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PCAOB Looks for Middle Ground in New Plan to Name Audit Partner

Chris Gaetano
Published Date:
Aug 7, 2015

The Public Company Accounting Oversight Board (PCAOB) is trying a new tack in its years-long effort to make available the names of audit engagement partners, as well as information about other accounting firms that participate in the audits of public companies: It wants to create a special form solely for those disclosures that firms would file with the regulator within a month after they file audit reports with the U.S. Securities and Exchange Commission (SEC).

The PCAOB released a request for comment about the proposal on June 30, though it has openly discussed the idea of the latest proposal since last October. 

It marks the fourth time that the board has floated a plan for naming the audit engagement partner, which, it says will increase transparency and accountability by allowing the public to link audit work to specific individuals. The PCAOB took its first stab in a 2009 concept release that considered requiring that engagement partners sign the audit report itself.

Opinion on the original measure—as well as subsequent efforts to tweak it—has been sharply divided. The practitioner community rejected some or all of the initial proposal, cautioning that it would confuse readers about the nature of the audit and might possibly increase firms’ litigation exposure. But members of the investor community argued that it would enable them to better evaluate the quality of individual engagement partners connected with an audit.

With these two forces on opposing sides, the PCAOB has been in search of a middle ground that would balance the concerns expressed by various commentators. It released a second proposal in 2011 that would require the engagement partner’s name, without a signature, and information about other audit participants. The board then re-proposed the measure in 2013 to include some revisions to the disclosure requirements, though the overall mandate to identify the lead audit engagement partner and outside firms in the audit report remained intact. 

The NYSSCPA came out against each of those plans. Among other things, the Society felt that disclosing the name of the lead engagement partner would not provide any meaningful information. Indeed, in a comment letter published on Feb. 4, 2014, drafted by members of its Auditing Standards and SEC committees, the Society said that “it is highly unlikely that investors and other users of financial statements could be sufficiently familiar with the capabilities, integrity and ethical values of a significant portion of the hundreds, or perhaps thousands, of
engagement partners responsible for the audit of public companies, or the quality control
environments in which they function, in order to make any meaningful investment judgments concerning the audit.”

Still, the authors of the Society’s 2014 comment letter did say that although they “do not see any benefit to investors or other users” of disclosing the engagement partner’s name, they “see no reason it should be kept secret or not readily available to those who want to know,” and that a “practical alternative in compromise” would be to disclose the information on the PCAOB Form 2 or Form 3 reports. The board’s latest proposal conforms very closely to this suggestion.

One difference: Instead of including the disclosures on those pre-existing PCAOB forms, the board wants to create an entirely new document entitled, “Auditor Reporting of Certain Audit Participants” (Form AP), to identify the lead engagement partner and other firms that took part in the audit. This would be filed with the PCAOB within 30 days of filing the completed audit report with the SEC, and made accessible to the public through the regulator’s website. According to the PCAOB, the information would be available in a searchable database.

Looking for the middle ground

In a statement, PCAOB Chair James R. Doty called the Form AP “a middle ground approach” that would provide the disclosures to investors “in a manner that responds to auditors’ concerns about risk.”

By requiring that the disclosures be listed on a separate form filed with the PCAOB, rather than in the audit report filed with the SEC as part of a company’s annual Form 10-K, the board hopes to address some of the legal and practical issues practitioners have raised. Under securities law, naming auditors in an SEC filing can trigger certain consent requirements and may also subject them to potential liability.

The PCAOB said that it is seeking feedback on whether the Form AP would also address concerns that the risk of potential liability in private actions might be increased as a result of the disclosures.

Howard B. Levy, a member of the NYSSCPA’s Auditing Standards Committee and an author of the Society’s 2014 comment letter, agreed with Doty in one sense. Though he still doesn’t see any usefulness in naming the auditor, saying that whatever benefits people think they would get from it are likely to be “wholly imaginary,”  he added that if the board insists on disclosing this information, “filing it in a separate form with the PCAOB would be far superior to putting it in the audit report.” This, he said, makes the board’s current proposal “much more palatable.”

Still, both Levy and fellow Auditing Standards Committee member Julian E. Jacoby, who also helped craft the Society’s response in 2014, said it makes little sense to create a form when the disclosures can easily be included on existing PCAOB forms that already need to be filed with the board. They worried that having to submit an additional form and meet additional deadlines would represent an increased administrative burden for auditors, with no incremental benefit.

The Society plans to officially respond to the proposal this month; the PCAOB’s open comment period closes Aug. 31.


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