At an open meeting this morning, the PCAOB voted to adopt new rules requiring audit firms to disclose, on new PCAOB Form AP — Auditor Reporting of Certain Audit Participants, the name of the audit engagement partner. The form will also disclose the names, locations and extent of participation of any other accounting firms outside of the principal auditor that participated in the audit, if their work constituted 5% or more of the total audit hours. For all other accounting firms whose individual participation was less than 5%, the form would disclose the number and the extent of participation in the aggregate. The form must be filed with the PCAOB by the 35th day after the auditor’s report is first included in a document filed with the SEC, with a 10-day deadline for IPOs. The forms will be accessible by investors through a searchable database.
If the new rules are approved by the SEC, the disclosure requirement for the engagement partner would be effective for auditor’s reports issued on or after January 31, 2017, or three months after SEC approval of the final rules, whichever is later. For disclosure of other audit firms participating in the audit, the requirement would be effective for reports issued on or after June 30, 2017. (See the PCAOB press release.) With regard to audits of EGCs, the PCAOB recommended that the SEC determine that the new rule apply to those audits (a determination required by the JOBS Act if the the new rule is to be applicable to EGCs).
The PCAOB believes that that the new rule will assist investors in evaluating audit quality. The release notes that, through its oversight activities, the PCAOB “has observed that the quality of individual audit engagements varies within firms, notwithstanding firmwide or networkwide quality control systems. Although such variations may be due to a number of factors, the Boards staff uses engagement partner history as one factor in making risk-based selections of audit engagements for inspection.” In addition, the disclosure regarding other firms “is intended to help investors understand how much of the audit was performed by the accounting firm signing the auditor’s report and how much was performed by other accounting firms.” The PCAOB also believes that the increased transparency could improve audit quality through increased reputational risk and should “promote increased accountability in the audit process.”
The PCAOB has been batting this concept around since 2009, when it floated the idea that the engagement partner actually sign the audit report. Investors had originally advocated that engagement partners be required to sign the audit report – similar to the signing of certifications by CEOs and CFOs and common practice in the UK—to reinforce their “ownership” of audit reports. In 2011, the PCAOB issued a proposal on naming the audit engagement partner; however, in light of comments raising concerns that a signature requirement would minimize the audit firm’s accountability and role in conducting the audit, the proposal provided only that the engagement partner be named in the audit report (and in a report already filed annually with the PCAOB), but not required to sign his or her name to it. A 2013 reproposal, issued by a divided PCAOB, would have required inclusion of the name of the engagement partner in the audit report, but would not have required engagement partners to be named in firms’ annual filings with the PCAOB. However, comments on the reproposal were remarkably similar to those received on this topic in the past, with audit firms protesting that naming engagement partners would not improve audit quality or increase the auditor’s sense of accountability, but would still expose them to additional liability, especially if they could be deemed to be “experts” under SEC rules and might even be required to provide separate consents. The PCAOB then went back to the drawing board again and came up with the current compromise position that calls for the engagement partner to be named in a new, publicly available form to be filed with the PCAOB. That concept apparently drew audit firms back into the fold.