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NYSSCPA reaffirms stance on revived PCAOB naming measure

Chris Gaetano
Published Date:
Feb 12, 2014
In a comment letter published on Feb. 4, the NYSSCPA roundly criticized a revived effort by the Public Company Accounting Oversight Board (PCAOB) to require auditors to disclose the names of their engagement partners, as well as the names, locations and participation of any other experts who assisted the audit, in the audit report.

The PCAOB detailed the proposal in the exposure draft, “Improving the Transparency of Audits: Proposed Amendments to PCAOB Auditing Standards to Provide Disclosure in the Auditor’s Report of Certain Participants in the Audit,” released on Dec. 4, 2013. The draft marks the second time in five years that the board has advanced a measure to identify engagement partners and other audit participants in the audit report—a move, it says, that will increase transparency and accountability.

It first raised the issue in a 2009 concept release, which was followed by a 2011 exposure draft. That early draft, by the board’s own account, was poorly received—indeed, in a January 2012 comment letter, the NYSSCPA itself questioned how useful the naming measure would be and cautioned that it may lead the public to draw inappropriate conclusions about an engagement partner’s authority.

The reworked proposal, which the board said took previous public comments into account, does include some concessions: While the initial version called for the engagement partner to sign the audit report alongside the audit firm, the current version requires only that the partner’s name be disclosed. The board also increased the disclosure threshold for listing other audit participants from 3 percent to 5 percent of hours worked. What’s more, the disclosure requirement no longer applies to offshore work within the same firm (i.e., Deloitte China would not count as an outside firm). Firms would, however, need to disclose experts who participated in the audit and have a specialty in an area other than accounting or auditing. Those professionals had previously been excluded from the measure.

In a January interview with The Trusted Professional, PCAOB member Lewis H. Ferguson said that several key factors have changed since the board first made its pitch a few years ago, which might help the latest version of the proposal to be better received. Among other things, Ferguson said, in recent years, there has been more academic research encouraging the idea of including the engagement partner’s name in the audit report, and many nations, such as the European Union, Japan and Australia, already require it.

But in the NYSSCPA’s Feb. 4 comment letter, authored by members of its Auditing Standards and SEC committees, the Society said that it holds the same position today as it did in 2012 and had not been persuaded by the current release to alter its view.

“We do not agree with the basic premise that disclosure of the name of the engagement partner on the audit would constitute useful or meaningful information of any significance to investors or other financial statement users,” the Society said. “We find the arguments put forth by investor groups and other proponents of the re-proposal as summarized by the board in the current Release unconvincing.” Moreover, it stated that the PCAOB had formed a conclusion about the usefulness of such information primarily through the use of surveys, which aren’t necessarily a good indicator of how effective the measure will be.

“The empirical work of the surveys is questionable, and doesn’t improve the case being made,” said Julian E. Jacoby, chair of the Auditing Standards Committee and one of the authors of the comment letter.

The Society argued that if the PCAOB really wants to increase investor confidence in other firms participating in audits, it might be better for the board to strengthen group audit standards, noting that its current one, AU Section 543, is outdated. Strengthening the standards would create more robust requirements with regard to audit planning, performance, supervision and review. Any enhanced standard, the Society said, should also strengthen required communications with audit committees regarding the participation of others and the oversight applied by the primary auditor.

In general, the Society said it was doubtful that readers of the audit report would be able to sufficiently assess the capabilities, integrity and ethical values of the hundreds—or even thousands—of people who audit public companies. Even if readers were to recognize the name of a particular engagement partner, it explained, that doesn’t necessarily mean they would be able to evaluate that person’s ability to coordinate an audit engagement.

The Society was similarly skeptical of whether the disclosure of outside professionals taking part in the audit would be particularly useful, as there can be complex organizational issues that might make such disclosures problematic.

“The experts may just be a small piece of the engagement. They may not play a substantive role, on some occasions,” Jacoby said.

The Society also felt that if the PCAOB is intent on making audit participants’ names publicly available, they would be better placed in the PCAOB’s periodic reporting forms, rather than in the audit report itself.

“Our main objection is that the audit report is not the place to put that information,” Jacoby said. “There are plenty of other places where it would be more appropriate.” 

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