The Public Company Accounting Oversight Board voted Tuesday to propose requiring PCAOB-registered accounting firms to disclose the name of the engagement partner in the audit report they file for a corporate client and on the PCAOB Annual Report form.
The proposed amendments to the PCAOB standards would also require disclosure in the audit report of any other accounting firms and other persons not employed by the auditor that took part in the audit.
The changes aim to bring greater transparency to public company audits, which have long been criticized by investors for providing little useful information. Auditing firms, on the other hand, have worried about the threat of litigation and disciplinary actions against their auditors. The use of outsourced auditing services, particularly in foreign countries, is also a touchy matter for many firms, as the PCAOB seeks more access to firms outside the U.S. that do work on audits of public companies for U.S.-based firms.
“This proposal would increase transparency of public company audits by providing investors with information about certain key participants in the audit,” said PCAOB chairman James R. Doty in a statement. “This would bring disclosures about U.S. audit engagement partners more in line with those provided for many engagement partners abroad.”
The proposal to require disclosure of the name of the engagement partner follows and builds upon a related concept release issued by the PCAOB on July 28, 2009. That concept release considered requiring the engagement partner to sign his or her name on the audit report.
After careful consideration, the PCAOB said it did not include in the current proposal a requirement to sign the engagement partner’s name on the audit report. Instead, the proposal would require that the engagement partner’s name be disclosed in the audit report, which would make the engagement partner’s name readily available to the users of the audit report while mitigating concerns about minimizing the firm’s role in the audit.
The proposal also would amend PCAOB Form 2, the Annual Report, to require firms to disclose the engagement partner’s name for each audit report listed on the form. Form 2 provides basic information about the firm and the firm’s issuer-related practice over the most recent 12-month period.
In addition, the proposal would require the auditor to disclose in the audit report other accounting firms and other persons not employed by the auditor that took part in the audit. The proposed disclosure would enable investors to evaluate the other participants in the audit in the same way that they evaluate the auditor. For example, knowing the name of a disclosed accounting firm that took part in the audit would enable investors to determine whether the firm was registered with the PCAOB and has been subject to PCAOB inspections, or is located in a country that does not allow PCAOB inspections. Investors would also be able to verify whether a disclosed firm or person has had any publicly available disciplinary history with the PCAOB or other regulators.
“I am concerned about investor awareness,” said Doty. “I have been surprised to encounter many savvy business people and senior policy makers who are unaware of the fact that an audit report that is signed by a large U.S. firm may be based, in large part, on the work of affiliated firms. Such firms are generally completely separate legal entities in other countries.”
Comments on the proposed amendments are due Jan. 9, 2012.
“We’ve carefully studied the issue of enhancing the transparency of public company audits and discussed it with the board’s Standing Advisory Group and Investor Advisory Group,” said PCAOB chief auditor and director of professional standards Martin F. Baumann. “Now we look forward to receiving public comment on this proposal.”
Not everybody on the board was in agreement on what information should be disclosed. “I believe there is a strong case for disclosure of participating firms,” said PCAOB board member Daniel Goelzer. “As to engagement partner disclosure, the issues are more difficult and how the board should ultimately proceed is less clear.”
He noted that some people who commented on the concept release had argued that signing the partner’s own name might signal a counterproductive shift from emphasis on firm-wide quality controls to the skill of the particular partner. “In my view, the board would need more evidence than it has now to conclude that partner identification would improve audit quality,” said Goelzer. “I hope those who comment on the proposal will focus on that question.”
Another board member, Steven Harris, indicated his support for the proposals and the additional informatiion they would provide investors. “Today, an audit report typically contains no information about who served in the role of engagement partner or whether the firm issuing the report actually performed all of the work,” he said. “The proposed amendments would remedy that by requiring the disclosure in the audit report of both the name of the engagement partner and the names of other independent public accounting firms and persons that took part in the audit and the extent of their participation. Equipped with this information, investors would have the ability to search our Web site for the names of any engagement partner’s public company clients and any PCAOB publicly available disciplinary actions against that engagement partner. Investors also would be able to determine whether a firm that participated in the audit is registered with the board and has been subject to PCAOB inspection and whether a disclosed firm or person has had any publicly available disciplinary history with the board or other regulators.”
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