The PCAOB has continued its focus on economic analysis in light of criticisms that the standard-setting body has not given enough consideration to the economic implications of its standards. In the fall of 2013 the PCAOB announced the creation of a Center for Economic Analysis. The Center was created with the objective of “studying the role and relevance of the audit in capital formation and investor protection.” The Center was designed to generate research and advise the PCAOB on economic theory during the standard setting process.
In recent weeks the PCAOB issued its “Staff Guidance on Economic Analysis in PCAOB Standard Setting” which represents a framework for economic analysis during the standard setting process. The guidance was developed to assist the PCAOB staff in evaluating the economic impact of proposed standards. The PCAOB believes that the guidance will help the staff find an appropriate balance between pursuing investor protection while also considering regulatory burdens.
The guidance released on May 15, 2014 laid out four main elements of regulatory economic analysis which should be integrated throughout the rule-making process –
- Describing the Need for the Rule – For each proposed Standard, the PCAOB must clearly demonstrate there is a problem and that the standard will address the problem.
- Developing the Baseline for Measuring Rule Impacts – The PCAOB must establish a baseline which can be used to measure the costs and benefits with and without proposed standard.
- Considering Reasonable Alternatives – The PCAOB should demonstrate how the proposed standard is preferable to other methods for addressing the problem noted above, how the proposed standard is preferable to other potential standards, and the key policy choices made by the Board in determining the details of the standard.
- Analyzing the Economic Impacts of the Standard (and Alternatives) – The most likely economic benefits and costs of the proposed standard and its alternatives should be measured on an incremental basis against the established baseline. The analysis of the benefits and costs should make it clear how the proposed standard achieves the objective as well as tradeoffs between the alternatives.
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