Finally achieving the path of least resistance after multiple prior attempts, the Public Company Accounting Oversight Board has approved a rule requiring audit firms to identify engagement partners and others outside the firm who contribute to public company audits.

Beginning with audit reports issued after Jan. 31, 2017, audit firms will be required to file “Form AP” with the PCAOB to provide the name of the engagement partner on each audit. For reports issued after June 30, 2017, firms will be required to file additional information about other audit firms outside of the principal audit firm that assisted with the audit. As the information is provided, it will be gathered into a database accessible through the PCOAB’s website where investors and other users of financial statements can search and download the information, either in whole or in part.

In addition to the name of the engagement partner, the new filing will require audit firms to specify the names, locations, and extent of participation of other accounting firms that took part in the audit, if their work constituted 5 percent or more of the total audit hours, and the number and aggregate extent of participation of all other accounting firms that took part in the audit whose individual participation was less than 5 percent of the engagement's total audit hours.

The Securities and Exchange Commission must approve the rule before it can become effective. SEC Chief Auditor Martin Baumann told the PCAOB in an open meeting that approval is expected in mid-April. The PCAOB staff said they plan to publish additional guidance in 2016 to help firms comply with the filing requirements.

The PCAOB began its long journey to the new transparency rule with discussion in 2005 that led to a concept release in 2009 posing the idea of requiring engagement partners to sign audit reports, much the way CEOs and CFOs certify financial statements. That release and the subsequent rule proposal met heavy resistance from auditors and their attorneys, claiming it would increase their personal liability and thus their exposure to litigation under existing securities law. 

The PCAOB backed down from the signature with a second proposal to require auditors to be named in the audit report, an idea that still drew booming objection over the prospect of increased liability. Even the five-member PCAOB itself was split in supporting the idea, with two board members raising several concerns over whether it would improve audit quality or lead to unintended consequences.

The board retreated again from requiring the information in audit reports, instead devising Form AP that audit firms would complete and provide to the PCAOB in a separate filing. The final rule does not provide disclosure in the audit report as required in other countries, said Chairman Jim Doty, but it will move in that direction. “The new rules will, in our own way, bring U.S. audits into line with international standards and practices that have proven effective for issuers, auditors and investors alike in other markets,” he said.

PCAOB Jay Hanson, who objected to the inclusion of information in the audit report, said he supports the separate filing. The new requirements “represent the most practical approach and will provide investors with information they have long requested without imposing unreasonable burdens on auditors or issuers,” he said.

PCAOB Steve Harris, a longtime investor advocate, voted to finalize the new rule but remains convinced the original signature requirement would have been more effective and more in line with what is required in other professions and in other jurisdictions. “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, CEOs and CFOs who are similarly required to attest to their company’s financial statements,” he said.