The Public Company Accounting Oversight Board (PCAOB) unanimously approved much-anticipated new rules on Dec. 15 that will require audit firms to disclose the names of each engagement partner in a public company audit on a new form, as well as the names of other accounting firms that contributed to the audit.
The action taken by the PCAOB on Tuesday morning culminates a project that began in 2009, when the audit regulator issued a concept release on requiring the audit engagement partner to sign his or her own name to the auditor's report. Since then, the board has considered several options on how to best provide investors with more information about the audit and the auditors who conduct them.
âGenerally, in the United States, investor decisions about how much credence to give to an auditor's report have been based on proxies of audit quality, such as the size and reputation of the firm that issues the auditor's report,â the PCAOB said in the final rules document. âInvestors and other financial statement users know the name of the accounting firm signing the auditor's report and may have other information related to the reputation and quality of services of the firm, but they are generally unable to readily identify the engagement partner leading the audit. They are also unlikely to know the extent of the role played by other accounting firms participating in the audit.â
Under the new rules, which are subject to approval by the US Securities and Exchange Commission (SEC), auditors will be required to file a new PCAOB Form AP, Auditor Reporting of Certain Audit Participants, for each issuer audit, disclosing the following information:
- The name of the engagement partner.
- The names, locations, and extent of participation of other accounting firms that took part in the audit, if their work constituted 5 percent or more of the total audit hours.
- The number and aggregate extent of participation of all other accounting firms that took part in the audit whose individual participation was less than 5 percent of the total audit hours.
The information filed on Form AP will be available in a searchable database on the PCAOB website.
âAuditing is a business about reputation,â PCAOB Chairman James Doty said in a written statement following Tuesday's meeting. âTransparency about the partner and firms involved should further incentivize auditors to organize audit teams conscientiously to give investors comfort that it is reliable.â
The standard filing deadline for Form AP will be 35 days after the date the auditor's report is first included in a document filed with the SEC. In the case of initial public offerings, the Form AP filing deadline will be 10 days after the auditor's report is first included in a document filed with the SEC.
If approved by the SEC, the disclosure requirement for the engagement partner will go into effect for auditor's reports issued on or after Jan. 31, 2017, or three months after SEC approval of the final rules â whichever is later, according to the PCAOB. For disclosure of other audit firms participating in the audit, the requirement will take effect for reports issued on or after June 30, 2017.
Form AP was seen by the PCAOB as a middle-ground approach to providing disclosure information to investors. The board issued a proposal in October 2011 that, among other things, would have required disclosure of the name of the engagement partner in the auditor's report without requiring a signature, as well as disclosure of certain information about other participants in the audit. A reproposal that amended some of the disclosure requirements, but kept the disclosure in the auditor's report, was issued by the PCAOB in December 2013.
But public accounting firms and others shared their concerns with the PCAOB about potential consequences of such a disclosure in the auditor's report, according to Martin Baumann, PCAOB chief auditor and director of professional standards.
âThe rules the board is adopting will add more specific data points to the mix of information that can be used when evaluating audit quality,â the PCAOB said in the final rules document. âSince audit quality is a component of financial reporting quality, high audit quality increases the credibility of financial reporting.â
For example, the name of the engagement partner could, when combined with additional information about the experience and reputation of that partner, provide more information about audit quality than solely the name of the firm, the PCAOB said.
About Jason Bramwell
Jason Bramwell is a staff writer and editor for AccountingWEB. He has nearly 20 years of experience in print and online media as a journalist and editor.