The PCAOB approved Auditing Standard No. 7, Engagement Quality Review on July 28, 2009. They also issued a Concept Release on requiring the engagement partner to sign the audit report. The comment period closed September 11th and boy oh boy were there a lot of comments. The firms came out en masse to denounce the proposal. I described their strategy to a friend:
Continued, after the jump

“Representatives from each firm got together at CAQ HQ over dinner. (Well, maybe a conference call since everyone is tightening belt these days…) They listed all the possible objections, split them up, one each, and agreed to write the comment letters.”

Sounds a little like a much nerdier version of the Apalachin Meeting, doesn’t it?
Jim Hamilton’s World of Securities Regulation has a great summary of their arguments, followed by a little input from yours truly:
1. GT: “Requiring the engagement partner sign off could disrupt the intricate corporate governance structure set up by Sarbanes-Oxley…shareholders may…contact the engagement partner directly…” (fm: God forbid shareholders should upset the delicate balance and think they have the right to contact the audit partner directly.)
2. McGladrey & Pullen: “The audit committee is responsible for engaging the audit firm. If [they have] concerns about the independence or competency of the engagement partner, they would address those concerns with the firm…These types of decisions are appropriately left with the audit committee and not with the individual shareholders. (fm: So the audit firms, whose clients are the shareholders, would prefer to work with their proxy, the audit committee. Hmmmm.)
3. EY: “Requiring the engagement partner to sign the audit report would not provide appreciable benefit in audit quality…sufficient mechanisms are already in place to heighten the engagement partner’s sense of personal accountability…supported by a firm’s system of quality control and PCAOB oversight.” (fm: EY should know. In Akai, EY partner was so accountable he falsified workpapers to evade responsibility. His arrest by HK authorities does make the point. But shouldn’t shareholders have known his name sooner?)
4. PwC parrots EY: “It’s an unsupported assumption that engagement partners, as a class, need to have an increased sense of accountability to achieve improved audit quality…signing the audit report in the firm’s name reflects the reality that the quality of an audit depends on the competence of many people at the firm, as well as the firm’s quality controls…SEC can enforce the securities laws against auditors…” (fm: So will PwC take responsibility for the lack of quality in the Satyam audits, since their two partners are but part of a big “competent firm,” not lone wolves? To be sure, the SEC is already on the case!)
5. KPMG: “The identity of the engagement partner is fully transparent to company management and audit committee members… Although there is no requirement to do so, the engagement partner usually attends the annual shareholders’ meeting, and typically is available to respond to appropriate questions.” (fm: Good. So publish the names, photos, email address, contact phone numbers and CVs of all audit partners in charge of accounts where your clients, the shareholders, are suing you. Even better, publish assignments for all clients. That would certainly spice up the shareholders’ meetings.)
6. Deloitte: “…beneficial effects on accountability and transparency are speculative…. subject to…multiple sources of external oversight, such as audit committees, regulators, and the threat of civil liability.” (fm: Yes, but hiding identity of responsible partner makes it easier for you to keep paying them and reinstating them after sanctioning, suspension or other actions by those “multiple sources of oversight.”)
7. BDO: The engagement partner’s responsibilities…are set out extensively in professional standards…effectiveness …routinely monitored as part of a firm’s system of quality control, in addition to periodic inspections…” (fm: Yeah, just like BDO International monitored quality for BDO Seidman and the partner in charge of their client Banco Espiritu Santo. So, why did you fight accountability?)
The audit firms are still, as in the issue of global networks and accountability/liability for each member firm and its partners, talking out of both sides of their mouths.
Just look another recent case, the settlement of the American Home Mortgage litigation by Deloitte to see that the question of, “Who is responsible?” is not one the firms like to answer. Who was the Deloitte partner in charge of the American Home Mortgage engagement during the period litigated? Do you know?
I do.
Tim Forrester is still in their phone book and getting paid by Deloitte.
Yours truly,