PCAOB Unanimously Approves Auditor Disclosure Rule

Update below specifies the timing of the rule’s effect.

As promised, the PCAOB is dropping its auditor disclosure rule with 9 shopping days left until Christmas. It's been quite a haul as the Board has been working this project since 2008 after the Treasury Department's Advisory Committee on the Accounting Profession recommended that audit partners be required to sign audit opinions.

By now you're probably aware of what this all entails, but here it is again anyway:

[R]equire disclosure of the name of the audit engagement partner on a new PCAOB form, Auditor Reporting of Certain Audit Participants, or Form AP. Firms would also be required to use Form AP to disclose information about other accounting firms participating in an audit, including the names of the firms and the extent of their participation.

All of the Board members approved the rule and here are excerpts from each of their statements:

Jim Doty:

Irrespective of this institutionalization, auditing is still a business about reputation. The firm name is clearly part of that reputation.  But the names of the individuals entrusted with the franchise have been lost in the sea of expansion.  In this regard, the profession is an outlier among participants in the financial reporting chain.  The names of corporate board members, CEOs, CFOs and other senior management are already disclosed.  It allows the market to provide nuanced signals to dispersed investors about how to price the cost of capital. Based on nearly thirteen years of experience, PCAOB inspections have revealed that, even within a single firm, and notwithstanding firm-wide or network-wide quality control systems, the quality of individual audit engagements varies. 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.

Lewis Ferguson:

It may be that it is impossible completely to eliminate all risk of increased liability, but this proposal, by only requiring disclosure of the information in a separate form rather than in the auditor’s report itself, should eliminate the necessity for auditors and other participants to file consents under Section 11 of the Securities Act of 1933 for the inclusion of their names in certain filings under the 1933 Act thereby minimizing the risk of Section 11 liability for the disclosure.  In addition, since the information is not required to be included in the auditor’s report, I also believe the proposal significantly reduces the risk that the individual auditor could be found liable under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 for statements made in that report.

Jeanette Franzel:

The disclosures about other accounting firms participating in the audit, in my view, should be immediately useful to investors and other users when the rule becomes effective.  To the extent that the auditor issuing an audit report discloses its reliance on the work of other firms that have a poor reputation for quality or have not been subject to PCAOB oversight, investors will now have an additional tool to demand accountability for such an audit approach.

Jay Hanson:

Firm identity and reputation is often the only basis – however imperfect – on which investors can judge audit quality, and the standards we are adopting today will increase transparency into the identities of firms participating in the audit.

Steven Harris:

I see no reason why auditors should be treated any differently from other professionals—such as architects and engineers—who must sign off on their work product or, as mentioned, CEOs and CFOs who are similarly required to attest to their company’s financial statements. I also agree with investors that engagement partners should be held individually accountable for the audit work and ultimate result of the audit engagements they are responsible for supervising.

Statements from Ferguson and Harris both mention "compromise" which implies neither side is completely happy with the outcome. As we've discussed, the audit firms are all on board with Form AP, although with a heavy dose of chagrin and investor advocates all believe the rule doesn't go far enough. And it doesn't! We talked about that too. It would not have, for example, provided anyone with enough information about the performance history of the Grant Thornton audit partner who missed the fraud at Assisted Living Concepts. However, we're hoping that we'll be able to find the what engagements the BDO partners involved in the audit of General Employment Enterprises are working on. And maybe we'll learn which Chinese audit firms frequently approve suspicious accounting. Who knows what else will come of it, really.

The rules go into effect for audit reports issued in after January 31, 2017 and we'll all be pre-occupied with something else by then. Unless that something else is an audit failure; in which case, Form AP will be quite handy.

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