On December 15, 2015, the Public Company Accounting Oversight Board (the “PCAOB”) announced it is adopting new rules and related amendments to its auditing standards to improve transparency regarding the engagement partner and other accounting firms that take part in an issuer’s audit.  The rules will require disclosure of the name of the engagement partner and information about other accounting firms participating in an audit on a new PCAOB Form AP, Auditor Reporting of Certain Audit Participants (“Form AP”).

According to the PCAOB, of the 20 countries with the largest market capitalization (based on data obtained from the World Bank, World Development Indicators), only four do not currently require disclosure of the name of the engagement partner: the United States, Canada, Republic of Korea, and Hong Kong.  On the other hand, disclosure of other accounting firms that participated in an audit does not appear to be required in any other country.  Indeed, the PCAOB’s own standards currently prohibit identification of other accounting firms in the auditor’s report unless responsibility for the audit is divided.  The new rules will require public disclosure of such information on Form AP and will remove the prohibition on disclosure in the auditor’s report of information required to be disclosed on Form AP, so long as the disclosures also clarify the responsibility of the firm signing the auditor’s report.

The PCAOB intends to use these disclosures to create a database investors can use to learn, among other things, whether the engagement partner has been associated with restatements of financial statements or the subject of public disciplinary proceedings, as well as whether he or she has experience as an engagement partner auditing issuers of a particular size or in a particular industry.  The PCAOB also intends that Form AP and the resulting database will help investors understand how much of an audit was performed by the accounting firm signing the auditor’s report and how much was performed by other accounting firms.

Form AP will be available in a searchable database on the PCAOB’s website and firms will be required to file Form AP through the PCAOB’s existing web-based Registration, Annual, and Special Reporting system (“RASR”), unless otherwise directed by the PCAOB.

Form AP Disclosure Requirements

Under the final rules, firms will be required to file Form AP for audit reports issued in connection with issuer audits.1 The Form AP must disclose:

The engagement partner, including:

  • The partner’s name; and
  • The partner’s 10-digit Partner ID number assigned to the partner by his or her firm.2

The other accounting firms participating in the audit whose work constituted at least 5% of the total audit hours, including:

  • The legal name of the firm, and, if different, the name under which it issued the audit report;
  • The firm’s five-digit PCAOB-assigned Firm ID number, if any;
  • The headquarters office location, including city and state (city and country if outside the US); and
  • The extent of participation, expressed as a percentage (either as a single number or within a range) of total audit hours.

As to those firms whose individual participation was less than 5% of total audit hours:

  • The number of all such other accounting firms, and
  • The aggregate percentage of total audit hours attributable to such firms.

The rules will require this information to be filed on Form AP, but will also allow the firm signing the auditor’s report to voluntarily provide information about the engagement partner, other accounting firms, or both in the auditor’s report. Firms should think carefully before making such voluntarily disclosures in the auditor’s report, however, as such disclosures could give rise to various legal and practical challenges.

Because the PCAOB intends Form AP to be used in the preparation and issuance of audit reports and believes the proposed rules are authorized by Section 103 of the Sarbanes-Oxley Act, as opposed to Section 102, the information filed on Form AP will not be eligible for confidential treatment.  Moreover, the PCAOB has rejected requests to modify the rules to allow firms to withhold certain information required by Form AP based on an asserted conflict with non-US law.

Significantly, the following persons would be excluded from the disclosures and from the computation of total audit hours:

  • The engagement quality reviewer;
  • Persons performing a review pursuant to Appendix K; Specialists engaged, not employed, by the auditor;
  • A firm performing the audit of entities in which the issuer has an investment that is accounted for using the equity method;
  • Internal auditors, other company personnel, or third parties working under the direction of management or the audit committee, who provided direct assistance in the audit of internal control over financial reporting; and
  • Internal auditors who provided direct assistance in the audit of the financial statements.

Filing Requirements

The deadline for filing Form AP generally will be 35 days after the date the auditor’s report is first included in a document filed with the SEC.  In an IPO situation, however, the filing deadline is shortened significantly, to 10 days after the auditor’s report is first included in a document filed with the SEC, in order to make the information available prior to any applicable IPO roadshow.

Firms must file Form AP regarding an audit report the first time the audit report is included in a document filed with the SEC. Subsequent inclusion of precisely the same audit report in other documents filed with the SEC is not necessary. Additionally, although the hours incurred for interim reviews must be included in total audit hours, firms need not file Form AP in connection with interim reviews.  The Form must be amended only when there was an error or omission in the original submission.  On the other hand, if the auditor’s report is reissued and dual-dated, a new Form AP is required even when the only information that changes is the date of the report.

If approved by the Commission, the new rules and amendments to auditing standards will become effective in two phases in 2017: disclosure regarding the engagement partner will be required for audit reports issued on or after January 31, 2017 or three months after SEC approval of the final rules, whichever is later.  Disclosure regarding other accounting firms will be required for audit reports issued on or after June 30, 2017.