Audit regulators are trying again to propose a rule that would give investors more information about who is working behind the curtain when an audit firm files its final report on a company’s financial statements.
The Public Company Accounting Oversight Board has issued a proposal for public comment for a new rule that would require audit firms to file a new form: PCAOB Form AP -- Auditor Reporting of Certain Audit Participants. On this new form, firms would name the engagement partner for each audit and provide information on others from outside the principal audit firm who assisted with the audit.
At the same time, the PCAOB also is issuing for public comment a concept release exploring how to define indicators of audit quality. Among the indicators, the PCAOB is exploring the extent to which audit professionals affect audit quality -- the availability and competence of auditors, for example, and the ways auditors focus on audit, such as how audit hours are allocated to particular phases of the audit. That effort has been brewing for a number of years, with the PCAOB looking for a way to define audit quality as a first step to perhaps using the indicators to manage and drive audit quality.
PCAOB Chairman James Doty is a believer that different engagement partners might be associated with different levels of audit quality, the driving motivation behind identifying engagement partners. “Based on more than ten 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 engagement vary,” he said.
The form the PCAOB is proposing would serve as a “public information vehicle,” meant to provide more transparency about the audit and the auditors who performed it. The forms would be posted on the PCAOB’s website so investors and others who are interested can search out the information. The rule would also allow auditors voluntarily to provide the same disclosures in the body of the audit report.
“This proposal is a way to use the motivating power of our markets to incentivize higher quality audits,” said Doty as the board proposed the new rule. “But to do so, the markets need information,” he said. “If the public knew about partner history, and the relative extent of involvement of other firms that have their own records of good or poor auditing, the market could react by appropriately pricing the cost of capital.”
The new form proposal is the latest iteration in an effort spanning most of a decade to give investors more information about who performs public company audits. The board began discussing the idea with its Standing Advisory Group in 2005 and issued a concept release in 2009 proposing the engagement partner’s signature on audit reports, much the way CEOs and CFOs certify financial statements under Sarbanes-Oxley.
The idea of a signature requirement met heavy resistance from the audit profession, concerned it would increase their professional liability. The board pressed on with proposals in 2011 and 2013 to require only identification of the engagement partner in the audit report. Even PCAOB members were not unanimously supportive of the proposals.
Board member Steve Harris, said the latest proposal represents “the best we can do.” An investor advocate clearly disheartened by the lengthy effort and defeat of a signature requirement, said the proposal is “a further dilution of previous proposals to identify the engagement partner in the audit report and is largely in response to liability concerns raised by some commenters, which I do not share.” He supported issuing the proposal “to elicit the additional comments the Board believes necessary to finalize this project, which I hope, after all this time, will be in the near future.”
PCAOB member Jay Hanson, a career auditor, said he supported the latest proposal, despite his uncertainty over how useful the information will prove to be over time. “We may not know the answer to that question until disclosure has been collected for a period of years and put into context by investors, data aggregators, the media, and others,” he said. “But in light of investor demand for the information, it is appropriate for us to provide it, assuming that the negative consequences do not outweigh the positive. I believe that disclosure on a separate PCAOB form, rather than in the auditor's report, would accomplish that goal, but I look forward to hearing from commenters on whether they agree.”
The Securities and Exchange Commission is expected soon to issue its own concept release looking for ideas on how to enhance audit committee reports, and the release is expected to explore whether audit committees should disclose the names of engagement partners and the tenure of the audit firm in their reports. Comments on the PCAOB proposal are due Aug. 31.