A new rule requiring audit firms to name engagement partners on individual audits has passed its final obstacle to becoming effective after the Securities and Exchange Commission gave its final approval.
The SEC issued an order approving the rule adopted by the Public Company Accounting Oversight Board that will require audit firms to complete a new filing on Form AP to provide the name of the engagement partner on each audit engagement after it is completed. On the same form, audit firms will be required to identify other firms or individuals who had a hand in the audit if they are not associated with the audit firm that signs the audit report.
The PCAOB says it will soon release staff guidance and other tools so that audit firms can gear up to comply with the new filing requirement. The filings will be compiled into a searchable database on the PCAOB’s website. Users will be able to search by partner name, issuer name, and audit firm. The database will also facilitate searching for the name, location, and extent of participation of others outside the audit firm who contribute to public company audits.
"Auditing is a profession built on reputation, and one important way investors can assess the quality of an audit is to know who conducted that audit," said James Doty, chairman of the PCAOB, in a statement. "Form AP will provide that important information to investors."
The engagement partner disclosures will be required beginning with audit reports issued on or after Jan. 31, 2017, so calendar-year companies will begin to see their engagement partners named on their 2016 financial statements. Firms will have more time to prepare the comply with the rest of the Form 2 filing requirements, with those details required for audit reports filed after June 30, 2017.
The SEC said it received only four comment letters on the controversial rule after it was approved by the PCAOB and forwarded to the SEC for its consideration. One, from the U.S. Chamber of Commerce, suggested the PCAOB approve the rule only for a five-year period, allowing it to sunset unless more convincing evidence is produced over the life of the rule to show its benefit. The SEC said in its order approving the rule that it would rely on the PCAOB's monitoring and post-implementation review processes instead.
The PCAOB received nearly 200 comment letters over the various stages of its rule-making process to arrive at the final rule. Originally, the PCAOB considered requiring audit partners to sign the audit report, much the way corporate CEOs and CFOs are required to certify financial statements under Sarbanes-Oxley. After much debate over liability considerations, the board opted for requiring identification in a separate filing.