Number One
Number Two
Number Three

In May and June, the SEC gave its stamp of approval on the first two standards issued by the PCAOB. A third standard is pending SEC approval.

Number One

Auditing Standard No. 1, References in Auditors' Reports to the Standards of the PCAOB, requires that auditors' reports on audits and other engagements relating to public companies and other issuers include a reference that the engagement was performed in accordance with the standards of the PCAOB. This replaces the previous reference to generally accepted auditing standards. This standard was effective beginning May 24, 2004.

The SEC’s order approving Auditing Standard No. 1 is available on the SEC’s web site, under Regulatory Actions. The SEC has issued interpretive guidance for Standard No. 1.

Number Two

Auditing Standard No. 2, An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements, addresses both the work that is required to audit internal control over financial reporting and the relationship of that audit to the audit of the financial statements.

An audit of internal control includes, among other things, evaluating the process management used to perform its assessment of internal control effectiveness, evaluating the effectiveness of both the design and operation of the internal control, and forming an opinion about whether internal control over financial reporting is effective.

“This standard is one of the most important and far-reaching auditing standards the Board will ever adopt,” said PCAOB Chairman William J. McDonough. “In the past, internal controls were merely considered by auditors; now they will have to be tested and examined in detail. That process will add an important protection for investors because solid internal controls are the first line of defense against misconduct and one of the most effective deterrents to fraud.”

Companies considered accelerated filers (seasoned U.S. companies with public float exceeding $75 million) are required to comply with the internal control reporting and disclosure requirements of Section 404 of the Act for fiscal years ending on or after November 15, 2004. Accordingly, auditors engaged to audit the financial statements of such companies for fiscal years ending on or after November 15, 2004, also are required to audit and report on the company's internal control over financial reporting as of the end of such fiscal year.

Other companies (including smaller companies, foreign private issuers and companies with only registered debt securities) have until fiscal years ending on or after July 15, 2005, to comply with these internal control reporting and disclosure requirements, and the requirement for audit reporting on internal control is similarly delayed.

The SEC’s order approving Standard No. 2 is available on the SEC’s web site, under Regulatory Actions. The PCAOB has published staff guidance regarding implementation of this standard.

Number Three

In early June, the PCAOB adopted its third auditing standard along with rules related to the oversight of non-U.S. firms and certain terminology. They will not take effect until approved by the SEC.

Auditing Standard No. 3, Audit Documentation, and a related amendment to an interim auditing standard, establishes general requirements for documentation an auditor should prepare and retain in connection with engagements conducted pursuant to the standards of the PCAOB. The Sarbanes-Oxley Act of 2002 expressly directs the Board to establish auditing standards that require registered public accounting firms to prepare and maintain, for at least seven years, audit documentation "in sufficient detail to support the conclusions reached" in the auditor's report. This standard and the related amendment were proposed on November 12, 2003.

The Board also adopted a rule to set forth the terminology the Board will use to describe the degree of responsibility the auditing and related professional practice standards impose on auditors. This rule was proposed on October 7, 2003.

In addition, the Board adopted rules related to the oversight of non-U.S. public accounting firms. Section 106(a) of the Act provides that any non-U.S. public accounting firm that prepares or furnishes an audit report with respect to any U.S. public company is subject to the Act and rules of the Board. The rules set out a framework under which, with respect to non-U.S. firms, the Board could implement the Act's provisions by relying, to an appropriate degree, on a non-U.S. system. The rules were proposed on December 9, 2003.

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