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PCAOB Readies Compromise on Naming Engagement Partners

Tammy Whitehouse | October 1, 2014

The Public Company Accounting Oversight Board is working on a new idea for how to get investors what they want, the name of the engagement partner on each public company audit, by requiring audit firms to submit a brand new form specifically for that purpose.

The board has indicated in an updated standard-setting agenda that its staff is drafting for the board’s consideration “a supplemental request for comment” that would reflect comments received earlier this year on a December 2013 proposal to elicit more transparency over exactly who is working behind the curtain in each public company audit engagement. That proposal was already a second try for a new rule, and it was issued by a sharply divided board, with member Jeannette Franzel questioning the basis for the project and Jay Hanson wondering aloud what more the board might learn from a fresh round of comments on essentially the same proposal.

After sifting through nearly 70 comment letters offering many of the same views heard earlier that investors deserve to know, that auditors deserve a shield from any heightened liability, that there’s questionable evidence providing names would have any effect on audit quality the PCAOB appears poised to offer a compromise. Now, the board is exploring whether there might be support for requiring a new form to be filed with the PCAOB to name the engagement partner and any others outside the principal audit firm who contributed to the audit.

Hanson-jay-1014“We’re not viewing this as another reproposal,” says PCAOB member Jay Hanson, who was opposed to the PCAOB’s original idea to require names to be provided in the audit report. Hanson, a career auditor himself, was sensitive to the argument from audit firms and attorneys that naming partners in the audit report would expose auditors to increased liability under Securities and Exchange Commission filing rules. He sided with those who wanted to see the information gathered and presented in some other way, perhaps through the firms’ annual “Form 2” filings to the PCAOB.

Comments on the Form 2 idea, however, pointed out investors would have to wait many months after an audit is complete to find out who supervised and performed the work. “It’s hard to object to transparency, but it’s the manner in which it gets done that I’m troubled by,” says Hanson. He’s an advocate for requiring the firms to provide the information, but not in the audit report. “I am supportive of this now that we are talking more about a form-based solution.”

Hanson says the idea itself is not entirely new, but the board has never proposed it, and therefore never solicited feedback specifically on requiring a new filing. The solicitation for new comment would ask for views on how to make the filing as simple as possible while also giving investors the information they are demanding, says Hanson. “The hope is we would have the best intelligence possible to put something out that would work smoothly and seamlessly,” he says.