PCAOB seeks feedback on new idea for identifying engagement partner

The PCAOB voted unanimously Tuesday to release for comment an alternative proposal for naming the engagement partner on audits. The board also approved issuing a concept release of a proposed set of 28 audit quality indicators.

The new idea for identifying the engagement partner calls for the creation of a new form, called Form AP, Auditor Reporting of Certain Audit Participants, on which the engagement partner would be named. The form also would provide the names, locations, and extent of participation of other accounting firms that contributed to the audit.

The vote Tuesday is the latest in a long process that started in 2009, when the board floated the idea of requiring engagement partners to sign audit reports. The idea met stiff resistance from those who worried that the signatures could expose partners to increased personal liability and litigation risks.

To address those concerns, the PCAOB dropped the signature requirement and proposed naming the engagement partner in the audit report, but opponents said that change didn’t adequately mitigate the partners’ liability and lawsuit risks. The intent of the new form is to provide adequate mitigation for those risks.  

Supporters of identifying the engagement partner and other firms that contribute to the audit argue that such a move would supply investors with more transparency about who is completing the audits. It could also provide additional incentives for partners to improve audit quality, proponents say.

The move would bring the United States more in line with other large economies, PCAOB Chairman James Doty said in an open meeting Tuesday. “The role of the engagement partner is of singular importance to the reliability of the audit,” he said. “There are numerous factors required to achieve a high quality audit. But the role of the engagement partner in promoting quality, or allowing it to be compromised, is of singular importance to the ultimate reliability of the audit.”

While proposing the new form as an option, the PCAOB also is still considering requiring engagement partner identification in the audit report. The comment period, which ends Aug. 31, 2015, will allow commenters to address specifics of the new form in addition to larger issues regarding the implications of naming the engagement partners and other firms that contribute to the audit.

PCAOB Chief Auditor Martin Baumann said the goal is to have the new rules apply to disclosure for reporting periods on or after June 30, 2016.

Audit quality indicators

The PCAOB also voted unanimously Tuesday to issue a concept release regarding a proposed set of audit quality indicators, or AQIs.

Doty said the long-term goal is to provide information allowing companies and audit committees to evaluate audit firms on factors other than price. Committee members Steven Harris and Lewis Ferguson said they wanted audit firms to compete on quality.

“In an environment where all audits look the same on paper,” Doty said. “The pressure is on fees.”

PCAOB staff proposed 28 AQIs, divided into three groups: audit professionals, audit process, and audit results. Staff members addressing the board at the open meeting emphasized that the 28 measures are just a first step in the process of developing quantitative measures to help audit committees, audit firms, investors, and regulators assess audit quality.

The comment period for the proposed AQIs will extend until late September. The PCAOB then plans to hold a public hearing this fall to discuss the proposals and comments.

Center for Audit Quality (CAQ) Executive Director Cindy Fornelli issued a statement commending the PCAOB on its efforts to create AQIs. The statement also said that the CAQ believes “communications of audit quality indicators” should be directed at independent audit committees.

“Since 2012, the public company auditing profession has undertaken its own initiative in this area, as documented in the 2014 white paper, The CAQ Approach to Audit Quality Indicators,” Fornelli said in the statement. “Based on extensive input from investors, audit committees, preparers, audit professionals, and other stakeholders, we believe that audit quality indicators should be tailored to the particular facts and circumstances of a company’s audit.”

The CAQ is affiliated with the AICPA.

For more information, see the PCAOB website.

—Jeff Drew (jdrew@aicpa.org) is a JofA senior editor.