The name of the engagement partner in an audit of a public company will be disclosed on new Form AP, Auditor Reporting of Certain Audit Participants, as a result of a new rule approved Tuesday by the PCAOB.
Form AP also will require disclosure of the other firms that participate in public company audits, as well as their percentage of participation.
The PCAOB will submit the rule to the SEC for final approval.
The PCAOB unanimously approved the audit transparency proposal at an open meeting Tuesday, completing a six-year effort that generated some controversy. The board at first sought to have the engagement partner’s name disclosed in the auditor’s report but received objections over a perception by some that the disclosure would be irrelevant and subject engagement partners to liability risks.
Board members called creation of the new Form AP a compromise.
“I believe that the rules and standards we are finalizing today—requiring the respective disclosures in a PCAOB form to be filed and made public on the PCAOB website—represent the most practical approach and will provide investors with information they have long requested, without imposing unreasonable burdens on auditors or issuers,” PCAOB member Jay Hanson said.
Filing of Form AP with the PCAOB will be required no more than 35 days after the audit firm files the audit report with the SEC. The form will be available to be reviewed by the public on the PCAOB’s website.
For initial public offerings, Form AP will be required to be filed no later than 10 days after the auditor’s report is first included in a document filed with the SEC.
The new rules also will permit audit firms to voluntarily disclose in the audit report the names of engagement partners and other firms participating in the audit.
To prevent confusion when engagement partners have names that are the same or change their names, firms will be required to assign engagement partners unique identification numbers for disclosure on Form AP. When partners change firms, they will be assigned a new partner ID, but their previous ID number also will be reported on any new Form AP associated with that partner.
The Center for Audit Quality (CAQ), which is affiliated with the AICPA, supports the PCAOB’s efforts to respond to calls from financial statement users for increased transparency around the audit, CAQ Executive Director Cindy Fornelli said in a news release.
“The board should be commended for its responsiveness to concerns raised by a variety of stakeholders regarding identifying the engagement partner in the auditor’s report by proposing disclosure of this information in the newly created Form AP,” Fornelli said. “The CAQ looks forward to expected adoption of this rule in the new year.”
Over time, Form AP will enable investors or commercial data aggregators to accumulate information about specific partners’ experience and history. This may incrementally increase investors’ ability to make judgments about audit quality and the credibility of financial statements, Hanson said.
The disclosure of other firms participating in the audit was sought in part to provide more information on audits of public companies that operate in multiple locations internationally. In those audits, the firm signing the audit report may perform only a small portion of the work while the rest is performed by other firms that are located in other jurisdictions.
For firms whose participation was at least 5% of total audit hours, disclosure of the name, location, and percentage of participation will be required on Form AP. For firms whose participation is less than 5%, only the number of firms and their aggregate percentage of participation will be required to be disclosed.
Upon SEC approval, the new rules for engagement partner disclosure will apply to auditor’s reports issued on or after Jan. 31, 2017, or three months after SEC approval of the final rules, whichever is later. For disclosure of other accounting firms, the rules will apply to auditor’s reports issued on or after June 30, 2017.
—Ken Tysiac (firstname.lastname@example.org) is a JofA editorial director.