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SEC approves PCAOB standard for Emerging Growth Companies

The leader of Frazier & Deeter’s Public Company Audit and Advisory Practice, Bill Godshall, discusses AS 16, the first auditing standard issued by the PCAOB and approved by the SEC since the JOBS Act was signed into law.

This week the SEC approved Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 16, Communications with Audit Committees (AS 16). AS 16 is significant for several reasons. First, it pulls auditor communication requirements from SEC rules and PCAOB auditing standards under one document and proposes guidance for various circumstances.  Secondly, AS 16 is the first auditing standard issued by the PCAOB and approved by the SEC since the JOBS Act was signed into law.

In order to understand the significance of the approval of AS 16, you must first understand the JOBS Act. The objective of the JOBS Act is to make the capital formation for start-up companies less burdensome. Given this objective, a key focus of the JOBS Act is to try to reduce the cost of extensive disclosures and audit costs for emerging growth companies (EGC), a defined term in the JOBS Act.

Among other things, the JOBS Act required the SEC to assess certain types of PCAOB rules and auditing standards to determine whether they should be applied to an EGC. AS 16 represents the first chance for the SEC to make such a determination.  In the SEC’s 23 page release announcing the approval of AS 16, nine pages are devoted to its basis for the determination that AS 16 will be applied to the audit of an EGC upon the effective date of AS 16.

As the SEC stated in its release, “the application of the Proposed Rules to EGC audits is necessary or appropriate in the public interest, after considering the protection of investors and whether the action will promote efficiency, competition, and capital formation.” The new standard and related amendments will be effective for public company audits of fiscal periods beginning after December 15, 2012. You can read the full SEC release here.

At the recent AICPA Conference on Current SEC and PCAOB Developments (held in Washington, D.C. in early December) the SEC made it clear that it will seek to narrowly apply the provision of the JOBS Act when possible.

With this move the SEC has made it clear that it believes a narrow application of certain of the JOBS Act provisions are key to protecting investors.  While many leaders in the business and financial reporting community believe the creation of emerging growth company designation by the JOBS Act is important to the new capital formation, the SEC appears to sending the message that audit standards should be applied equally to all public companies.

For more information about AS 16 or other public company auditing developments, please email Bill Godshall, Lead Quality Control Partner and leader of our Public Company Audit and Advisory Practice at bill.godshall@frazierdeeter.com.

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