Securities Lawyer's Deskbook                          published by The University of Cincinnati College of Law

Section 103 -- Auditing, Quality Control, and Independence Standards and Rules

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1. Auditing, Quality Control, and Ethics Standards.
   
   
   1. In general. The Board shall, by rule, establish, including, to the extent it determines appropriate, through adoption of standards proposed by 1 or more professional groups of accountants designated pursuant to paragraph (3)(A) or advisory groups convened pursuant to paragraph (4), and amend or otherwise modify or alter, such auditing and related attestation standards, such quality control standards, and such ethics standards to be used by registered public accounting firms in the preparation and issuance of audit reports, as required by this Act or the rules of the Commission, or as may be necessary or appropriate in the public interest or for the protection of investors.
      
      
   2. Rule requirements. In carrying out paragraph (1), the Board--
      
      
      1. shall include in the auditing standards that it adopts, requirements that each registered public accounting firm shall--
         
         
         1. prepare, and maintain for a period of not less than 7 years, audit work papers, and other information related to any audit report, in sufficient detail to support the conclusions reached in such report;
            
            
         2. provide a concurring or second partner review and approval of such audit report (and other related information), and concurring approval in its issuance, by a qualified person (as prescribed by the Board) associated with the public accounting firm, other than the person in charge of the audit, or by an independent reviewer (as prescribed by the Board); and
            
            
         3. describe in each audit report the scope of the auditor's testing of the internal control structure and procedures of the issuer, required by section 404(b), and present (in such report or in a separate report)--
            
            
            1. the findings of the auditor from such testing;
               
               
            2. an evaluation of whether such internal control structure and procedures--
               
               
               (aa) include maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
               
               (bb) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and
               
               
            3. a description, at a minimum, of material weaknesses in such internal controls, and of any material noncompliance found on the basis of such testing.
               
               
      2. shall include, in the quality control standards that it adopts with respect to the issuance of audit reports, requirements for every registered public accounting firm relating to--
         
         
         1. monitoring of professional ethics and independence from issuers on behalf of which the firm issues audit reports;
            
            
         2. consultation within such firm on accounting and auditing questions;
            
            
         3. supervision of audit work;
            
            
         4. hiring, professional development, and advancement of personnel;
            
            
         5. the acceptance and continuation of engagements;
            
            
         6. internal inspection; and
            
            
         7. such other requirements as the Board may prescribe, subject to subsection (a)(1).
            
            
   3. Authority to adopt other standards.
      
      
      1. In general. In carrying out this subsection, the Board--
         
         
         1. may adopt as its rules, subject to the terms of section 107, any portion of any statement of auditing standards or other professional standards that the Board determines satisfy the requirements of paragraph (1), and that were proposed by 1 or more professional groups of accountants that shall be designated or recognized by the Board, by rule, for such purpose, pursuant to this paragraph or 1 or more advisory groups convened pursuant to paragraph (4); and
            
            
         2. notwithstanding clause (i), shall retain full authority to modify, supplement, revise, or subsequently amend, modify, or repeal, in whole or in part, any portion of any statement described in clause (i).
            
            
      2. Initial and transitional standards. The Board shall adopt standards described in subparagraph (A)(i) as initial or transitional standards, to the extent the Board determines necessary, prior to a determination of the Commission under section 101(d), and such standards shall be separately approved by the Commission at the time of that determination, without regard to the procedures required by section 107 that otherwise would apply to the approval of rules of the Board.
         
         
   4. Advisory groups. The Board shall convene, or authorize its staff to convene, such expert advisory groups as may be appropriate, which may include practicing accountants and other experts, as well as representatives of other interested groups, subject to such rules as the Board may prescribe to prevent conflicts of interest, to make recommendations concerning the content (including proposed drafts) of auditing, quality control, ethics, independence, or other standards required to be established under this section.
      
      
2. Independence Standards and Rules. The Board shall establish such rules as may be necessary or appropriate in the public interest or for the protection of investors, to implement, or as authorized under, title II of this Act.
   
   
3. Cooperation With Designated Professional Groups of Accountants and Advisory Groups.
   
   
   1. In general. The Board shall cooperate on an ongoing basis with professional groups of accountants designated under subsection (a)(3)(A) and advisory groups convened under subsection (a)(4) in the examination of the need for changes in any standards subject to its authority under subsection (a), recommend issues for inclusion on the agendas of such designated professional groups of accountants or advisory groups, and take such other steps as it deems appropriate to increase the effectiveness of the standard setting process.
      
      
   2. Board responses. The Board shall respond in a timely fashion to requests from designated professional groups of accountants and advisory groups referred to in paragraph (1) for any changes in standards over which the Board has authority.
      
      
4. Evaluation of Standard Setting Process. The Board shall include in the annual report required by section 101(h) the results of its standard setting responsibilities during the period to which the report relates, including a discussion of the work of the Board with any designated professional groups of accountants and advisory groups described in paragraphs (3)(A) and (4) of subsection (a), and its pending issues agenda for future standard setting projects.
   
   

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