PCAOB Reproposes Naming Engagement Partner in Reports

By Jason Bramwell, Staff Writer
 
A revised proposal of a 2011 measure that would require public accounting firms to disclose in the auditor's report the name of the engagement partner who oversees an audit as well as information about certain other audit participants was issued by the Public Company Accounting Oversight Board (PCAOB) December 4.
 
The public has until February 3, 2014, to provide the PCAOB with comments on the updated proposal, which was unanimously approved by board members.
 
According to the PCAOB, the disclosure requirement would enhance investor protection by increasing transparency into and accountability for the preparation and issuance of the auditor's report.
 
"The disclosure would require no new work by the auditor," PCAOB Chairman James Doty stated during the meeting. "Yet as with previous accountability reforms like it  such as Sarbanes-Oxley's requirement that CEOs and CFOs personally certify their company's financial statements and internal controls  it holds the promise of improving audit quality by sharpening the mind and reminding auditors of their responsibility to the public."
 
Board member Steven Harris said the principle of accountability extends to most professionals in the United States who are identified under federal or state law, such as tax accountants who sign tax returns or engineers and architects who sign their engineering and architectural designs. "It is hard to understand why auditors should be held to a different standard," he stated during the meeting.
 
The new proposal will direct registered public accounting firms to disclose the name of the audit engagement partner in the auditor's report, but it will not require the engagement partner to be named in the annual report form, or Form 2, that is filed with the PCAOB, which differs from the board's original proposal in October 2011. The reproposal also would not require the engagement partner's signature as part of the disclosure process.
 
"Commenters have also allowed us to think even more deeply about the relative benefits of requiring the engagement partner's signature, as many jurisdictions do, versus merely requiring disclosure of the engagement partner's name," Doty said. "Requiring a signature could increase the engagement partner's liability exposure. A perceived risk of liability is not necessarily bad and indeed may contribute to a sense of responsibility. Disclosure of a name, however, should not increase fraud liability for the engagement partner."
 
The PCAOB would also require the inclusion of information about certain other participants in the audit. In many audit engagements, especially audits of companies with multiple locations and international operations, the audit firm issuing the opinion may perform only a portion of the audit.
 
According to a PCAOB fact sheet on the reproposal, the following information would need to be disclosed:
  • With respect to another independent public accounting firm(s), the name of the other firm(s); with respect to other persons not employed by the auditor, the phrase "persons not employed by our firm," instead of identifying the persons by name. "Persons" mean any natural person or any business, legal or governmental entity or association.
  • The location of other participants in the audit (the country of the firm's headquarters' office location and the country of residence or headquarters' office location for other persons).
  • The percentage of the total hours attributable to the audits or audit procedures performed by the other participants in the most recent period's audit.
The PCAOB also raised the disclosure threshold for other participants in the audit from 3 percent of the total audit hours in the original proposal to 5 percent of the total audit hours. Additionally, the new proposal would no longer require firms to identify people in the auditor's report who are not employed by the auditor but who participated in the audit.
 
Some Board Members Have Concerns
Despite voting on Wednesday to move the disclosure requirement forward, board member Jay Hanson said he would be hesitant to support the proposal as currently drafted.
 
"What troubles me about today's reproposal, however, is the mechanism for the disclosures," he stated during the meeting. "In the 2011 proposal, we raised questions about whether auditors should disclose the relevant information in the auditor's report or in the firms' annual filings with the Board or both. Today, we are issuing a reproposal to require all of the disclosures in the audit report. In my view, requiring these disclosures in the audit report  as opposed to on our website in a firm's annual filing on Form 2 or another filing  involves substantial uncertainties and potentially unnecessary risks. I believe that the evidence cited in the release for the potential benefits of the disclosures is weak. And certainly the incremental benefit, if any, from including the disclosure in the audit report rather than in another filing is minimal, at best."
 
Board member Jeanette Franzel said naming the audit engagement partner in the auditor's report might "be a solution in search of a problem."
 
"First . . . the objectives of this project are difficult to follow over its various iterations," she stated during the meeting. "Second, the current release does not articulate how the proposed solution addresses any particular problem; nor does it present an analysis of benefits that is supported by data. Finally, many questions remain unanswered about the potential costs and exposure of auditors to additional liability."
 
The initial comment period for the 2011 proposal ended on January 9, 2012, and many business organizations and accounting operations  including the Big Four firms  that sent comment letters to the PCAOB stated they were not convinced the proposal would provide meaningful information to investors and other users of audit reports, enhance auditor accountability, and improve audit quality.
 
The 2011 proposal followed a concept release issued by the PCAOB in July 2009 on requiring the engagement partner to sign the audit report.
 
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