AUDIT FIRM REGULATION: No Autographs
Firms decry PCAOB's proposal on requiring audit signatures
Controversial new audit standards under consideration by the Public Company Accounting Oversight Board to require engagement partners to personally sign corporate audit reports could lead to higher audit fees, rollercoaster stock prices, liability nightmares for accountants, and even threats against auditors, critics of the plan warned.
In a concept release seeking input on the plan, the PCAOB made the case that a signature requirement may improve audit quality by increasing the sense of accountability of the engagement partner for the work performed during the audit, and by providing meaningful transparency to the investing public.
But in comments submitted in response to that release, Big Four firm Deloitte told the audit overseer that the signature requirement would fail to achieve either objective. "The suggested beneficial effects on accountability and transparency are speculative, and the concept release does not present evidence that an engagement partner signature requirement will enhance audit quality," Deloitte said. "However, the associated costs and burdens, including unintended consequences, are real and could be significant."
Other leading firms took a similar stand.
Under the present system, engagement partners "are held accountable by their own professionalism, supplemented by mechanisms that are in place that allow third parties to hold them accountable," Grant Thornton said. "Additionally, these partners have a significant portion of their net worth invested in the firms in which they are partners. A single audit failure can take down a firm, resulting in a significant personal loss to the engagement partner, and all of his or her partners. We do not believe individually signing a report will promote greater accountability."
A DEBATE FROM DAY ONE
The board's concept release was issued in response to a recommendation from the Treasury Department's Advisory Committee on the Auditing Profession that called on the PCAOB to undertake a standard-setting initiative to consider mandating the engagement partner's signature on the auditor's report.
From the onset, the PCAOB had reason to believe the plan would stir controversy.
When the proposal was first discussed during an October 2008 meeting of the board's Standing Advisory Group, Securities and Exchange Commission General Counsel David Becker suggested bluntly that the measure was a waste of time.
"I just hope that whatever the board does in this ... it spends most of its time on things that are much more important, and are going to have a more demonstrable effect on audit quality," Becker told PCAOB officials.
But that was the least of the concerns raised by members of the accounting profession who filed comments with the board challenging the plan. At the top of that list of concerns: a widespread suspicion that the proposed standard would create serious new liability problems for engagement partners and their firms.
The plan would "undoubtedly increase the number of times that an engagement partner will be the subject of private litigation," BDO Seidman warned the board. "We believe that the plaintiffs' bar will focus unnecessarily on the engagement partner in adding parties to private lawsuits, resulting in firms facing increased costs."
Worse yet, these liability concerns are likely to make it more difficult for accounting firms to recruit and retain high-quality auditors, BDO argued. "Unnecessarily subjecting engagement partners to litigation as an individual defendant will likely cause a chilling effect on the profession, when auditors decide that the stress from being individually named in a lawsuit (even where the claims are unjustified) is not worth the benefits of becoming or acting in the capacity of the engagement partner, particularly on high-risk engagements," the firm said. "This could also serve as a disincentive for college graduates to enter the public accounting profession, and investors would lose the benefit of enhanced audit quality that this proposed signature requirement seeks to achieve."
Even more disturbing than the potential liability exposure is the specter of individual auditors coming under public attack by disgruntled investors and a "lynch mob" media mentality. "Engagement partners and their families could be subject to unwarranted and unwelcome communications from shareholders who are unhappy with a particular company's performance in matters that are wholly unrelated to the completeness and accuracy of the financial statements," Grant Thornton warned.
In high-profile cases, "The publication of the engagement partner's name could generate indefensible press coverage that will likely negatively affect his or her reputation even if the audit is later determined to be sufficient," the firm said.
In extreme cases, identified engagement partners could become targets of violence by outraged shareholders seeking revenge for investment losses, critics argued.
PAINTING A TARGET?
In the European Union, where audit report signatures are required, signatures may be withheld from the public if disclosure could lead to an "imminent, significant threat to the personal security of any person."
A U.S. requirement lacking a similar exemption could place auditors directly in the line of fire, critics maintained.
Groveland, Mass.-based CPA Frank Gorrell, for one, warned that identifying engagement partners by name could prompt irate investors to set up Internet sites to "vent their frustrations" by criticizing individual accountants and even publishing their home addresses online.
"Who wants to be an engagement partner if it endangers a life?" he asked.
Gorrell also raised concerns that identifying the engagement partner could have unpredictable and unwarranted consequences for a company's stock value.
Once engagement partners are identified in audit reports, some may attract a following among investors, he reasoned. When an accountant who has developed a reputation for high-quality audits is rotated off an account, investors could interpret the change as a bad omen for the company and sell off that stock.
As for the board's contention that requiring personal signatures on audit reports would increase transparency for investors, Big Four firm KPMG said that transparency already exists, since company management and audit committees know the identity and qualifications of the engagement partner.
"If the board believes that greater transparency in this area is desired, consideration should be given to requiring that the engagement partner attend shareholders' meetings and be made available to respond to appropriate questions," KPMG said.
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