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 Statement on the Proposed Framework for Reorganization of PCAOB Auditing Standards

DATE: March 26, 2013
SPEAKER: Jay D. Hanson, Board Member
EVENT: PCAOB Open Board Meeting
LOCATION: Washington, D.C.

Good Morning.

I would like to join my fellow Board members in thanking the staff of the Office of the Chief Auditor for their thoughtful and thorough work on this project.

This project is intended to put PCAOB auditing standards — including standards issued by the Board, as well as the interim AICPA standards adopted by the Board in 2003 — into a consistent framework with an ultimate goal to make them more user-friendly and accessible for auditors and others. As explained by the staff, today's action by the Board is just the first step in what will be a multi-year effort to reorganize and, where needed, substantively amend the auditing standards.

The framework we are voting on today is about reorganizing the existing interim and PCAOB-issued auditing standards by topic with a single integrated numbering system. In other words, we would categorize the auditing standards into topic areas, generally following the flow of a typical audit, and renumber the standards accordingly. We are interested in comments on whether the proposed approach makes sense, whether we should consider any changes to the proposed categories, organization or numbering system, and whether the end-product toward which we are aiming will be an improvement over the current structure. Our ultimate goal, as always, is to improve audit quality and investor protection, and it is my hope that a more organized set of auditing standards will increase compliance by firms and enable the overseers of audits, including audit committees, to better understand the audit process and its requirements.

As a by-product of the reorganization, we are proposing certain conforming amendments to Rule 3101, Certain Terms Used in Auditing and Related Professional Practice Standards, and Rule 3200T, Interim Auditing Standards. The Board also is proposing certain related amendments to the PCAOB auditing standards — including updating some cross-references — and is proposing to rescind certain interim auditing standards that the Board believes are no longer relevant or necessary.

But there are several important issues that today's proposal does not address:

  • First, we are proposing only the framework for the reorganization. Before we can adopt this framework as final, we will need to propose for comment the detailed, line-by-line amendments that would need to be made, for example, to renumber the standards and adjust cross-references. After considering commenters' feedback, we likely will propose these detailed line-by-line amendments as the next step. It is my hope that we will be able to provide an online "pilot" version of the reorganized standards on our website when we issue that proposal, in order to allow potential commenters to try out the new system.
  • Second, and perhaps most importantly, this project does not involve redrafting the auditing standards or making substantive changes to any audit requirements. Many of the interim standards, in particular, merit close review and potential amendment by the Board, both to improve audit quality and to reflect current practice. A number of these standards are on our standard-setting agenda, and others will be added as time and resources allow. The process of substantive review and amendment, however, taking one standard at a time, will take a number of years. Today's reorganization project is intended solely to provide a coherent organization of the existing standards, into which future standards or amendments will be incorporated, not to address any real or perceived substantive shortcomings of those standards.
  • Third, we are not, at this time, proposing to evaluate or amend the PCAOB-issued or interim standards for any references to generally accepted accounting principles ("GAAP") or other requirements not issued by the PCAOB that may have been superseded or eliminated since the standards were originally drafted. In some cases, these references would be relatively easy to eliminate or to replace with current citations; in others, the changes may require a substantive amendment to the auditing requirements. At this point, the Board has not made a final decision about how inaccurate references to GAAP or other requirements in the context of this reorganization project will be addressed. The proposal being issued today essentially includes these inaccuracies for now with plans to correct them in connection with its longer term substantive review and amendment of each individual interim standard. We are seeking comment specifically on questions related to this issue.
  • Finally, for those familiar with the accounting standards codification project undertaken by the Financial Accounting Standards Board ("FASB") several years ago, I should note that the scope of our current project is significantly narrower than the FASB's. Like the FASB, we are moving toward a topically based framework. Unlike the FASB, we are not proposing yet to use a consistent numbering convention in the reorganization for the individual sections within each standard. Nor have we included in our current reorganization proposal relevant materials that go beyond the PCAOB-issued or interim auditing standards, such as requirements of the Securities and Exchange Commission, that are applicable to audits. At this point, we are not amending the interim standards to make the use of all terminology consistent or to add common definitions applicable across all standards. And, although we plan to make the reorganized standards available and searchable on the PCAOB website along with links to the Board's adopting releases for the respective standards, our vision currently does not include establishing a sophisticated research system with section-by-section links to guidance or intersecting content links like the FASB's online codification system. We welcome comments on all of these issues for future consideration.

In short, what we are proposing today is a starting point for a more logical organization of the auditing standards under our purview. I look forward to your comments about the scope and approach of our first foray into this area. Let us know if there is something that we appear not to have considered or where we may be going down the wrong path.

Again, I would like to thank our staff, as well as the staff of the SEC, for their thoughtful work and valuable insights.

 

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