Proposed Standard for Auditing Supplemental Information Accompanying Audited Financial Statements 

The second standard we are considering today would govern the audits of supplemental information accompanying audited financial statements. It is applicable both to the supplemental information provided by brokers and dealers — such as supporting schedules regarding the computation of net capital and reserve requirements — and to other types of supplemental information included in SEC filings, whether required by regulatory bodies or submitted voluntarily.

Currently, our interim standard regarding auditor reporting on information accompanying audited financial statements, known as AU section 551, provides guidance regarding auditors' reporting responsibilities regarding supplemental information. Because of the importance of supplemental information accompanying financial statements of broker-dealers and others, the proposed standard specifies the audit procedures to be applied to test the supplemental information, as well as the auditor's reporting responsibilities. Under the proposed standard, the auditor will audit and report on whether the supplemental information accompanying the financial statements is fairly stated, in all material respects, in relation to the financial statement as a whole.

While the Board is considering this proposed standard today because of its relevance to the audits of brokers and dealers, the standard has several broader objectives. First, it increases investor transparency into the auditor’s responsibilities for supplemental information accompanying audited financial statements. Second, it establishes substantive requirements for the audits of supplemental information, while retaining the concept embodied in current AU sec. 551 that the supplemental information is presented in relation to the financial statements as a whole. Finally, the proposed standard establishes requirements that promote enhanced coordination between the work performed on the supplemental information with the work performed on the financial statement audit. All of these objectives are intended to serve the ultimate goal of increased investor understanding and protection.

As do most of the Board's standard setting projects, the proposed standard aims to achieve its investor protection objectives effectively as well as efficiently. The proposed standard is risk-based and scalable. Under the proposed standard, the auditor must consider the work and conclusions of the audit of the financial statements, the purpose and materiality of the supplemental information and the risk of material misstatement of the supplemental information. Because the auditor’s assurance on the supplemental information will be made in relation to the financial statements as a whole, the audit also will be conducted with a higher materiality threshold than it would be if the auditor reported directly on the supplemental information.

I look forward to receiving feedback during the comment period about whether the proposed standard is clear, comprehensive and likely to achieve its investor protection objectives, and whether it does so efficiently and cost-effectively.

Again, let me commend the staff on their excellent work and thank them for their efforts.