PCAOB may consider different mechanism for naming engagement partner

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 Wednesday.

Under Doty’s proposal, firms could disclose the name in the new form instead of in the auditor’s report. This so-called “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 name of the engagement partner in the auditor’s report, which is included in companies’ 10-K annual reports.

In an updated agenda released Wednesday, 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 the auditor’s report also could alleviate auditors’ concerns about liability, Brennan said.

Center for Audit Quality (CAQ) Executive Director Cindy Fornelli was supportive of 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 the issuance of a concept release on the subject in 2009. A proposed rule was issued in October 2011, and the board sought more feedback in the reproposal in December of last year.

At that time, Doty and board members Lewis Ferguson and Steve Harris stated support for the proposal with the view that it would provide needed transparency for investors.

But board members Jeanette Franzel and Jay Hanson expressed reservations. Franzel questioned the benefits of the proposal and said that the cost of potential exposure to liability of auditors was a concern that needed to be studied. Hanson said the best place for the name of the engagement partner would be in the audit committee report.

Some investor advocates supported the proposal, with some saying disclosure of the engagement partner’s name would subject auditors to the same public accountability that other professionals such as doctors and lawyers face.

Some representatives of the accounting profession wrote letters opposing the proposal, saying identifying the engagement partner would not provide meaningful information to financial statement users and could result in many practical challenges and liability considerations. Fornelli said in a Feb. 3 comment letter that if the board moves forward with the proposal, Form 2 of the firms’ PCAOB annual reports would be a more appropriate place than the audit report for the identification of the engagement partner.

“However, regardless of where this information might be provided, we believe there are unintended consequences associated with identifying the engagement partner,” she said in the letter.

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.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.