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Speech by SEC Staff:
Remarks before the 2008 AICPA National Conference on Current SEC and PCAOB Developments


Jeff Ellis

Professional Accounting Fellow, Office of the Chief Accountant
U.S. Securities and Exchange Commission

Washington, D.C.
December 8, 2008

As a matter of policy, the Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the SEC staff.


Good afternoon. Recently, the PCAOB exposed for public comment a suite of risk assessment standards.1 These risk assessment standards are important in a couple of ways.

First, because an auditor’s assessment of and response to risk are integral to the manner in which an audit is conducted, risk assessment standards are fundamental to ensuring high quality audits. The staff of the SEC shares with the PCAOB the objective of high audit quality and encourages the PCAOB’s efforts to promote effective risk assessment as a means to help achieve it.

Second, the proposed risk assessment standards are important because they reflect, in some respects, a modification to the approach used by the PCAOB in developing auditing standards. Today, I’d like to highlight three areas related to the PCAOB’s approach in drafting these proposed standards.2 These areas relate to:

  • The relationship of the proposed standards to the standards of other audit standard setters;
  • The drafting conventions used by the PCAOB in the proposed standards; and
  • The process by which the PCAOB has drafted the proposed standards.

Public feedback on these proposed standards, including feedback related to these areas, will be important as the PCAOB evaluates whether changes are necessary to the proposed standards. Because final standards adopted by the Board are submitted to the Commission for approval and do not become effective unless approved by the Commission, such feedback is likewise important to the SEC staff as we assist the Commission in discharging its oversight responsibilities of the PCAOB.3

Relationship to other professional standards

In drafting the proposed risk assessment standards, the PCAOB indicated that it began by considering whether the objectives and requirements of the comparable International Standards on Auditing (the “ISAs”) of the International Auditing and Assurance Standards Board (“IAASB”) are appropriate for issuers and consistent with the Board’s mandate.4

This proposed approach is consistent with the PCAOB’s strategic plan, which included a commitment to “[p]articipate in the work of, and engage with, other auditing standard-setting bodies to benefit from, and as appropriate incorporate, new developments and techniques to promote high quality audits worldwide.”5

This proposed approach is also consistent with the views of some suggesting that high quality audits may be facilitated through the convergence of auditing standards. For example, the following comments have been provided to the SEC in recent years:

  • “Everyone will be best served by having standard setters develop consistent core auditing standards...”6
  • “…we urge the SEC to dedicate the resources and develop the infrastructure to support convergence of auditing standards. To this end, we reiterate our strong encouragement to the SEC to work with the Public Company Accounting Oversight Board (PCAOB), their international counterparts and the International Auditing and Assurance Standards Board (IAASB) toward global convergence of auditing standards.”7
  • “We must…work to find a way to narrow down differences in auditing standards.”8

Similar feedback has been provided in other settings, such as in the PCAOB’s Standing Advisory Group meetings,9 responses to the PCAOB’s proposed standard on Engagement Quality Review,10 the Bloomberg/Schumer Report,11 an official position of the CFA Institute,12 the AICPA’s testimony on International Financial Reporting Standards before the U.S. Senate,13 and the endorsement of the ISAs by the World Federation of Exchanges (of which NYSE, NASDAQ and AMEX are members).14

Although the PCAOB’s proposed risk assessment standards started with the ISAs, it is important to note that the proposed standards were not drafted to achieve full convergence with them. Indeed, significant differences identified by the Board exist, which are explained in the appendix to the Board’s release. For example, some of these differences relate to the internal control requirement unique to U.S. issuers; others relate to using the terms set forth in the PCAOB’s Rule 3101, Certain Terms Used in Auditing and Related Professional Practice Standards; and others “reflect the Board’s view that particular procedures described in the ISAs are not necessary for audits of issuers, or that additional procedures not described in the ISAs are necessary.”15

In some respects, the Board’s approach in drafting these proposed standards may therefore facilitate a broader discussion about the extent and manner in which convergence of auditing standards should occur. This debate is complex, but seems to involve at least two questions: should convergence of auditing standards occur, and if so, how should it be achieved? Here, there appear to be at least two issues that are particularly relevant.

The first issue may be analogous to the issue that we face in the United States related to accounting standards. For example, in summarizing the views expressed by panelists at the SEC’s December 2007 roundtable on IFRS, Chief Accountant Conrad Hewitt noted that panelists were largely supportive of moving to a single set of high-quality, globally accepted accounting standards and that many countries are using or have stated their intent to transition to IFRS.16

A similar observation might be made about auditing standards:

  • First, a single set of high-quality, globally accepted auditing standards is a laudable goal if it helps to promote consistent auditor performance and high quality audits.
  • Second, in many jurisdictions – including in the United States with respect to the audits of nonissuers – ISAs are used in some form or convergence with them is occurring.17

So if globally accepted auditing standards is a worthwhile goal – or for that matter if consistent auditing standards within the United States is desirable – the role and extent of convergence is an issue that merits discussion.

If convergence is determined to be worthwhile, then the second issue would be to determine how convergence might actually happen. For example, in the PCAOB’s proposed standards, the Board sought to “eliminate unnecessary differences,” the result of which are standards that reflect “a degree of commonality” even though the standards “do not mirror each other word-for-word.”18 A different approach has been taken by the ASB, which recently voted for exposure its own risk assessment standards that were based upon the ISAs.19 The ASB’s approach is derived from its “International Convergence Plan,” which among other things means that its standards use the ISAs, including the international convention for wording, as the base standard, with modifications made only where deemed necessary to better serve the needs of U.S. users of audited financial statements of nonissuers or where modifications are appropriate for U.S. legal and regulatory reasons.20 As a result, the ASB’s risk assessment standards generally mirror those of the IAASB word-for-word.

The PCAOB’s proposing release seeks feedback on whether the proposed standards appropriately consider the provisions of the ISAs and whether they reflect necessary differences from the risk assessment standards applicable outside the United States. Consequently, commenters on the PCAOB’s proposed risk assessment standards may wish to review the PCAOB’s and ASB’s standards concurrently. Although the mandates of the PCAOB and ASB are different, such a comparison could provide a unique opportunity to compare standards that have each started with the ISAs.

Drafting conventions

The second overarching area that I’d like to highlight relates to the drafting conventions that the PCAOB used in the proposed standards, some of which differ from those used in the Board’s interim standards and the standards of the IAASB and ASB. For example, consistent with the IAASB and ASB standards, but unlike the Board’s interim standards, each of the proposed standards articulates an objective that the standard is intended to fulfill. Additionally, each standard includes less detailed guidance than the PCAOB’s comparable interim standards and the standards of the IAASB and ASB.

Fundamentally, these drafting conventions relate to the debate as to how to best achieve more principles-based standards. Although the principles vs. rules debate has most notably occurred in the context of accounting standards – as evidenced by the SEC’s 2003 Study on Objectives-Based Standards and certain of the recommendations of the SEC Advisory Committee on Improvements to Financial Reporting21 – it is a debate that is also relevant in the context of auditing standards. Indeed, the stated foundation of the ASB’s “Clarity Project” is the establishment of an objective for each auditing standard as a means to “better reflect a principles-based approach to standard-setting.”22

Here again, the Board’s approach in drafting these proposed standards may facilitate a broader discussion about the drafting conventions that can be used to most effectively achieve principles-based standards. For example, while the PCAOB has not undertaken a separate “clarity project” comparable to the projects of the IAASB or ASB, few would disagree that auditing standards should be understandable, clear and capable of consistent application. In fact, the SEC staff, through our work with the International Organization of Securities Commissions (IOSCO) Standing Committee No. 1 on Multinational Disclosure and Accounting (SC 1), reviews proposed ISAs to determine whether the standards are sufficient in scope and adequately cover all relevant aspects of the area of audit being addressed, whether the standards are clear and understandable, and whether the standards are written in such a way as to be enforceable.23

To effectuate this same outcome, the IAASB has sought to utilize drafting conventions designed to, among other things:

  • Identify the auditor’s overall objective when conducting an audit, set an objective in each ISA, and establish an obligation on the auditor in relation to those objectives;
  • Clarify the obligations imposed on auditors by the requirements of the ISAs and the language used to communicate such requirements;
  • Eliminate ambiguity about the requirements an auditor needs to fulfill (e.g., by avoiding the use of the present tense); and
  • Improve the overall readability and understandability of the ISAs through structural and drafting improvements (e.g., by presenting the requirements and application and other explanatory material in separate sections within the ISAs).24

The PCAOB’s proposing release seeks feedback on whether the principles of the risk assessment process are articulated appropriately in the proposed standards. The release also seeks feedback in several areas as to whether the direction provided in the proposed standards is clear and sufficient. Commenters on the PCAOB’s proposed risk assessment standards may therefore want to compare the drafting conventions used in the PCAOB’s and IAASB or ASB’s standards as doing so could provide a unique opportunity to compare standards that are each intended to be understandable, clear and capable of consistent application.

Standard setting process

The last area that I’d like to highlight relates to the process by which the PCAOB developed these proposed standards. In his remarks at the PCAOB’s open meeting at which the proposed standards were approved for exposure, Board Member Dan Goelzer referred to the transparency and openness of the Board’s standard setting process. He observed that the project began over three years ago with a public discussion of audit risk assessment by the Board’s Standing Advisory Group and that depending upon the nature of the comments received, additional steps to promote transparency might be considered, such as publishing a revised proposal, opening a second comment period and holding additional public forums or Board discussions to consider the comments.25 The staff of the SEC is similarly interested in the nature of the comments received and the actions that the Board might take to promote transparency in its standard setting activities.


The PCAOB and SEC share a common commitment to auditing standards that promote high quality audits. The staff of the SEC recognizes that risk assessment is the foundation upon which an effective audit is built and encourages the PCAOB’s efforts to promote effective risk assessment. The PCAOB’s proposed standards represent an important step in this regard, and the staff encourages and looks forward to the important public feedback that will be provided to the PCAOB in response to its proposal.




Modified: 12/08/2008