On December 15, 2015, the Public Company Accounting Oversight Board (PCAOB) continued its pursuit of providing investors with improved audit transparency and audit accountability by adopting new rules requiring auditors to disclose:
- the name of the engagement partner;
- the name, location and extent of participation of any other accounting firm participating in the audit whose work constituted at least 5 percent of total audit hours; and
- the number and aggregate extent of participation of other accounting firms participating in the audit whose individual participation was less than 5 percent of total audit hours.
The goal of these new rules, as stated by PCAOB Chairman James R. Doty, is to “protect investors from poor auditing, and promote their interest in more informative, accurate and independent audit reports.”
The final rule requires the filing of Form AP, Auditor Reporting of Certain Audit Participants. Auditing firms will be required to file this form for each audit, and the filing deadline for Form AP will be 35 days after the date the auditor’s report is first included in a document filed with the Securities and Exchange Commission (SEC). For any initial public offerings, the filing deadline for the Form AP will be 10 days after the auditor’s report is first included in a document filed with the SEC. The information gathered from Form APs will be made available in a single, searchable database and will provide, as Chairman Doty stated, “investors and other financial statement users with the information they have continued to request.”
How did we get here? Back in 2008, the Treasury Department’s Advisory Committee on the Auditing Profession recommended that engagement partners be required to sign their audit reports. With this recommendation, the PCAOB became engaged in what it described as “extensive research” on the topic, including considering public concerns over four comment periods, and weighing comments from members of its own Standing Advisory Group and Investor Advisory Group. There were concerns from the accounting industry and others about what Chairman Doty described as the “unintended consequences of such a disclosure in the auditor’s report,” such as potential liability under federal securities laws and practical concerns surrounding the need to obtain consents for identified parties in connection with registered securities offerings. The PCAOB understood these concerns, but also recognized that disclosure both creates better-informed investors and increases auditor accountability.
Since the new rule does not require such disclosures on the auditor’s report (this is a voluntary option), the separate and required Form AP is likely the necessary compromise between the industry and the regulator. The PCAOB believes that disclosure on Form AP should not raise potential liability concerns under Section 11 of the Securities Act or trigger the consent requirement of Section 7 because the engagement partner and other accounting firms would not be named in a registration statement or in any document incorporated by reference. The PCAOB also stressed limited risk of potential liability under Exchange Act Section 10(b) and Rule 10b-5 under the Form AP approach, noting its goal is not to expose auditors to additional liability. But the board believes requiring disclosure is appropriate because the ability of engagement partners to promote a quality audit is of “singular importance to the ultimate reliability of the audit” and making this information available on Form APs, accessible in a searchable database, will allow the investing public to make better-informed decisions.
So far, as least publicly, the audit profession has not demonstrated much reaction to the announcement. The Center for Audit Quality (CAQ), an autonomous nonprofit group affiliated with the American Institute of CPAs (AICPA), expressed its support of the rule. CAQ Executive Director Cindy Fornelli stated in a recent news release in relation to the adoption of the Form A, “The board should be commended for its responsiveness to concerns raised by a variety of stakeholders.”
The SEC has final approval authority over the new rules and, with industry support and the reporting compromise in place, is likely to approve the adoption. Once approved, the disclosure requirement for engagement partners will be effective for auditor’s reports issued on or after January 31, 2017, or three months after SEC approval, whichever is later. Regarding the disclosure of other audit firms participating in the audit, the requirement will be effective for reports issued on or after June 30, 2017.