The Public Company Accounting Oversight Board proposed Tuesday to require firms to file a new PCAOB form to make public the name of the audit engagement partner and information about certain other participants in the audit, and also issued a concept release on audit quality indicators.
In a supplemental request for comments, the board is seeking comment on the proposed form, PCAOB Form AP, as a potential alternative to a 2013 proposal to promote audit transparency by providing such disclosures in the auditor's report.
“A cornerstone of our effort to provide investors more information about the audit and the auditors who conduct them is our consideration of disclosure to investors of the identity of the engagement partner and other firms that conduct an audit,” said PCAOB Chairman James R. Doty in a statement. “Knowing the identity of the engagement partner plays a key role in investor confidence and capital formation in those jurisdictions where it is provided to investors. Form AP is a middle-ground approach that would provide investors this disclosure in a manner that responds to auditors' concerns about risk.”
In December 2013, the PCAOB proposed a rule that would mandate disclosure in the auditor’s report of the name of the engagement partner and information about certain other participants in the audit. The request for comment Tuesday explores an alternative to that proposal.
PCAOB Form AP—Auditor Reporting of Certain Audit Participants—would be created and put into service specifically as a public information vehicle. Audit firms would use Form AP to disclose the name of the engagement partner on the audit, along with information about certain other participants.
All Forms AP would be posted and made searchable on PCAOB's website. In addition to filing Form AP, auditors could voluntarily provide the same disclosures in the auditor's report.
“Form AP would provide investors and other financial statement users with the information they have continued to request—the name of the engagement partner and information about certain other participants in the audit—in a single searchable database, giving the market valuable information, while responding to concerns raised by accounting firms and others about the unintended consequences of such a disclosure in the auditor's report,” said PCAOB chief auditor and director of professional standards Martin F. Baumann.
Currently, auditor’s reports generally disclose only the name of the firm issuing the report. There is seldom information on other firms that participated in the audit or information about the partner who led the work, the PCAOB pointed out.
“Auditor transparency is a way to use the motivating power of our markets to incentivize higher quality audits,” said Doty. “But to do so, the markets need information.”
For several years, the PCAOB has been considering requiring auditors to provide more information about key participants in audits, including the engagement partner and firms other than the one issuing the auditor's report. Providing such information would provide additional transparency about who is responsible for performing an audit for the benefit and use of investors and other market participants.
The PCAOB, acting on the recommendation of the Department of Treasury’s Advisory Committee on the Auditing Profession, began the transparency rulemaking process in 2009 when it issued a concept release on requiring the engagement partner to sign his or her own name to the auditor's report.
In October 2011, the PCAOB issued a proposal that, among other things, would have required disclosure of the name of the engagement partner in the auditor’s report without requiring a signature, along with disclosure of certain information about other participants in the audit.
In December 2013, a reproposal from the PCAOB amended some of the disclosure requirements, but kept the disclosure in the auditor’s report.
In addition to the various proposals and releases, auditor transparency has been the subject of Standing Advisory Group and Investor Advisory Group meetings. Further background and relevant documents on the initiative can be found on the PCAOB website on its own page: Docket 029. A fact sheet on the proposal is available here.
Audit Quality Indicators
Also on Tuesday, at the same meeting, the PCAOB issued a concept release seeking comment on the content and possible uses of audit quality indicators, measures that may provide new insights into audit quality.
Taken together with qualitative context, AQIs can inform and enhance discussions among those concerned with the financial reporting process, such as audit committees, audit firms, investors, and regulators. Enhanced discussions could improve audits and stimulate competition among audit firms based on the quality of work.
"The AQI concept release should stimulate discussion about the drivers of audit quality," said Doty. "Currently, major parts of the audit service are less than fully transparent and improving the transparency of auditing is at the heart of several projects currently on the board's agenda."
The concept release seeks comment on 28 potential AQIs, covering three broad categories:
Audit Professionals: measures dealing with the availability, competence and focus of those performing the audit;
Audit Process: measures concerning an audit firm's tone at the top and leadership, incentives, independence, investment in infrastructure needed to support quality auditing, and monitoring and remediation activities;
Audit Results: measures relating to financial statements (such as the number and impact of restatements, and measures of financial reporting quality), internal control over financial reporting, going concern reporting, communications between auditors and audit committees, and enforcement and litigation.
"Evaluating AQIs requires context; they are not scorecards or benchmarks for grading audits," said Gregory Jonas, director of the PCAOB’s Office of Research and Analysis. "Rather than answering questions, AQIs are more likely to empower stakeholders to ask insightful questions of auditors, and thereby encourage auditors to do their best work."
In addition to seeking comments on the content of AQIs, the PCAOB is asking for views on how AQIs may best be used to promote audit quality.
Tuesday’s concept release explores potential uses of AQI data. It also considers how AQI data might be obtained and distributed, whether use of AQIs should be voluntary or mandatory, the scope of audits and audit firms that may be subject to AQI reporting, and the possibility of phasing-in steps toward AQI reporting and use.
“The concept release raises a wide range of important issues,” said Doty. “We trust it will stimulate discussion and elicit insightful comments and suggestions that will inform the board's work on the possible use of AQIs.”
This fall, the PCAOB will convene a public roundtable to discuss views on the release and related comments. Additional details about the roundtable will be forthcoming.
Many stakeholders have encouraged the PCAOB to explore possible use of AQIs, including the Treasury Advisory Committee on the Auditing Profession, the Board's advisory groups, audit committee members, audit firms, SEC staff, and other audit regulators. Beginning in 2013, the PCAOB named the AQI project a priority. Since then, it has held public meetings on the topic with its Standing Advisory Group and Investor Advisory Group, and has sought the views of many constituents in developing the concept release.
The PCAOB is requesting comments on the concept release by September 28, 2015. A fact sheet is also available on the AQI concept release.
The Center for Audit Quality praised the PCAOB’s audit quality indicators effort. “The Center for Audit Quality commends the PCAOB for its ongoing efforts to create audit quality indicators,” said CAQ executive director Cindy Fornelli in a statement. “Audit quality is critical to the effective functioning of our capital markets and an important element of investor confidence. The CAQ believes that communications of audit quality indicators should be directed at independent audit committees, who play a vital role in providing oversight of the audit on behalf of investors. Since 2012, the public company auditing profession has undertaken its own initiative in this area, as documented in the 2014 white paper, The CAQ Approach to Audit Quality Indicators. Based on extensive input from investors, audit committees, preparers, audit professionals, and other stakeholders, we believe that audit quality indicators should be tailored to the particular facts and circumstances of a company’s audit. The PCAOB’s efforts to develop audit quality indicators may help audit committees by providing them with context and insight to supplement inspection findings, thus offering a more complete picture of audit quality. The CAQ looks forward to fully reviewing the PCAOB’s concept release and providing feedback from the profession to the board.”
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