Auditing


- The PCAOB may consider a different mechanism for disclosing the name of the engagement partner after a proposal last year raised significant objections from the accounting profession.

Some investors have told the PCAOB that placing the name of the principal partner for engagements in public company audit reports would allow financial statement users to research meaningful information about engagement partners and their track records. But some in the accounting profession have said naming the engagement partner would not improve audit quality or provide useful information.

PCAOB Chairman James Doty plans to ask the board to approve a supplemental request for public comment on a new form that would be created solely for the purpose of naming the engagement partner and other firms participating in the audit, PCAOB Public Affairs Director Colleen Brennan said.

Under Doty’s proposal, firms could disclose the name in the new form instead of in the auditor’s report. This “Form 5” would be filed shortly after companies’ 10-K annual reports are issued, Brennan said.

This would mark a change from rules the PCAOB reproposed in December that would require disclosure of the engagement partner’s name in the auditor’s report, which is included in companies’ 10-K annual reports.

In an updated agenda, the PCAOB said its staff is drafting a supplemental request for comment for the board to consider that would take into account comments related to liability for auditors and an alternative location for the disclosure.

The Form 5 would represent a compromise on the timing of the naming of the engagement partner. The name would be immediately available to investors if included in the annual report, but it could be available more than a year behind the annual report filing if included only in Form 2 of the annual reports audit firms file with the PCAOB, which some in the accounting profession have proposed is a more appropriate location if the board insists that firms name the engagement partner.

Including the auditor’s name in Form 5 rather than in the auditor’s report also could alleviate auditors’ concerns about liability, Brennan said.

Center for Audit Quality (CAQ) Executive Director Cindy Fornelli supports the possibility of the board considering identifying the engagement partner in a place other than the auditor’s report. The CAQ is affiliated with the AICPA.

“The CAQ is encouraged by reports that the PCAOB could seek additional input from key stakeholders on engagement partner identification, and that the board is exploring an alternative to including this information in the auditor's report,” Fornelli said in a statement. “While we broadly support enhancing transparency into the audit, the CAQ maintains that the auditor’s report is not the most sensible place to include this information, given legal consent issues that could arise.”

Doty’s plans represent a new twist in an issue that has been debated since a concept release on the subject was issued in 2009. A proposed rule was issued in October 2011, and the board sought more feedback in the reproposal in December of last year.

Doty remains committed to disclosing the name of the engagement partner, Brennan said, and is hoping that the new mechanism he will suggest will help build support for the proposal.

 

- Regulatory oversight and inflation have played significant roles in the rise in fees U.S. companies paid in 2013 to external auditors, according to new research by Financial Executives International.

The 87 public companies participating in the survey reported an average rise in audit fees of 4.5% over the previous year, and paid an average of $7.1 million in audit fees. The 104 private company respondents said their audit fees increased an average of 3.7% over the previous year and reported spending an average of $174,858 for their audits.

The average change in audit fees for the 203 not-for-profits surveyed was an increase of 1.5%, with an average fee of $73,023.

Public company respondents said their increase in audit fees was primarily the result of the review of manual controls resulting from PCAOB inspections, as well as other PCAOB issues.

The cost of complying with Section 404 of the Sarbanes-Oxley Act of 2002 increased within the past three years for 57% of the public company respondents. Many said the additional expense was worthwhile because they believe their internal controls are better now.

Most private company respondents (60%) and not-for-profit respondents (67%) attributed their rising audit costs to inflation.

 

- Recent changes to U.S. GAAP do not change public company auditors’ responsibilities for following existing PCAOB standards when considering a company’s ability to continue as a going concern.

In a staff audit practice alert, the PCAOB said current auditing requirements remain in force in light of FASB’s release in August of a standard defining management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern. The alert is available at tinyurl.com/lchqcr7.

While the current going-concern auditing standard remains in force, the PCAOB is evaluating potential revisions to the standard.

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