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AUDITING

PCAOB proposal to name engagement partner may generate debate

 

By Ken Tysiac
December 2, 2013

A vigorous debate is expected as the PCAOB prepares to repropose a rule that would require engagement partners’ names to be disclosed in public company auditor’s reports.

The PCAOB has announced that it will consider making a reproposal on Wednesday. The board will welcome public comment on the issue, and letters submitted previously show how the debate may shape up.

“There is a lot of opinion on all sides of this question,” PCAOB Chairman James Doty said recently. “It’s a deeply debated, highly charged issue. And it’s time to bring it to a resolution.”

A rule the board proposed on Oct. 11, 2011, would have required PCAOB-registered firms to disclose the name of the engagement partner in the audit report. It also would have required the disclosure in the audit report of other firms and persons that participated in the audit.

More than two years later, the proposal has not become a standard. But the International Auditing and Assurance Standards Board (IAASB) proposed in July a standard that would require the name of the engagement partner to be included in the auditor’s report for audits of financial statements of listed entities unless, in rare circumstances, that disclosure is expected to lead to a significant threat to the engagement partner’s security.

The PCAOB is not obligated to follow the IAASB’s standards. But Doty said the PCAOB’s understanding of the issue has benefited as a result of discussions with SEC staff members and a review of academic research. Now the board is again raising the issue of naming the engagement partner.

The opinions of many of the board’s stakeholders were revealed, though, in comments submitted on the last proposal. Investor groups such as the CFA Institute and Council of Institutional Investors favored the additional disclosure.

Many representatives of the accounting profession—including KPMG, EY, BDO, Grant Thornton, McGladrey, Mayer Hoffman McCann, and some smaller firms—either objected to naming the engagement partner or said naming the engagement partner would not improve audit quality. Some groups associated with state CPA associations also were critical of the proposal. Comments included:

  • “We believe that there is already a sufficient level of accountability in the existing environment, obviating the need for engagement partner identification,” BDO said.
  • “The name of the engagement partner would provide no more protection to investors than the names of the chief of drilling operators of oil companies could protect the Gulf of Mexico from oil spills,” said the Audit and Assurance Services Committee of the Illinois CPA Society.
  • “We do not believe that a partner’s name would add anything useful to the total mix of information relied upon by investors and will likely cause some persons to make incorrect inferences about audit partners and audits,” EY said.
  • “The name of the engagement partner is not meaningful information to investors,” the Accounting Principles and Auditing Standards Committee of the California Society of CPAs said. “The name of the engagement partner in most cases will be no more than the name of an unknown person of unknown qualifications to investors and others outside the entity, and requiring the identity of the engagement partner therefore hardly increases transparency in any meaningful way.”


The Center for Audit Quality (CAQ), which is affiliated with the AICPA, suggested that if the PCAOB requires the engagement partner to be named, it would be more appropriate for firms to disclose names of engagement partners for each audit report on Form 2 in firms’ PCAOB annual reports. Letters from PwC and Deloitte also suggested that Form 2 may be a more appropriate place for this disclosure.

But the CAQ letter expressed skepticism about the value of naming the engagement partner.

“We do not believe that identification of the engagement partner will result in any incremental engagement partner accountability, as engagement partners are already held accountable to multiple parties,” the CAQ letter said.

The CAQ also suggested that the PCAOB obtain a greater understanding of the liability implications for individual auditors who are named in audit reports. And the U.S. Chamber of Commerce Center for Capital Markets Competitiveness expressed concern that the PCAOB is moving in the direction of expecting engagement partners to build their own reputations for audit quality, independent of the firms’ reputation.

The Chamber letter said that would undermine accountability for the audit process and harm investor protection. But some investors had other ideas:

  • “By more explicitly tying the lead auditor’s professional reputation to audit quality, requiring engagement partners to sign the audit report will further result in better supervision of the audit team and the entire audit process,” the Council of Institutional Investors said, quoting one of its own previous letters to the PCAOB. Although the PCAOB’s proposal would require only naming the engagement partner, the Council said that would have most of the same benefits as the signature.
  • “We also believe that the engagement partner, as the primary individual responsible for the audit, should be held to the same level of personal accountability as senior executive officials at the company,” said the CFA Institute.


Doty said last month that he believes naming the engagement partner is in the audit profession’s long-range best interest. But he said he wants input on the utility of this information and on what possible problems could arise from including it in auditor’s reports.

In a speech last month, PCAOB member Jay Hanson summed up some of the feedback the board has received in the past on the issue. He said it is difficult to be opposed to transparency and said investors may want and benefit from the information.

He said some preparers have told the PCAOB that identifying the engagement partner is no more objectionable than requiring a financial executive to sign the annual report in observance of SEC regulations. But Hanson said others have opposed the project for a variety of reasons, including a potential increase in liability for the engagement partner, a lack of context about the engagement partner’s role versus the firm’s role, and concern about rising costs if partners feel compelled to do more work because of potential liability.

Hanson asked preparers to consider:

  • What challenges they will face in obtaining expert “consents” from auditors to include in their SEC filings.
  • What potential costs to the preparer may arise from the requirements and whether audit fees will increase.
  • Whether their shareholders are asking for this information and how they would use it.
  • If there are other ways to achieve the transparency goals of the project.


The comment period will be 60 days, Doty said, as the board seeks feedback on an issue that he predicted will stir deep passions.

Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.

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