

Another commenter, noting that the 

Board has balanced the differing 

perspectives of various stakeholders, 

indicated that investors desire robust 

information within the auditor’s report 

beyond the requirements in the 

Proposed Rules.18

In commenting on the Proposed 

Rules, one large accounting firm 

acknowledged that many financial 

statement users have expressed 

dissatisfaction with the current 

reporting by auditors.19 This same 

commenter also stated that the 

enhanced transparency of the audit 

process benefits all stakeholders and 

promotes the important role of 

independent auditors in serving the 

public interest.20 Another large 

accounting firm generally agreed with 

the views of investors and investor 

associations that communication of 

CAMs will enhance the value and 

relevance of audits to the capital 

markets.21

We agree with these commenters and 

the Board that communicating CAMs to 

investors will reduce information 

asymmetries. In particular, we are 

persuaded that the communication of 

CAMs, as structured in the Proposed 

Rules, will add to the total mix of 

information available to investors by 

eliciting more information about the 

audit itself—information that is 

uniquely within the perspective of the 

auditor and, thus, not otherwise 

available to investors and other 

financial statement users. In so doing, 

we believe the communication of CAMs 

could enhance the value and relevance 

of audits to the capital markets and be 

useful to investors and other financial 

statement users in assessing a 

company’s financial reporting and 

making capital allocation and voting 

decisions. We are, therefore, of the view 

that the requirement to communicate 

CAMs, as structured in the Proposed 

Rules, is consistent with the SarbanesOxley Act and the securities laws and 

is necessary or appropriate in the public 

interest or for the protection of 

investors. 

We recognize that some commenters 

questioned the usefulness of CAMs, 

including asserting that the 

communications will not provide 

meaningful information, likely will 

duplicate management disclosures, or 

will use standardized language (some 

commenters referred to this as 

‘‘boilerplate’’).22 A few commenters 

expressed concern that CAMs could also 

provide information that conflicts with 

management disclosures, which some 

argued would be confusing to 

investors.23 Some commenters indicated 

CAMs will force issuers to make 

reactive disclosures because they will 

not want auditors to be the source of 

information about the company that 

would not otherwise have been 

disclosed (which commenters referred 

to as ‘‘original information’’), which 

they argued could increase costs and 

reduce disclosure effectiveness.24 Some 

commenters expressed concern that 

auditors may communicate an 

overabundance of CAMs to reduce 

litigation risk, as CAMs may be seen as 

a shield from litigation.25

Similar concerns were raised in the 

PCAOB’s rulemaking process. In 

response to these concerns, the Board 

stated in the release accompanying the 

Proposed Rules that the requirements in 

the Proposed Rules ‘‘aim to provide 

investors with the auditor’s unique 

perspective on the areas of the audit that 

involved the auditor’s especially 

challenging, subjective, or complex 

judgments. Limiting critical audit 

matters to these areas should mitigate 

the extent to which expanded auditor 

reporting could become standardized. 

Focusing on auditor judgment should 

limit the extent to which expanded 

auditor reporting could become 

duplicative of management’s reporting.’’ 

We acknowledge the risks identified 

by commenters that CAMs will not 

provide meaningful incremental 

information, either because the 

information is duplicative of what is 

already provided by the issuer, or 

because auditors will communicate 

numerous or boilerplate CAMs. With 

respect to the duplication risk, the 

requirement for CAM communications 

focuses on the auditor’s perspective, not 

the issuer’s. Specifically, as discussed 

above in Section II.A, ‘‘Changes to 

PCAOB Standards,’’ the auditor must 

identify the CAM, describe the principal 

considerations that led the auditor to 

determine that the matter is a CAM, 

describe how the CAM was addressed in 

the audit, and refer to the relevant 

financial statement accounts or 

disclosures. With the exception of the 

reference to the relevant portions of the 

financial statements, those required 

communications are not expected to 

overlap with the Commission’s required 

issuer disclosures, which generally do 

not focus on the audit. Also, the 

required reference to the relevant 

financial statement accounts or 

disclosures provides context for the 

CAM-related communications but does 

not necessarily duplicate those 

disclosures. 

With respect to the risk that auditors 

would communicate unnecessary CAMs 

or boilerplate CAMs, we acknowledge 

that our own experience with the 

disclosure by companies of risk factors 

under Item 503(c) of Regulation S–K 26

illustrates the potential challenges of 

disclosure practices. The Commission 

and SEC staff have issued numerous 

releases and other guidance seeking to 


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27See e.g., Plain English Disclosure, Release No. 

33–7497 (Jan. 28, 1998), 63 FR 6370 (Feb. 6, 1998), 

available at https://www.sec.gov/rules/final/33- 

7497.txt. 

28See e.g., Letter from Center for Capital Markets 

Competitiveness, U.S. Chamber of Commerce, 

August 11, 2017 (‘‘CCMC Letter’’); Quest Letter; 

Letter from Eli Lilly and Company, August 15, 2017 

(‘‘Eli Lilly Letter’’); Letter from Regions Financial 

Corporation, August 17, 2017 (‘‘Regions Letter’’); 

Sullivan & Cromwell Letter; Letter from American 

Tower Corporation, et al., August 18, 2017 

(‘‘American Tower Letter’’); New York City Bar 

Letter; Davis Polk Letter; Letter from Financial 

Executives International, August 18, 2017 (‘‘FEI 

Letter’’); Robert Waxman Letter; Letter from Cleary 

Gottlieb Steen & Hamilton LLP, August 24, 2017 

(‘‘Cleary Gottlieb Letter’’). 

29See e.g., CCMC Letter; Quest Letter. 

30See e.g., CCMC Letter. 

31See e.g., CII Letter; Letter from The Capital 

Group Companies Inc., August 15, 2017 (‘‘Capital 

Group Letter’’). 

32See Note 2 to Paragraph 14 of AS 3101 within 

the Proposed Rules. 

33 In the release accompanying the Proposed 

Rules, the Board states, ‘‘there are areas under 

current law and auditing standards that require 

auditor reporting that goes beyond attesting to the 

compliance of management disclosures (e.g., 

substantial doubt about a company’s ability to 

continue as a going concern or illegal acts).’’ See 

also Cleary Gottlieb Letter (acknowledging that no 

legal prohibition prevents the auditor from 

communicating original information). 

34The mission of the PCAOB, as provided in 

Section 101(a) of the Sarbanes-Oxley Act, is ‘‘to 

oversee the audit of companies that are subject to 

the securities laws, and related matters, in order to 

protect the interests of investors and further the 

public interest in the preparation of informative, 

accurate, and independent audit reports.’’ 

(emphasis added). 

induce registrants to focus on clear 

discussions of the ‘‘most significant 

factors,’’ rather than numerous 

boilerplate risk factors.27

We believe that some of these 

concerns are lessened by the way that 

the Board has defined CAMs. 

Specifically, as it relates to the concern 

of auditors reporting an overabundance 

of CAMs, we note that, under the 

Proposed Rules, a matter must meet 

each element of the definition of a CAM. 

In our view, the inclusion of a 

materiality component in the definition; 

narrowing the source of potential CAMs 

to matters communicated or required to 

be communicated to the audit 

committee; limiting CAMs to those areas 

that involved especially challenging, 

subjective, or complex auditor 

judgment; and refining the factors to 

take into account in determining 

whether a matter involved especially 

challenging, subjective, or complex 

auditor judgment should all act to 

mitigate the risk of auditors reporting 

too many CAMs. 

Similarly, we believe that the focus on 

auditor judgment in the definition of 

CAMs, along with the requirement to 

disclose why a matter is a CAM and how 

it was addressed, should mitigate the 

extent to which expanded auditor 

reporting could become standardized. 

Moreover, we believe these concerns 

must be balanced against the additional 

insights into the audit that we believe 

would be gained from the reporting of 

CAMs. 

Having considered the public 

comments, we are persuaded that the 

reporting of CAMs, as structured in the 

Proposed Rules will be beneficial. The 

communication of CAMs should not be 

numerous and boilerplate and will 

provide additional information about 

the audit—and from the auditor’s own 

unique perspective—that will be useful 

to investors and other financial 

statement users in assessing a 

company’s financial reporting and 

making capital allocation and voting 

decisions. 

B. The Auditor’s Role as the Potential 

Source of Original Information About 

the Company 

A number of commenters expressed 

concern with the auditor potentially 

disclosing original information, 

including potentially immaterial or 

confidential information.28 Some of 

these commenters asserted that this runs 

counter to the U.S. regulatory 

framework, or confuses the role of the 

auditor.29 Further, at least one 

commenter questioned whether the 

PCAOB has the regulatory authority to 

require such disclosure.30 Conversely, 

as stated in the Board’s release 

accompanying the Proposed Rules, 

‘‘[i]nvestor commenters, including the 

auditor’s report working group of the 

Investor Advisory Group, argued that 

there should not be any limitation on 

the auditor providing original 

information and that [the PCAOB Reproposal] went too far in constraining 

the auditor from providing original 

information in response to concerns 

expressed by other commenters. . . .’’ 

Furthermore, as discussed above, 

investors and investor associations have 

indicated that there is a benefit in 

receiving information about the audit 

directly from the auditor’s point of 

view.31

Similar concerns regarding the 

auditor being the source of original 

information about the company were 

raised in response to the PCAOB 

Concept Release, PCAOB Proposal, and 

PCAOB Re-proposal. The Board 

acknowledged these concerns and made 

certain modifications in the Proposed 

Rules in an effort to balance investor 

interests in expanded auditor reporting 

and the concerns of other stakeholders, 

primarily issuers and issuer 

organizations and audit committees, 

related to the costs, benefits, and 

potential unintended consequences 

associated with communicating CAMs. 

For example, the Board added a 

materiality component in the definition 

of a CAM ‘‘to respond to investor 

requests for informative and relevant 

auditor’s reports while, at the same 

time, addressing other commenters’ 

concerns regarding auditor 

communication of immaterial 

information that management is not 

required to disclose under the 

applicable financial reporting 

framework and SEC reporting 

requirements.’’ Further, in an effort to 

clarify the requirements, the Board 

stated in the release accompanying the 

Proposed Rules, among other things, 

that ‘‘while auditor reporting of original 

information is not prohibited, it is 

limited to areas uniquely within the 

perspective of the auditor: describing 

the principal considerations that led the 

auditor to determine that the matter is 

a critical audit matter and how the 

matter was addressed in the audit.’’ AS 

3101 of the Proposed Rules includes the 

following note to the same effect, 

‘‘When describing critical audit matters 

in the auditor’s report, the auditor is not 

expected to provide information about 

the company that has not been made 

publicly available by the company 

unless such information is necessary to 

describe the principal considerations 

that led the auditor to determine that a 

matter is a critical audit matter or how 

the matter was addressed in the 

audit.’’ 32

With respect to whether mandating 

such disclosure would run counter to 

the U.S. regulatory framework or exceed 

the Board’s authority, the Board 

observed in the release accompanying 

the Proposed Rules that there is no 

PCAOB standard, SEC rule, or other 

financial reporting requirement 

prohibiting auditor reporting of 

information that management has not 

previously disclosed.33 Moreover, in the 

release accompanying the Proposed 

Rules, the Board stated its belief that 

requiring expanded auditor reporting to 

make the auditor’s report more relevant 

and informative as prescribed in the 

Proposed Rules is consistent with the 

statutory mandate of the PCAOB.34

We agree with commenters that, in 

general, the preparation and disclosure 

of information about an issuer should be 

the primary responsibility of the issuer, 

and that the auditor’s role, by contrast, 

is to audit the issuer’s financial 

statements and to provide a report 

thereon. That said, we disagree with 

those commenters who expressed an 


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35See supra footnote 33. 

36See e.g., CCMC Letter; American Tower Letter; 

Eli Lilly Letter; New York City Bar Letter. 

37See e.g., CCMC Letter; Eli Lilly Letter. 

38See e.g., J. Robert Brown Jr. Letter; CII Letter; 

Letter from Colorado Public Employees’ Retirement 

Association, August 18, 2017 (‘‘Colorado PERA 

Letter’’). 

39See e.g., Letter from BDO USA LLP, August 15, 

2017 (‘‘BDO Letter’’); Letter from 

PricewaterhouseCoopers LLP, August 18, 2017 

(‘‘PwC Letter’’); Deloitte Letter; EY Letter. 

absolute view of the relative roles and 

responsibilities of the issuer and the 

auditor. Nothing prohibits exceptions to 

this general principle, and indeed, 

existing requirements contemplate a 

role for the auditor in disclosing original 

information.35 Until recently, for 

example, the auditor’s role in preparing 

the ‘‘going concern’’ explanatory 

paragraph contemplated that the auditor 

would be required to provide original 

information. Pursuant to Section 101(a) 

of Sarbanes-Oxley Act, part of the 

Board’s mission is ‘‘to further the public 

interest in the preparation of 

informative, accurate, and independent 

audit reports.’’ Providing investors and 

other users of financial statements with 

the unique perspective of the auditor 

regarding CAMs can give them valuable 

insight about the audit. This furthers the 

underlying purpose of the auditor’s 

report itself—to provide investors and 

other users with information to use in 

evaluating a company’s financial 

statements and make informed 

investment decisions—and is consistent 

with the U.S. regulatory framework. 

Nor do we believe that CAMs, 

particularly as currently proposed, will 

displace the financial reporting 

responsibilities of management. Instead, 

we believe the communication of CAMs 

should add to the total mix of 

information available to investors by 

eliciting more information about the 

audit itself, which is uniquely within 

the perspective of the auditor, 

irrespective of the financial reporting 

responsibilities of management. 

Requiring communication of 

information about the audit, from the 

auditor’s perspective, as the Proposed 

Rules require, should limit the extent to 

which original information would be 

provided by the auditor. Moreover, to 

the extent original information would 

need to be communicated in a CAM, we 

anticipate that the auditor, management, 

and the audit committee will engage in 

a dialogue about that communication. 

While we acknowledge the important 

concerns raised by several commenters 

in this area and intend to closely 

monitor the implementation of the 

Proposed Rules, as discussed further 

below, we believe that the requirements 

for communicating CAMs in the 

auditor’s report are reasonably designed 

to ameliorate these concerns and are 

within the Board’s authority. As a 

result, we believe that the Proposed 

Rules are consistent with the SarbanesOxley Act and the securities laws and 

are necessary or appropriate in the 

public interest or for the protection of 

investors. We address more specific 

concerns on this matter in the following 

paragraphs. 

1. Definition of CAM 

As discussed in Section II.A, 

‘‘Changes to PCAOB Standards’’ above, 

under the Proposed Rules, a CAM is 

defined as any matter arising from the 

audit of the financial statements that 

was communicated or required to be 

communicated to the audit committee 

and that: (1) Relates to accounts or 

disclosures that are material to the 

financial statements, and (2) involved 

especially challenging, subjective, or 

complex auditor judgment. 

Some commenters questioned the 

scope of the definition of CAMs, which 

states that a CAM ‘‘relates to’’ accounts 

or disclosures that are material to the 

financial statements, rather than 

specifying that a CAM itself has to be 

material to the financial statements.36

Commenters also questioned whether 

there is sufficient clarity on how to 

apply this requirement.37

The commenters that raised questions 

about the scope of the CAM definition 

principally explained their concerns by 

discussing specific examples that might 

result in the auditor disclosing original 

information about the company as it 

relates to the identification of a CAM or 

immaterial information that is not 

otherwise required to be disclosed by 

the financial reporting framework or 

SEC regulations. Specifically, 

commenters questioned whether 

significant deficiencies, illegal acts, and 

remote loss contingencies should be 

identified as CAMs. The same questions 

were posed to the Board in response to 

the PCAOB Re-proposal. In the release 

accompanying the Proposed Rules, the 

Board directly addressed each of the 

examples by providing guidance that: 

(1) The determination that there is a 

significant deficiency in internal control 

over financial reporting, in and of itself, 

cannot be a CAM; (2) a potential illegal 

act, if an appropriate determination had 

been made that no disclosure of it was 

required in the financial statements, 

would not meet the definition of a CAM; 

and (3) a potential loss contingency that 

was communicated to the audit 

committee, but that was determined to 

be remote and was not recorded in the 

financial statements or otherwise 

disclosed under the applicable financial 

reporting framework, would not meet 

the definition of a CAM. 

Other than the specific examples 

described above, no other examples 

raising concerns with the definition of 

a CAM have been brought to the 

attention of the PCAOB or the 

Commission. We recognize that some 

commenters suggested an alternative 

approach to materiality, but we agree 

with the balance struck by the PCAOB 

between the benefits of communicating 

CAMs and the possibility of the auditor 

providing information that has not 

previously been disclosed by the 

company. Under the Proposed Rules, 

communication of original information 

should be limited to rare circumstances, 

as we further discuss in section III.B.2 

below, and relate only to the discussion 

of the principal considerations as to 

why a matter was a CAM or how the 

auditor addressed the CAM. Moreover, 

we believe this approach is consistent 

with the Board’s statutory mandate 

under Section 101(a) of the SarbanesOxley Act to further the public interest 

in the preparation of informative, 

accurate, and independent audit reports. 

Requiring the communication of CAMs 

will provide additional information 

about the audit from the auditor’s own 

unique perspective that investors have 

indicated, and which we have found, 

could reduce information asymmetries 

and be useful to investors, in assessing 

a company’s financial reporting and 

making capital allocation and voting 

decisions.38

Commenters also suggested that their 

alternative approach to materiality 

would be easier to apply in determining 

which matters to communicate as 

CAMs. However, given the clarifications 

provided by the Board, we believe 

commenters’ concerns regarding the 

scope of the CAM definition have been 

adequately addressed and that the 

Proposed Rules’ materiality component, 

which specifies that a CAM ‘‘relates to’’ 

accounts or disclosures that are material 

to the financial statements, will be both 

workable and effective in assisting an 

auditor in determining which matters to 

communicate as a CAM. Indeed, we 

note that the accounting firms that 

would be responsible for implementing 

the Proposed Rules, while calling for 

active PCAOB and SEC monitoring both 

pre- and post-implementation, did not 

raise additional concerns in their 

comment letters to the Commission 

regarding any lack of clarity within the 

definition of a CAM under the Proposed 

Rules.39


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40Commenters indicated the second 

communication requirement ‘‘describing the 

principal considerations that led the auditor to 

determine that the matter is a CAM’’ is effectively 

a requirement to communicate ‘why’ a matter is a 

CAM. 

41See e.g., Sullivan & Cromwell Letter. 

42See e.g., Cleary Gottlieb Letter. 

43See e.g., CII Letter; Capital Group Letter. 

44See CII Letter. 

45See CII Letter. 

2. Disclosure of ‘Why’ a Matter Is a CAM 

and How It Was Addressed 

As discussed in section II.A, 

‘‘Changes to PCAOB Standards,’’ above, 

under the Proposed Rules, the 

communication of each CAM includes: 

(1) Identifying the CAM; (2) describing 

the principal considerations that led the 

auditor to determine that the matter is 

a CAM; (3) describing how the CAM 

was addressed in the audit; and (4) 

referring to the relevant financial 

statement accounts or disclosures that 

relate to a CAM. 

Some commenters, while 

acknowledging that much of the 

discussion in CAMs will focus on the 

audit itself, expressed concerns that the 

description as to why 40 a matter was 

designated as a CAM could frequently 

include information not otherwise 

required to be disclosed by a 

company.41 The example cited most 

frequently in comment letters as a 

concern was a significant deficiency in 

internal control over financial reporting 

(or control deficiencies, generally). At 

least one commenter suggested 

removing the requirements to describe 

(1) the principal considerations that led 

the auditor to determine that the matter 

is a CAM, and (2) how the matter was 

addressed in the audit.42

By contrast, comments from investors 

and investor associations indicated a 

desire for information directly from the 

auditor’s point of view.43 One 

commenter specifically stated that 

CAMs will make the auditor’s report 

more relevant and useful to investors 

and other readers by providing tailored, 

audit specific information.44 This same 

commenter noted that CAMs should 

provide insights that could be used in 

investors’ capital allocation decisions 

by, for instance, enabling comparison of 

certain aspects of the audit across 

companies and over time.45

Regarding the requirement to describe 

the principal considerations that led to 

the identification of a CAM (i.e., the 

‘‘why’’), the release accompanying the 

Proposed Rules states: ‘‘If auditors can 

adequately convey to investors the 

principal considerations and how the 

auditor addressed the matter without 

including previously undisclosed 

information, it is expected that they 

will. However, the standard provides 

that even when management has not 

disclosed information, the auditor is not 

constrained from providing such 

information if it is necessary to describe 

the principal considerations that led the 

auditor to determine that a matter is a 

critical audit matter or how the matter 

was addressed in the audit.’’ With 

regard to the specific control deficiency 

point raised by commenters, in the 

release accompanying the Proposed 

Rules, the Board concluded that the 

determination that there is a significant 

deficiency, in and of itself, cannot be a 

CAM, as it does not relate to an account 

or disclosure that is material to the 

financial statements as no disclosure of 

the determination is required. As a 

result, even though it might involve 

especially challenging, subjective, or 

complex auditor judgment, this 

determination would not be a CAM. 

Further, should the auditor deem it 

necessary to discuss control-related 

matters that do not rise to the level of 

a material weakness within the 

communication of a CAM (e.g., a 

significant deficiency was a principal 

consideration for determining that a 

matter was a CAM), the Board stated 

that the auditor could ‘‘describe the 

relevant control-related issues in a 

broader context of the critical audit 

matter without using the term 

significant deficiency.’’ 

Regarding the requirement to describe 

how the matter was addressed in the 

audit, the Board indicated in the release 

accompanying the Proposed Rules that 

including this information would be 

‘‘consistent with the Board’s objective of 

providing more information about the 

audit and, if developed with an 

appropriate focus on the intended 

audience, should be of interest to 

users.’’ The Board also indicated that 

this information should be specific to 

the circumstances of the audit and avoid 

standardized language. 

We agree with the Board and certain 

commenters that the ‘‘why’’ and the 

‘‘how’’ elements of the CAM will 

provide investors with relevant 

information from the auditor’s 

perspective that could assist them in 

understanding the audit, thereby 

reducing information asymmetries. We 

believe that, by providing insight into 

the audit, the ‘‘why’’ and the ‘‘how’’ 

elements will provide additional 

transparency to investors, which in turn 

will enhance investor confidence in the 

audit. We therefore believe this 

requirement is consistent with the 

Board’s statutory mandate to ‘‘protect 

the interests of investors and further the 

public interest in the preparation of 

informative, accurate, and independent 

audit reports.’’ In our view, the 

importance of this information to 

investors justifies the possibility that the 

auditor would provide information 

about a company that is not otherwise 

required to be disclosed by the 

company. 

Further, we are not persuaded that the 

description of principal considerations 

will frequently lead to communication 

of original information, as commenters 

suggested. We believe that situations 

where auditors would be required to 

provide information about the company 

that management has not already made 

public would be exceptions, arising 

only in limited circumstances, and not 

a pervasive occurrence. With respect to 

providing original information about 

control deficiencies in particular, we 

similarly believe these situations would 

be rare. The especially challenging, 

subjective, or complex auditor judgment 

in these cases is typically limited to the 

determination as to whether a control 

deficiency is a significant deficiency or 

material weakness. The other judgment 

to consider when a control deficiency 

exists is whether and how the auditor 

might need to adjust the original audit 

plan (i.e., the audit response). The 

concerns expressed by commenters 

related to disclosing original 

information about control deficiencies 

are primarily related to scenarios where 

the company and auditor have 

concluded a material weakness in 

internal control over financial reporting 

does not exist but the deficiency is a 

principal consideration for determining 

that a matter is a CAM. The audit 

response to a deficiency that is not a 

material weakness is typically less 

extensive because the auditor has 

already concluded that a reasonable 

possibility of material misstatement due 

to the control deficiency does not exist. 

For example, the audit response might 

be more of the same procedures being 

performed without changing the nature 

of the procedures. In those instances, 

typically, judgments about the audit 

response would not be a principal 

consideration of why something is a 

CAM and therefore would not need to 

be reported. 

3. Client Confidentiality—Professional 

Obligations and State Laws 

At least one commenter stated that 

auditors may have a requirement to 

maintain client confidentiality under 

certain states’ laws or professional 

obligations that could conflict with the 

Proposed Rules, if the Proposed Rules 

required the auditor to communicate 

original information about the 


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46See e.g., CCMC Letter. 

47AICPA Code of Professional Conduct 

1.700.001.01. 

48AICPA Code of Professional Conduct 

1.700.001.02. See also, e.g., Rule 10–4 of the 

Uniform Accountancy Act Model Rules, which has 

been the basis for many state rules for professional 

conduct. 

49One commenter stated that the PCAOB 

reaffirmed the propriety of confidentiality 

requirements imposed on auditors by other 

authorities within PCAOB Release No. 2008–001 

which adopted Auditing Standard No. 6, Evaluating 

Consistency of Financial Statements (since 

reorganized as AS 2820) in which the Board stated 

that the revisions contained therein ‘‘did not reflect 

a decision that auditor confidentiality requirements 

imposed by other authorities were inappropriate.’’ 

See CCMC Letter. However, by reaffirming the 

propriety of confidentiality requirements imposed 

on auditors by other authorities in PCAOB Release 

2008–001, we believe the Board also effectively 

reaffirmed professional requirements such as the 

AICPA’s confidential client information rule, 

which, as discussed above, expressly states that the 

rule does not prohibit a member’s compliance with 

applicable laws and government regulations. 

50See e.g., CII Letter; J. Robert Brown Jr. Letter. 

51See e.g., J. Robert Brown Jr. Letter. 

52See e.g., Letter from Bruce J. Nordstrom, August 

11, 2017 (‘‘Bruce J. Nordstrom Letter’’); Northrop 

Grumman Letter; Sullivan & Cromwell Letter; 

Cleary Gottlieb Letter; Letter from Nasdaq, August 

24, 2017. 

53See e.g., Bruce J. Nordstrom Letter; Quest 

Letter; Aetna Letter. 

54See AS 1301.9. 

55See AS 1301.10a. 

56See AS 1301.12b. 

57See AS 1301.12c. 

58See AS 1301.12d. 

59See AS 1301.15. 

60See AS 1301.24. 

company.46 In the release 

accompanying the Proposed Rules, the 

Board noted that auditor’s obligations 

under PCAOB standards arise under 

federal law and regulations and 

professional or state law duties of client 

confidentiality should not apply to, or 

should be preempted by, the obligation 

to communicate CAMs. 

We agree that the communications 

called for by the Proposed Rules should 

not be precluded by existing state legal 

or professional obligations as to client 

confidentiality in light of, among other 

things, existing exceptions for 

disclosure where required by applicable 

law. For example, the AICPA Code of 

Professional Conduct articulates the 

professional duties of a member CPA in 

public practice regarding confidential 

client information and stipulates that 

‘‘[a] member in public practice shall not 

disclose any confidential client 

information without the specific 

consent of the client.’’ 47 However, the 

Code goes on to state that ‘‘[t]his rule 

shall not be construed . . . to prohibit 

a member’s compliance with applicable 

laws and government regulations.’’ 48

While we are sensitive to the 

importance of client confidentiality, and 

do not believe it should be overridden 

lightly, we believe that the benefits of 

requiring communication to investors of 

CAMs—within the confines of the 

Proposed Rules—justify the potential 

that some information that otherwise 

would be considered a client confidence 

will be made public.49

C. The Potential Impact of CAMs on the 

Role of the Audit Committee and the 

Communication Among the Audit 

Committee, Management, and the 

Auditor 

Commenters provided mixed views 

on the potential impact of CAM 

reporting on the role of the audit 

committee and the communication 

among the audit committee, 

management, and the auditor. Some 

commenters indicated they believe the 

public reporting of CAMs will likely 

result in improved communications 

between auditors and audit 

committees.50 At least one commenter 

suggested audit committees should have 

a particular interest in matters 

communicated by the auditor that are 

likely to be made public in the auditor’s 

report and they will likely want to more 

fully understand any auditing matter 

that resulted in a CAM.51

Conversely, some commenters 

indicated they believe there is a risk that 

the requirement for auditors to 

communicate CAMs will result in 

‘‘chilled’’ conversation among audit 

committees, management, and 

auditors.52 Generally, these commenters 

expressed concern that the Proposed 

Rules could unintentionally discourage 

free and open communication between 

the auditor and management and 

between the auditor and audit 

committee. Further, some commenters 

expressed concern that the role of the 

audit committee will be undermined by 

the auditor’s responsibilities under the 

Proposed Rules.53

Similar comments were received by 

the PCAOB in its rulemaking process. In 

the release accompanying the Proposed 

Rules, the Board explained that it 

believes there should not be a chilling 

effect or reduced communications to the 

audit committee because of the 

requirements included in AS 1301, 

Communications with Audit 

Committees. Any potential chilling 

effect would therefore relate only to 

matters that are not explicitly required 

to be communicated to the audit 

committee. However, the Board noted 

that given the broad requirements of AS 

1301 (particularly paragraph .24), there 

may be few, if any, relevant 

communications affected by that 

possibility. 

We acknowledge that there exists a 

risk that communications between the 

auditor and the audit committee could 

be chilled, if the auditor were to avoid 

raising certain issues to the audit 

committee’s attention so as to not trigger 

the requirement to determine whether 

such issues are CAMs. However, we 

agree with the Board’s conclusion that 

the existing requirements to 

communicate matters to the audit 

committee—an auditing standard that 

would be violated if matters were not 

communicated—limits the risk of 

chilling to matters not falling within the 

scope of AS 1301, but falling within the 

scope of a CAM. In this regard, we 

believe it would be highly unusual for 

a matter to meet the definition of a CAM 

and not be required to be communicated 

to the audit committee. To illustrate this 

point, the following are examples of 

matters that are required to be 

communicated to the audit committee 

based on the requirements in AS 1301: 

• Significant risks identified during 

the auditor risk assessment 

procedures; 54

• The nature and extent of 

specialized skill or knowledge needed 

to perform the planned audit procedures 

or evaluate the audit results related to 

a significant risk; 55

• Critical accounting policies and 

practices; 56

• Critical accounting estimates; 57

• Significant unusual transactions; 58

• Difficult or contentious matters for 

which the auditor consulted (outside of 

the engagement team); 59 and 

• Other matters arising from the audit 

that are significant to the oversight of 

the company’s financial reporting 

process.60

The Proposed Rules provide the 

following nonexclusive list of factors 

that auditors should take into account, 

alone or in combination, in determining 

whether a matter involved especially 

challenging, subjective, or complex 

auditor judgment for purposes of 

evaluating whether a matter falls within 

the definition of a CAM: 

• The auditor’s assessment of the 

risks of material misstatement, 

including significant risks; 

• The degree of auditor judgment 

related to areas in the financial 

statements that involved the application 

of significant judgment or estimation by 

management, including estimates with 

significant measurement uncertainty; 


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61See e.g., Possible Revisions to Audit Committee 

Disclosures, Release No. 33–9862 (July 1, 2015), 80 

FR 38995 (July 8, 2015) available at https://

www.sec.gov/rules/concept/2015/33-9862.pdf. 

62See Section 301 of the Sarbanes Oxley Act and 

Section 10A(m) of the Exchange Act. 

63Some commenters suggested the Commission 

undertake rulemaking to provide a safe harbor 

around auditor reporting of CAMs. See e.g., PwC 

Letter, CCMC Letter. The question before the 

Commission at this time, however, is whether the 

rules as proposed meet the statutory criteria for 

approval. Moreover, we believe it would be more 

appropriate to consider whether any potential 

rulemaking is warranted related to safe harbors after 

the Board and the Commission have the 

opportunity to observe how the Proposed Rules are 

implemented in practice. 

64See e.g., Quest Letter; PwC Letter; Davis Polk 

Letter. 

65See e.g., CCMC Letter; American Tower Letter; 

EY Letter. 

66See e.g., CII Letter; Letter from The Value 

Alliance and Corporate Governance Alliance, 

August 18, 2017. 

• The nature and timing of significant 

unusual transactions and the extent of 

audit effort and judgment related to 

these transactions; 

• The degree of auditor subjectivity in 

applying audit procedures to address 

the matter or in evaluating the results of 

those procedures; 

• The nature and extent of audit effort 

required to address the matter, 

including the extent of specialized skill 

or knowledge needed or the nature of 

consultations outside the engagement 

team regarding the matter; and 

• The nature of audit evidence 

obtained regarding the matter. 

Given the similarity of the two lists, 

we believe it would be difficult to 

identify an example of a matter that 

would meet the definition of a CAM that 

would not otherwise need to be 

communicated to the audit committee 

based on the requirements in AS 1301. 

Further, it is important to bear in mind 

that the mere communication of 

information from the auditor to the 

audit committee is not sufficient to meet 

the definition of CAM. The information 

communicated also would have to meet 

all other criteria in the definition of 

CAM, including that the matter 

involved especially challenging, 

subjective, or complex auditor 

judgment. Given auditors’ existing 

responsibilities to discuss the matters 

described above with audit committees, 

we do not believe that the Proposed 

Rules are likely to chill these 

conversations. 

As it relates to the risk that the role 

of the audit committee will be 

undermined, we emphasize that the 

Commission has a long history of 

promoting effective and independent 

audit committees.61 We believe the 

requirement for every company listed 

on an exchange to have an independent 

audit committee 62 plays an important 

role in protecting the interests of 

investors by assisting the board of 

directors in fulfilling its responsibility 

to oversee the integrity of a company’s 

accounting and financial reporting 

processes and both internal and external 

audits. Dialogue between audit 

committees and auditors provides real 

benefits to investors and the financial 

reporting process. The intent of the 

Proposed Rules is to supplement the 

role of the audit committee by providing 

information about the audit through the 

lens of the auditor. The Proposed Rules 

are unlikely to impact this relationship 

or the dialogue between audit 

committees and auditors, and may even 

encourage audit committees to engage 

more extensively with auditors given 

that there will be disclosures by the 

auditor about those aspects of the audit 

that constitute CAMs. 

D. The Potential Liability Impact of 

CAMs 

Commenters provided mixed views 

related to potential liability impacts of 

the introduction of CAMs.63 Some 

commenters expressed concern that the 

communication of CAMs may result in 

an increase of meritless claims under 

the securities laws by expanding the 

number and variety of statements that 

will be attributed to the auditor.64 Some 

commenters also expressed concerns 

that the requirements for auditor 

reporting of CAMs will increase 

litigation risk for both auditors and 

companies.65 However, other 

commenters expressed views that the 

communication of CAMs by the auditor 

may have the potential to decrease 

liability as it involves disclosure of risks 

and challenges, and accordingly, could 

effectively provide a defense for the 

auditor.66

These concerns were also raised by 

commenters during the PCAOB 

rulemaking process. As the Board 

acknowledged in the release 

accompanying the Proposed Rules, 

CAMs themselves would be new 

statements that could be the basis for 

asserted claims against auditors. The 

Board also noted in its release that 

information provided regarding CAMs 

could be used to impact other aspects of 

securities fraud claims, such as 

providing evidence to support pleadings 

against an issuer, an auditor, or both. 

In response to these concerns, the 

Board limited and clarified the process 

for determining CAMs, including by 

narrowing the source of CAMs to 

matters communicated or required to be 

communicated to the audit committee, 

adding a materiality component to the 

CAM definition, and refining the factors 

used to determine CAMs. We believe 

these modifications, as well as the CAM 

definition’s focus on the auditor’s 

judgment, should help mitigate 

potential liability concerns. For 

example, one of the concerns expressed 

by commenters regarding liability is the 

potential omission of CAMs within the 

auditor’s report. By narrowing the 

potential matters that could be CAMs, 

clarifying the process for determining 

CAMs, and revising the definition of a 

CAM as discussed above, the Board has 

provided a framework for the auditor to 

evaluate and demonstrate whether a 

matter meets the definition of a CAM in 

accordance with the Proposed Rules. 

We recognize, as the Board did, that 

mandating communication of CAMs 

will, by design, entail new statements in 

the auditor’s report, thereby increasing 

the potential for litigation regarding 

such statements. However, the actual 

litigation impacts of these 

communications are difficult to predict. 

As the Board notes, in order to succeed, 

any claim based on these new 

statements would have to establish all of 

the elements of the relevant cause of 

action (e.g., when applicable, scienter, 

loss causation, and reliance). Moreover, 

as discussed above, CAMs could be 

used to defend as well as initiate 

litigation. 

Nevertheless, we recognize reporting 

of CAMs likely will create an 

incremental risk of litigation and 

potential liability. To some degree, 

increased litigation risk is the byproduct of any new reporting 

requirement and must be balanced 

against the perceived benefits of the 

required reporting. As discussed above, 

we are persuaded that the 

communication of CAMs, which can be 

provided only by auditors, will benefit 

investors and other financial statement 

users by providing insights into the 

audit—and from the auditor’s own 

unique perspective—that can reduce 

information asymmetries and be used to 

assess a company’s financial reporting 

and make capital allocation and voting 

decisions. In our view, these benefits 

justify any such potential incremental 

liability risk arising from the 

communication, especially in light of 

the steps taken by the Board to mitigate 

such risk, as discussed above. However, 

because of these risks and other 

concerns expressed by commenters, we 

expect the Board to monitor the 

Proposed Rules after implementation for 

any unintended consequences. 

E. Economic Analysis of CAMs 

Several commenters expressed 

concerns that the costs of the Proposed 


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67See e.g., CCMC Letter; Society for Corporate 

Governance Letter; Davis Polk Letter. 68See e.g., Robert Waxman Letter; CCMC Letter; 

Davis Polk Letter. 69See e.g., CII Letter; Letter from Aberdeen Asset 

Management, August 11, 2017 (‘‘Aberdeen Letter’’); 

Hermes Letter; CFA Institute Letter. 70Compliance and implementation costs from the 

auditor’s standpoint could be passed through to the 

company and consequently investors in the form of 

increased audit fees. Moreover, companies 

themselves (and consequently investors) could 

incur additional costs as a consequence of the 

Proposed Rules, for example by engaging additional 

resources such as legal counsel, and such costs 

would impact investors. See also e.g., CII Letter; 

Aberdeen Letter; Hermes Letter. 

71Cf. Nat’l Ass’n of Mfrs v. SEC, 748 F.3d 359 

(D.C. Cir. 2014) (acknowledging the reasonableness 

of the SEC’s determination that it was unable to 

quantify benefits because it lacked the data 

necessary to do so). 

72See e.g., CFA Institute Letter; CII Letter. 

73See e.g., CFA Institute Letter. 

74See id. 

75See e.g., CII Letter; Letter from Public Citizen, 

August 18, 2017; CalPERS Letter; Hermes Letter; 

CFA Institute Letter. 

Rules will exceed their benefits, or that 

the economic analysis performed by the 

Board did not sufficiently analyze the 

costs and benefits of the Proposed 

Rules.67 Some commenters observed 

specifically that the Board’s analysis 

lacked quantitative information.68

Conversely, some commenters indicated 

they believe the potential costs are not 

likely to be significant relative to the 

potential benefits, for example because 

CAMs are based on matters already 

being discussed by the auditor and audit 

committee.69 Further, to the extent that 

costs are incurred related to the 

Proposed Rules, commenters from the 

investor community stated that, as 

shareholders, they are willing to bear 

the additional costs of the Proposed 

Rules in exchange for enhanced 

information about the audit.70

The Board’s evaluation of the 

potential costs and benefits of the 

Proposed Rules was informed by 

information sought and obtained from 

stakeholders. In the course of that 

analysis, the Board stated that ‘‘the 

potential benefits and costs of the 

[Proposed Rules] are inherently difficult 

to quantify, therefore the Board’s 

economic discussion is primarily 

qualitative in nature.’’ The Board also 

observed that commenters that raised 

concerns about the Proposed Rules’ 

costs generally did not quantify those 

costs and that ‘‘[e]ven those 

[commenters] that, at an earlier stage of 

the rulemaking, conducted limited 

implementation testing of the proposal 

were unable to provide a quantified cost 

estimate.’’ Moreover, as stated in the 

release accompanying the Proposed 

Rules, as related to comments provided 

to the Board, ‘‘[c]ommenters provided 

views on a wide range of issues 

pertinent to economic considerations, 

including potential benefits and costs, 

but did not provide empirical data or 

quantified estimates of the costs or other 

potential impacts of the standard.’’ As a 

result, in lieu of providing a quantitative 

analysis, the Board engaged in a 

detailed qualitative assessment of the 

Proposed Rules’ potential economic 

impacts, including consideration of 

direct and indirect benefits, costs, and 

potential unintended consequences. 

We disagree with commenters’ 

assertions that the Board’s analysis is 

defective for failing to adequately 

quantify the costs and benefits of the 

Proposed Rules. Analyzing the potential 

economic impacts, including the costs 

and benefits, of a proposed rule is a key 

way to develop regulatory changes that 

are well-reasoned, with potential costs 

that are warranted in light of the 

expected benefits. We believe that a 

high-quality qualitative analysis can 

allow for this type of evaluation, 

particularly in those cases where 

quantification is not feasible.71

We also agree with the Board that it 

would not have been feasible to quantify 

the potential costs and benefits of the 

Proposed Rules. While certain 

components of the total potential costs 

related to the Proposed Rules might be 

easier to estimate (e.g., the costs an 

auditor might incur to draft a CAM), 

several of the significant components of 

the total potential cost are inherently 

difficult to estimate. For example, under 

the Proposed Rules, the auditor would 

need to determine which matters are 

CAMs and have incremental discussions 

with the audit committee regarding the 

draft of the CAM communications. 

Given the audit-specific nature of such 

matters, it is difficult to predict how 

many hours would need to be involved 

in the analysis and communication 

process as this will vary based on a 

number of factors, including, for 

example, the complexity of the 

company and the number of CAMs. 

In addition, there are potential costs 

that might be incurred by the company 

as a consequence of the implementation 

of the Proposed Rules. For example, 

besides the audit committee, other 

executives and legal counsel may be 

required to expend more time and effort 

in discussing and reviewing the 

auditor’s report as a consequence of the 

Proposed Rules. Again, estimating these 

costs is difficult because these costs 

likely will vary among audit 

engagements depending on the 

circumstances. 

Potential benefits from new auditor 

reporting requirements are also 

inherently difficult to quantify. For 

example, to quantify the direct benefit 

to investors of a more useful and 

informative auditor’s report, one would 

require an estimate of how their 

investment or voting decisions would be 

affected by CAMs and an estimate of the 

amount of profit from such decisions. 

Such estimates are either impossible or 

very difficult to calculate with 

reasonable reliability. In addition to the 

direct benefits, there may be indirect 

benefits from the new reporting 

requirements. For example, the 

communication of CAMs can provide 

some auditors, management, and audit 

committees with additional incentives 

to enhance audit quality. Enhanced 

audit quality ultimately can lead to a 

reduced cost of capital. However, at this 

time, it is impossible to predict the 

amount of reduction in cost of capital 

that would arise from the Proposed 

Rules. 

Moreover, we agree with the Board’s 

qualitative analysis of the possible 

economic consequences of the Proposed 

Rules. As they did before the Board, 

investors and investor associations have 

expressed strong support to the 

Commission for the Proposed Rules and 

stated that they expect the potential 

benefits to justify the potential costs.72

As an example, one commenter stated 

the Proposed Rules will not require 

changes to the audit process and hence 

should not impose any significant 

incremental costs.73 This same 

commenter further stated that, while 

incremental costs or auditor effort 

should be minimal, there are manifold 

benefits for investors.74 Several 

commenters also informed the 

Commission that they believe that the 

information from the auditor’s 

perspective that would be required by 

the Proposed Rules would be useful, for 

example, in forming voting and 

investment decisions.75

We believe these are important 

benefits. The Proposed Rules are 

consistent with the broader economic 

theory regarding the benefits from 

enhanced disclosures. More specifically, 

we believe that the Proposed Rules are 

likely to improve the information 

currently available to investors and 

facilitate their efforts to understand the 

financial statements. Importantly, the 

Proposed Rules will assist investors in 

identifying those matters that relate to 

the relevant financial statement 

accounts or disclosures that involved 

especially challenging, subjective, or 

complex auditor judgment. This will, in 

turn, provide investors with auditspecific information directly from the 

auditor’s point of view and add to the 


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76See discussion in section III.D above, ‘‘The 

Potential Liability Impact of CAMs.’’ 

77See e.g., Society for Corporate Governance 

Letter; Letter from ArcBest, August 17, 2017. 

78See e.g., CCMC Letter; Aetna Letter. 

79See e.g., CCMC Letter; Robert Waxman Letter. 

total mix of information that could be 

used in their capital allocation and 

voting decisions. Further, investors will 

be able to observe reported CAMs for 

other companies. Within the right 

context, such information could be used 

by investors to improve their 

understanding of both the audit itself 

and the company’s financial statements. 

Moreover, the Proposed Rules may 

stimulate discussions between the 

auditor and the company regarding 

CAMs, and potentially increase 

professional skepticism by the auditor. 

The public nature of CAMs may also act 

to further enhance auditors’ professional 

skepticism. An increase in skepticism 

may lead to an increase in audit quality 

and, as a consequence, result in lower 

cost of capital for companies. 

Like the Board, we recognize that 

there are costs associated with 

complying with the Proposed Rules. 

The Board indicated that costs to 

auditors are most likely to arise from 

additional time to prepare and review 

auditor’s reports, including discussions 

with management and audit 

committees, as well as potential legal 

costs for review of the information 

provided in the CAMs. In addition, 

auditors may choose to perform more 

audit procedures related to areas 

reported as CAMs (even though auditor 

performance requirements have not 

changed in those areas), with cost 

implications for both auditors and 

companies. For auditors, costs might 

represent both one-time costs and 

recurring costs. One-time costs could be 

incurred as a result of: (1) Updating 

accounting firm audit and quality 

control methodologies; and (2) 

developing and conducting training. 

Recurring costs could include: (1) 

Drafting descriptions of CAMs and 

related documentation; (2) additional 

reviews by senior members of 

engagement teams, engagement quality 

reviewers, and national office 

personnel; and (3) additional time as a 

result of discussions with management 

or the audit committee regarding CAMs. 

Companies, including audit 

committees, will likely also incur both 

one-time and recurring costs. One-time 

costs could be incurred, for example, in 

educating audit committee members 

about the requirements of the new 

standard and in developing 

management and audit committee 

processes for the review of draft 

descriptions of CAMs and the related 

interaction with auditors. Recurring 

costs could include the costs associated 

with carrying out those processes, 

potential legal costs,76 as well as any 

increase in audit fees associated with 

new reporting requirements. 

We recognize that there is some level 

of uncertainty as to the costs that will 

be incurred to comply with the 

Proposed Rules. However, as discussed 

above, the Board has taken steps to 

mitigate those costs, including by, as an 

example, limiting the source of CAMs to 

matters communicated or required to be 

communicated to the audit committee 

and by adding a materiality component 

to the definition of a CAM. At the same 

time, for the reasons explained above, 

we believe that the Proposed Rules will 

provide significant new benefits to 

investors and other financial statement 

users. Based on the economic analysis 

in the release accompanying the 

Proposed Rules and our own evaluation 

of comments received by both the Board 

and the Commission regarding the 

potential economic effects of the 

Proposed Rules, we are persuaded that 

there is a sufficient basis to conclude 

that the potential benefits of the 

Proposed Rules will justify the potential 

related costs, and therefore, that the 

Proposed Rules are necessary and 

appropriate in the public interest and 

for the protection of investors. 

F. Practicability Matters Related to 

CAMs 

Several commenters raised certain 

practical concerns with the Proposed 

Rules. We discuss each of these 

concerns in detail below. 

1. Timing 

Some commenters expressed concerns 

that the requirement to communicate 

CAMs will impose additional burdens 

on auditors, audit committees, and 

preparers during an already timeconstrained period as management 

finalizes its annual financial 

statements.77 In the release 

accompanying the Proposed Rules, the 

PCAOB acknowledged that if drafting 

and reviewing of CAMs takes place 

towards the end of the audit, there will 

also be an opportunity cost associated 

with the time constraints on the parties 

involved. 

We also acknowledge these concerns, 

but we expect most matters that will 

ultimately need to be communicated as 

CAMs will be identified throughout the 

audit and not just at the end of the 

audit. As a result, we believe much of 

the work can be completed prior to the 

time-constrained period at the end of 

the financial reporting process. In those 

cases, we encourage auditors, audit 

committees, and preparers to coordinate 

and work together before the critical 

year-end financial reporting period so 

that, if other CAMs arise later in the 

audit, the burden can be lessened 

during the finalization of the audit. 

2. Inconsistent Application by Auditors 

Some commenters also expressed 

concerns that the principles-based 

nature of the Proposed Rules as it 

pertains to both the identification and 

communication of CAMs could lead to 

inconsistent application by auditors.78

In the release accompanying the 

Proposed Rules, the Board stated that 

the determination of CAMs is 

principles-based and the Proposed 

Rules do not specify any items that 

would always constitute CAMs as the 

auditor determines CAMs in the context 

of the specific audit. 

We recognize commenters’ concerns 

that the subjective requirements related 

to CAMs could lead to diversity in 

communications, but we agree with the 

Board that it is important for the CAM 

requirements, particularly the 

communication requirements, to be 

principles-based in order to meet the 

Board’s objective of having CAM 

communications provide tailored, auditspecific information by the auditor 

within the auditor’s report. We also 

believe the guidance provided by the 

Board in the release accompanying the 

Proposed Rules will assist auditors in 

implementing the Proposed Rules 

consistently. 

3. Lack of Examples 

Some commenters noted that the 

PCAOB did not include the illustrative 

example CAMs from the PCAOB Reproposal in the release accompanying 

the Proposed Rules, and they expressed 

concern that the removal of these 

examples will add to uncertainties and 

confusion for auditors in reporting 

CAMs.79 As the PCAOB noted in the 

release accompanying the Proposed 

Rules, given the principles-based nature 

of the requirements for CAMs and the 

objective of providing tailored, auditspecific information, the examples in 

the PCAOB Re-proposal were intended 

to function as illustrations of how CAMs 

could be communicated, and not as 

templates for how CAMs should be 

communicated. In this regard, it is 

important to bear in mind that a number 

of commenters expressed concerns that 


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80See e.g., Aetna Letter; Quest Letter; Davis Polk 

Letter. 

81See e.g., CCMC Letter; PwC Letter; Deloitte 

Letter. 

82See e.g., Davis Polk Letter; Regions Letter. 

83See e.g., Bruce J. Nordstrom Letter. 

84See e.g., Colorado PERA Letter; CFA Institute 

Letter. 

85See e.g., Deloitte, Center for Board 

Effectiveness, Audit Committee Disclosure in Proxy 

Statements—2017 Trend (Aug. 2017), available at 

https://www2.deloitte.com/content/dam/Deloitte/ 

us/Documents/center-for-board-effectiveness/uscbe-august-2017-on-the-boards-agenda.pdf. 

86Though institutional investors and professional 

analysts need to pay to get access to the databases, 

their marginal cost of acquiring this piece of 

information is likely much lower than that of retail 

investors because the database provider can spread 

the cost among the database’s many subscribers. 

87See e.g., CCMC Letter; FEI Letter; Eli Lilly 

Letter. 

88See e.g., CCMC Letter. 

the CAMs will become boilerplate and 

will not be useful.80

We agree with the Board’s objective of 

providing tailored, audit-specific 

information and believe it is important 

for auditors to develop CAM 

descriptions that comply with the 

Proposed Rules without conforming to 

an example provided by the Board. As 

a result, inclusion of examples may lead 

to more boilerplate descriptions of 

CAMs. In addition, the PCAOB does 

present certain examples in the release 

accompanying the Proposed Rules to 

provide guidance on how to identify 

and communicate CAMs. The release 

includes examples such as, whether the 

auditor’s evaluation of the company’s 

ability to continue as a going concern 

could also represent a CAM and 

whether a potential illegal act, if an 

appropriate determination had been 

made that no disclosure of it was 

required in the financial statements, 

would be a CAM. The Proposed Rules 

also include a note incorporating four 

examples of potential approaches to 

addressing the requirement to describe 

how the CAM was addressed in the 

audit. 

G. Disclosure of Auditor Tenure in the 

Auditor’s Report 

Commenters provided mixed 

perspectives related to the disclosure of 

auditor tenure in the auditor’s report. 

Some commenters did not support 

disclosure of auditor tenure in the 

auditor’s report. These commenters 

indicated such disclosure may give 

undue prominence to the information, 

thereby giving an impression that a 

correlation exists between auditor 

tenure and independence or audit 

quality.81 Some of these commenters 

suggested alternative locations for this 

information, such as the proxy 

statement, so that the information could 

be provided with context from the audit 

committee, or PCAOB Form AP.82 At 

least one commenter did not support 

requiring the disclosure of auditor 

tenure as this commenter stated the 

audit committee is in the best position 

to evaluate the auditor’s 

independence.83 Other commenters, 

including investors and investor 

associations, supported the disclosure of 

auditor tenure, indicating the 

information is useful in matters such as 

proxy voting.84

As described in the release 

accompanying the Proposed Rules, 

issuers are not currently required to 

disclose auditor tenure, although some 

voluntarily choose to do so. Based on 

recent surveys,85 and as noted in the 

release accompanying the Proposed 

Rules, there is a growing trend of 

voluntary disclosure of auditor tenure in 

the proxy statement, presumably 

reflecting audit committees’ use of and 

investors’ demand for such information. 

We believe it is important to note, for 

issuers that do not disclose auditor 

tenure voluntarily, investors 

themselves, in some circumstances, may 

be able to determine auditor tenure 

based on publicly available information. 

Further, we are aware that various thirdparty commercial databases provide 

auditor tenure information based on 

public records (e.g., the auditor’s report 

in an issuer’s annual report on Form 

10–K). Institutional investors or 

professional analysts typically have 

access to such databases; however, retail 

investors typically do not. To the extent 

that these retail investors seek to obtain 

auditor tenure information, they would 

need to incur the cost to determine this 

information themselves.86 Accordingly, 

we believe requiring this disclosure 

could lower information acquisition 

costs for such investors, which we find 

to be a compelling potential benefit in 

support of the requirement. 

As it relates to the location of the 

disclosure, the PCAOB does not have 

the statutory authority to require 

disclosure in the proxy statement. While 

the Commission does have authority to 

amend the proxy rules, as discussed in 

the release accompanying the Proposed 

Rules, not all companies required to be 

audited under PCAOB standards are 

subject to the proxy rules (e.g., foreign 

private issuers). In addition, certain 

issuers that are not required to hold 

annual meetings of shareholders, such 

as most registered investment 

companies, generally will solicit proxies 

less frequently than other issuers. Also, 

as discussed in the release 

accompanying the Proposed Rules, the 

Board considered disclosure of auditor 

tenure in Form AP, which requires 

disclosure of the name of the 

engagement partner and of the names 

and percentage of participation of other 

accounting firms in the audit for all 

issuer audits. However, Form AP was 

developed primarily to respond to 

commenter concerns about the potential 

liability consequences of naming 

persons in the auditor’s report, the 

potential need to obtain consents from 

those named persons in connection with 

registered securities offerings, and the 

additional time needed to compile 

information about the other accounting 

firms. The Board’s determination to 

create Form AP, rather than require 

disclosure of these items in the auditor’s 

report, was a means to address these 

concerns. 

We believe it is important to 

acknowledge that the disclosure of 

auditor tenure does not have the same 

potential liability or other consequences 

as disclosure of the name of the 

engagement partner or other accounting 

firms. We therefore agree with the Board 

that such an approach is unnecessary in 

the Proposed Rules. Overall, we believe 

it is appropriate for this disclosure to 

appear in the auditor’s report because it 

will provide for a consistent location 

and decrease search costs with respect 

to information about auditor tenure. 

H. The Effective Dates of the Proposed 

Rules 

Some commenters suggested 

postponement or further consideration 

of the effective dates included in the 

Proposed Rules.87 At least one 

commenter suggested postponement of 

the effective dates as companies and 

auditors will be dealing with the 

implementation of significant new 

GAAP standards, including those 

related to revenue, leases, and credit 

losses.88 In the release accompanying 

the Proposed Rules, the Board took into 

consideration commenters’ feedback 

and phased effective dates for CAMs, 

indicating this ‘‘may facilitate any postimplementation review of the impact of 

the final standard.’’ 

We believe the Board took a balanced 

approach to effective dates by adopting 

a reasonable phase-in schedule. For 

certain entities listed internationally, 

audit firms are already required to 

communicate information similar to 

CAMs. Given that the effective date for 

communication of CAMs for large 

accelerated filers is phased in first, 

larger firms will likely be able to 

observe practices developed by other 

firms within their global network in 

considering implementation questions. 


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89See e.g., Shareholder Approval of Executive 

Compensation and Golden Parachute 

Compensation, Release No. 33–9178 (Jan. 25, 2011), 

76 FR 6010 (Feb. 2, 2011) available at https://

www.sec.gov/rules/final/2011/33-9178.pdf. 

90See e.g., BDO Letter; Letter from the Center for 

Audit Quality, August 18, 2017 (‘‘CAQ Letter’’); 

Deloitte Letter; EY Letter; PwC Letter. 

91See id. 

92See e.g., CAQ Letter; EY Letter; PwC Letter. 

93See Paragraph .05b of AS 3101 within the 

Proposed Rules. 

94While the precise scope of this category of rules 

under Section 103(a)(3)(C) is not entirely clear, we 

do not interpret this statutory language as 

precluding the application of Board rules requiring 

a certain format for the auditor’s report or inclusion 

of additional factual information about auditor 

tenure, auditor independence and other 

requirements related to the audits of EGCs. In our 

view, this approach reflects an appropriate 

interpretation of the statutory language and is 

consistent with our understanding of the 

congressional purpose underlying this provision. 

95See White Paper on Characteristics of Emerging 

Growth Companies (Nov. 15, 2016), available at 

https://pcaobus.org/EconomicAndRiskAnalysis/ 

ORA/Documents/White-Paper-CharacteristicsEmerging-Growth-Companies-November-2016.pdf. 

As the Board discussed, the staggered 

approach to implementation may allow 

the Board to evaluate implementation 

by the first cohort of companies before 

applying the Proposed Rules to other 

companies. Also, the second cohort of 

auditors and companies will have more 

time to prepare, and will have the 

benefit of observing how the Proposed 

Rules have been implemented by the 

first cohort. The Commission itself, for 

many similar reasons, has used, at 

times, staggered implementation dates 

for new regulatory requirements.89 With 

respect to the other changes to the 

auditor’s report in the Proposed Rules 

that are not subject to a phase-in 

approach, those changes should not be 

a significant burden to implement as 

they involve relatively straightforward 

changes to the existing auditor’s report. 

Accordingly, we believe the effective 

dates in the Proposed Rules are 

reasonable. 

I. Implementation Efforts 

Several commenters, including most 

notably audit firms, generally expressed 

support for the Proposed Rules while 

simultaneously expressing concern that 

unintended consequences may arise 

during implementation. These 

commenters stated that uncertainty 

surrounding the effects of the Proposed 

Rules would necessitate a postimplementation review.90 Commenters 

called on the Commission and PCAOB 

to assist with implementation efforts 

should the Commission approve the 

Proposed Rules and encouraged the 

Board to take advantage of the proposed 

phased effective dates to undertake a 

post-implementation review of the 

impact of the final standard.91 Some 

accounting firms have also stated their 

willingness to work with both the 

Commission and PCAOB to provide 

feedback on implementation 

experiences.92 In the release 

accompanying the Proposed Rules, the 

Board stated that it ‘‘intends to monitor 

the results of implementation, including 

consideration of any unintended 

consequences.’’ 

The Commission acknowledges that 

the communication required of auditors 

by the Proposed Rules is a significant 

change in practice for auditors, 

companies, and audit committees. 

Accordingly, it will be important to 

closely monitor the implementation of 

the Proposed Rules, including 

potentially issuing incremental 

implementation guidance (if needed), 

providing PCAOB staff to be available to 

respond to questions and challenges as 

they arise, and completing a postimplementation review as soon as 

reasonably possible, including some 

analysis between effective dates for 

CAMs. The Commission expects the 

PCAOB to take such steps. 

IV. Effect on Emerging Growth 

Companies 

Under the Proposed Rules, the 

requirement to communicate CAMs 

would not apply to the audits of EGCs, 

but all other provisions within the 

Proposed Rules would apply to such 

audits.93 As described in section II.A, 

these include a number of changes to 

the auditor’s report that are primarily 

intended to clarify the auditor’s role and 

responsibilities related to the audit of 

the financial statements, provide 

additional information about the 

auditor’s tenure, and make the auditor’s 

report easier to read. 

Section 103(a)(3)(C) of the SarbanesOxley Act, as amended by Section 104 

of the Jumpstart Our Business Startups 

Act, requires that any rules of the Board 

‘‘requiring mandatory audit firm 

rotation or a supplement to the auditor’s 

report in which the auditor would be 

required to provide additional 

information about the audit and the 

financial statements of the issuer 

(auditor discussion and analysis)’’ shall 

not apply to an audit of an EGC. The 

provisions of the Proposed Rules 

applicable to the audits of EGCs do not 

fall into this category.94 Section 

103(a)(3)(C) further provides that ‘‘[a]ny 

additional rules’’ adopted by the 

PCAOB after April 5, 2012, do not apply 

to audits of EGCs ‘‘unless the 

Commission determines that the 

application of such additional 

requirements is necessary or appropriate 

in the public interest, after considering 

the protection of investors and whether 

the action will promote efficiency, 

competition, and capital formation.’’ 

The provisions of the Proposed Rules 

applicable to the audits of EGCs fall 

within this category, and thus the 

Commission must make a determination 

under the statute about the applicability 

of these provisions to EGCs. Having 

considered those statutory factors, the 

Commission finds that applying these 

provisions to the audits of EGCs is 

necessary or appropriate in the public 

interest. 

In proposing application of certain 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 facilitate the 

Commission’s determination, the Board 

provided information identified by the 

Board’s staff from public sources, 

including data and analysis of EGCs that 

sets forth its views as to why it believes 

certain of the Proposed Rules should 

apply to audits of EGCs. 

To inform consideration of the 

application of auditing standards to 

audits of EGCs, the PCAOB staff has also 

published a white paper that provides 

general information about 

characteristics of EGCs.95 The data on 

EGCs outlined in the white paper 

indicates that a majority of EGCs are 

smaller public companies that are 

generally new to the SEC reporting 

process. This suggests that there is less 

information available to investors 

regarding such companies relative to the 

broader population of public companies 

because, in general, investors are less 

informed about companies that are 

smaller and newer. 

We expect that the changes to the 

auditor’s report that would be applied to 

the audits of EGCs under the Proposed 

Rules, will: (1) Provide a consistent 

location and decrease search costs with 

respect to information about auditor 

tenure; (2) enhance users’ 

understanding of the auditor’s role; and 

(3) make the auditor’s report easier to 

read and facilitate comparison across 

companies by making the format of the 

report more uniform. Given the 

relatively straightforward nature of the 

additional changes to the auditor’s 

report, we expect that the costs 

associated with these changes will not 

be significant and will be primarily onetime, rather than recurring, costs. 

Overall, we expect the changes to 

increase the efficiency with which users 

are able to locate and understand the 

information presented in the auditor’s 

report. We do not expect the changes to 


asabaliauskas on DSKBBXCHB2PROD with NOTICES
Federal Register / Vol. 82, No. 207 / Friday, October 27, 2017 / Notices 49899 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 81498 

(August 30, 2017), 82 FR 42127 (September 6, 2017) 

(SR–BatsBYX–2017–19). 

significantly impact competition or 

capital formation. As such, after 

considering the protection of investors 

and whether the action will promote 

efficiency, competition, and capital 

formation, we believe there is a 

sufficient basis for the Commission to 

determine that applying the Proposed 

Rules, other than the provisions related 

to CAMs, to the audits of EGCs is 

necessary or appropriate in the public 

interest. 

V. Conclusion 

The Commission has carefully 

reviewed and considered the Proposed 

Rules, the information submitted 

therewith by the PCAOB, 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 the audits of EGCs, which do 

not have a requirement to communicate 

CAMs, 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–2017–01) be and hereby are 

approved. 

By the Commission. 

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2017–23379 Filed 10–26–17; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–81925; File No. SR– 

BatsBYX–2017–26] 

Self-Regulatory Organizations; Bats 

BYX Exchange, Inc.; Notice of Filing 

and Immediate Effectiveness of a 

Proposed Rule Change Relating to Its 

Amended and Restated Certificate of 

Incorporation 

October 23, 2017. 

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

Securities Exchange Act of 1934 (the 

‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on October 

13, 2017, Bats BYX Exchange, Inc. (the 

‘‘Exchange’’ or ‘‘BYX’’) 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 prepared 

by the Exchange. 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 

The Exchange seeks to amend its 

Amended and Restated Certificate of 

Incorporation. The text of the proposed 

rule change is provided below. 

(additions are italicized; deletions are 

[bracketed]) 

* * * * * 

AMENDED AND RESTATED 

CERTIFICATE OF INCORPORATION 

of BATS BYX EXCHANGE, INC. 

The name of the corporation is Bats 

BYX Exchange, Inc. The corporation 

filed its original Certificate of 

Incorporation with the Secretary of State 

of the State of Delaware on July 30, 2009 

under the name BATS Y-Exchange, Inc. 

This Amended and Restated Certificate 

of Incorporation of the corporation, 

which restates and integrates and also 

further amends the provisions of the 

corporation’s Certificate of 

Incorporation, was duly adopted in 

accordance with the provisions of 

Sections 242 and 245 of the General 

Corporation Law of the State of 

Delaware and by the written consent of 

its sole stockholder in accordance with 

Section 228 of the General Corporation 

Law of the State of Delaware. The 

[Amended and Restated] Certificate of 

Incorporation of the corporation is 

hereby amended, integrated and restated 

to read in its entirety as follows: 

* * * * * 

The text of the proposed rule change 

is available at the Exchange’s Web site 

at www.bats.com, at the principal office 

of the Exchange, 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, the 

Exchange 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. The 

Exchange has prepared summaries, set 

forth in Sections A, B, and C below, of 

the most significant parts of such 

statements. 

(A) Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

BYX recently amended its Certificate 

of Incorporation in connection with a 

corporate transaction (the 

‘‘Transaction’’) involving, among other 

things, the recent acquisition of BYX, 

along with Bats BZX Exchange, Inc. 

(‘‘Bats BZX’’), Bats EDGX Exchange, Inc. 

(‘‘Bats EDGX’’), and Bats EDGA 

Exchange, Inc. (‘‘Bats EDGA’’ and, 

together with Bats BYX, Bats EDGX, and 

Bats BZX, the ‘‘Bats Exchanges’’) by 

CBOE Holdings, Inc. (‘‘CBOE 

Holdings’’). CBOE Holdings is also the 

parent of Chicago Board Options 

Exchange, Incorporated (‘‘CBOE’’) and 

C2 Options Exchange, Incorporated 

(‘‘C2’’). Particularly, the filing proposed, 

among other things, to amend and 

restate the certificate of incorporation of 

the Exchange based on certificates of 

incorporation of CBOE and C2.3 The 

Exchange notes that in conforming the 

Exchange’s Certificate to the certificates 

of CBOE and C2, it inadvertently (1) did 

not comply with a provision of 

Delaware law and (ii) referred to an 

inaccurate version of the Certificate in 

the introductory paragraph. The 

Exchange seeks to correct those errors. 

Particularly, Section 245(c) of the 

Delaware General Corporation Law 

(DGCL) requires that a restated 

certificate of incorporation ‘‘shall state, 

either in its heading or in an 

introductory paragraph, the 

corporation’s present name, and, if it 

has been changed, the name under 

which it was originally incorporated, 

and the date of filing of its original 

certificate of incorporation with the 

secretary of state.’’ The Exchange notes 

that the conformed Certificate did not 

reference the name under which the 

corporation was originally incorporated 

(i.e., ‘‘BATS Y-Exchange, Inc.’’). In order 

to comply with Section 245(c) of the 

DGCL, the Exchange proposes to amend 

its Certificate to add a reference to its 

original name. 

The Exchange also notes that the last 

sentence of the introductory paragraph 

which provides that the current 

certificate is ‘‘amended, integrated and 

restated to read in its entirety as 

follows:’’ mistakenly references the new 


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