The Public Company Accounting Oversight Board expects to vote in December on a final rule − part of its “audit transparency” initiative − which, if adopted, would require disclosure of the name of the engagement partner for every public company audit.
This update was provided by PCAOB Chairman James Doty in remarks at a meeting of the audit overseer’s Standing Advisory Group last week.
Evolution of engagement partner disclosure
Engagement partner disclosure − in its earliest iteration, “engagement partner signature” − has been hotly contested through a notably extensive six-year, four-phase rulemaking process at the PCAOB. Responding to criticisms of its 2009 Concept Release and 2011 rule proposal, the standard-setter then issued a 2013 re-proposed rule and 2015 supplemental request for comment.
Chief among concerns raised by audit firms in particular was a potentially significant (possibly near-catastrophic) increase in legal liability that could face the individual partner, particularly if the partner were to literally “sign” his or her name on the audit report filed as part of SEC Form 10-K.
Currently in the United States, audit firms sign off on the name of the firm under the theory that the firm as a whole (and all of its individual partners) take collective responsibility for the quality of the firms’ audits. The impetus for the PCAOB’s proposal to require an engagement partner signature (later changed to disclosure of the name of the engagement partner, without a “signature,” per se) arose from the same theory of individual accountability that had led to requirements in the post-Enron-era Sarbanes-Oxley Act of 2002, requiring the CEO and chief accounting officer to sign off on their responsibility for the company’s financial statements and internal controls.
The suggestion that audit engagement partners similarly be required to provide a signature, pertaining to their parallel responsibility for the audit, was formalized in a recommendation of a U.S. Treasury Department advisory committee (the Advisory Committee on the Audit Profession or ACAP) in 2008. In a subset of recommendations on audit firm finances and structure included in ACAP’s Final Report, the advisory committee, co-chaired by former SEC chairman Arthur Levitt Jr. and former SEC chief accountant Don Nicolaisen, called upon “regulators, the auditing profession, and others, as applicable,” to “urge the PCAOB to undertake a standard-setting initiative to consider mandating the engagement partner’s signature on the auditor’s report.”
Disclosures filed with PCAOB, vs. SEC
To address the significant concerns raised about individual partner liability that could potentially arise from even a disclosure of (let alone “signature” of) the engagement partner’s name in the SEC Form 10-K, the PCAOB chairman told the SAG that the board’s supplemental request for comment issued in June 2015 “emanated from previous comments − that is, to allow firms to file the disclosures in a publicly available form on the PCAOB’s website.” Besides removing the obstacle about liability questions arising from disclosure of the name in an SEC filing in particular, Doty noted that “among other benefits,” reporting of the name of engagement partners in publicly available documents filed with the PCAOB “would facilitate compilations of data for comparison and analysis.”
On this very point about how engagement partner disclosure may play in Peoria, or how investors, audit committees and others may use, interpret and extrapolate from such disclosures, questions were raised throughout the rule proposal process as to whether more harm than good could come of such disclosures. Although the personal accountability factor would be fulfilled, would such disclosure potentially drive unintended consequences that could harm investors? For example, would there now be disincentives for engagement partners to challenge management, or let questionable accounting treatment pass, for fear of having audits with his / her name publicly attached to them appear to be troubled audits? Others may argue that underlying issues will ultimately surface, at a higher potential cost or loss to investors.
Some argued during the rule proposal process that this “audit transparency” initiative would not have any direct impact on audit quality, and therefore questioned if such a rule was within the PCAOB’s stated purview of “oversee(ing) the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports.”
It will be interesting to see if a majority of PCAOB board members, in voting on the final rule (as well as, ultimately, the SEC, which has the final say on approving PCAOB final rules) will support the argument that enhanced accountability of the engagement partner not only impacts that individual, but can have a knock-on behavioral effect on the rest of the audit engagement team, and potentially on company management and the audit committee as well. As to any potential downside to the disclosure or unintended consequences arising from applying the traditional SEC / public company disclosure argument of “sunshine being the best disinfectant” to disclosure of audit engagement partners, as with other types of paradigm-shifting rule-making, perhaps only time will tell.
In the meantime, the PCAOB seems to have reached alignment with the SEC staff on the engagement partner disclosure rule. As Doty told the SAG, “As we prepare the final rule, we have been working closely with our colleagues at the SEC, Chief Accountant Jim Schnurr, Deputy Chief Accountant Brian Croteau, and other colleagues in the Office of the Chief Accountant, the Division of Economic and Risk Analysis and elsewhere. … I am grateful for their support in this initiative, without which we would not be in a position to bring this important investor initiative to fruition.”