According to an August 13, 2014 New York Times Dealbook column entitled “Once Powerful, Mary Jo White’s S.E.C. Is Seen as Sluggish and Ineffective,” the SEC has pressured the PCAOB into modifying its proposal to require that the name of the engagement partner be disclosed in the auditor’s report. Columnist Jesse Eisinger reported --
On yet another front, the S.E.C. is embroiled in a quiet fight with the Public Company Accounting Oversight Board, the accounting industry regulator created after the Enron-era scandals. The accounting board has hardly been a regulatory terror, but it’s been getting resistance from the S.E.C. for even modest initiatives.
For years, the board has pushed for the lead audit partner to have to sign company audits. Wow. Big Step. Put your name to your work. Sadly and predictably, the industry has fought it in what can only be interpreted as cowardly refuge in anonymity. And the S.E.C. leans toward the industry.
“The profession feels that I am a proactive regulator,” James R. Doty, the chairman of the accounting oversight board, told me.
Of the S.E.C. and the topic of agency rivalry, Mr. Doty said, “Robust and vigorous debates are important in this area.” He praised Ms. White as constructive and a pleasure to work with. But his organization lost the fight. Audit partners will not be required to sign the statements, but can if they want to. I can imagine how many auditors will voluntarily put their heads on the block.
6 Update │ August 2014
In response, the Council of Institutional Investors (CII) sent a letter to the PCAOB in which it expressed its “surprise and disappointment in the report earlier this week in The New York Times that the Public Company Accounting Oversight Board (“Board”) has decided to dramatically weaken the above referenced proposed amendments by issuing a final standard providing that “[a]udit partners will not be required to sign the statements, but can if they want to.”
CII General Counsel Jeff Mahoney noted that the Council --
“strongly supports requiring disclosure in the auditor’s report of the name of the engagement partner. Our support is based on the Council’s membership-approved policies. Those policies indicate that information about engagement partners’ track record compiled as the result of requiring disclosure of the partner’s name in the auditor’s report would be relevant to our members as long-term shareowners in overseeing audit committees and determining how to cast votes on the more than two thousand proposals that are presented annually to shareowners on whether to ratify the board’s choice of outside auditor.”
The partner identification proposal has a long and contentious history. In 2009, the PCAOB issued a release inviting public comment on the concept of requiring engagement partners to sign audit reports in their own names, rather than in the name of their firm, as is today customary in the United States. The accounting profession generally opposed this idea, partly because of the potential impact on engagement partner personal liability and partly because some firms viewed partner signature as detracting from their efforts to promote uniform audit quality across all engagements, regardless of the personnel assigned.
The PCAOB responded in 2011 by proposing that the engagement partner’s name be included in the audit report, but that the partner not be required to sign the report. The public comments on this proposal were mixed. On December 4, 2013, the PCAOB issued a third release, again proposing to require disclosure in the audit report of the name of the partner who lead the engagement. The audit report would also be required to include the names, locations, and extent of participation of accounting firms that took part in the audit. The most recent PCAOB standard-setting agenda states that the status of this proposal is “adoption under consideration” and that the Board plans to take action on it during the second half of 2014.
Comment: From a public company perspective, the most serious ramification of the partner identification proposal is that, if the audited financial statements are used in a registration statement for a public offering of securities, naming the partner in the audit report will require that the partner sign and file with the SEC a written consent to being named as an expert in the registration statement. Participating accounting firms named in the audit report would also have to sign consents. These consents would provide a basis for suing the partner or participating firm, in the event that the audit opinion was alleged to be false because of material inaccuracies in the company’s financial statements. In some cases, engagement partners – particularly those who are no longer employed by the company’s auditor -- or participating firms – particularly those based outside the U.S. – may be reluctant to sign consents. This could complicate or delay the company’s ability to raise capital in a public offering.