When the Securities and Exchange Commission issues its discussion paper later this year on what can be done to improve audit committee reports, it likely will explore whether reports should include the audit firm’s tenure and the name of engagement partners.
The SEC’s ongoing comprehensive review of audit committee reporting requirements is expected to lead to a discussion paper, or concept release, “soon” said Brian Croteau, deputy chief accountant at the SEC, in May. The paper will explore a number of ideas around how audit committee reports could be made more robust and more useful to shareholders and others who rely on them.
The Public Company Accounting Oversight Board, meanwhile, is expected in the latter part of 2015 to issue the next iteration of its long-debated proposal to require audit firms to disclose the names of engagement partners and others from outside the principal audit firm who contributed to the audit. After earlier failed attempts to push out a rule requiring auditors to disclose such information in audit reports, the PCAOB is likely to focus on mandating the disclosure in some kind of separate form or filing with the board that would be accessible to investors.
Joe Carcello, executive director of the Corporate Governance Center at the University of Tennessee and a member of the SEC’s Investor Advisory Committee, says the SEC’s concept release likely will seek feedback on whether the SEC should require audit committees to disclose what the PCAOB has had a hard time selling as a required auditor disclosure. “Among the many things that are likely to be in there, at least from what I’m hearing, is whether the audit committee would disclose what the tenure of the audit firm is,” he says. “It will probably also talk about whether in the audit committee report there should be a disclosure of the engagement partner.”
As the PCAOB has debated and tried to agree even among the five board members on a means of gathering such information from auditors, the board has heard some pushback that the disclosure is better placed in audit committee reports, which are the jurisdiction of the SEC. “That’s why we’re likely to see that at least floated in the SEC idea document as to whether this disclosure should be made by the audit committee,” says Carcello.
Auditors have lobbied heavily against requiring engagement partners to sign audit reports, as the PCAOB initially proposed in 2009, or even disclosing the name of the engagement partner, arguing it will increase their liability under SEC reporting rules. “I don’t see a big difference in who provides it,” says Carcello. “But some may argue the tenure of the audit firm and the name of the engagement partner is a disclosure, not a financial reporting issue, so that’s really the SEC’s purview.” Advocates for an audit committee disclosure requirement might also posit that the information is relevant to shareholder ratification, so belongs in the proxy statement, where the audit committee report is contained.
The PCAOB’s latest target date for its next release on naming engagement partners is by September 2015. SEC’s Croteau said earlier this year that the SEC and PCAOB are working on the proposals and hope to have both out for comment soon.