by Cydney Posner

Last week, the WSJ reported that the PCAOB expects to finalize a new rule this September that would require audit firms to disclose the name of the engagement partner for each audit.  The purpose of the rule, according to its proponents, is to encourage auditors to perform better and help investors assess audit quality and performance by making it possible to consider an individual partner’s track record.  However, audit firms have been opposed to the proposal, protesting that naming engagement partners would not improve audit quality or accountability, but would instead subject them to potential liability.

You might recall that, among many changes designed to enhance audit accountability and transparency, the PCAOB had initially contemplated requiring the audit engagement partner to sign his or her name to the audit report. As reported in this Compliance Week article, signing of audit reports by the lead audit partner, designed to reinforce his or her “ownership” of audit reports, is already the practice in the UK.  According to a recent academic study by a former member of the PCAOB’s own Standing Advisory Group, “the signature requirement adopted in the United Kingdom has been followed by an improvement in some key indicators of audit quality. Those include a reduction in abnormal accruals, an easing on the part of preparers to try to meet earnings targets, and an increase in the issuance of qualified audit reports. The study also points out a significant increase in audit cost after the signature requirement took effect. The study doesn’t establish a cause-and-effect link to the signature requirement, but [the study’s] author…speculates that people act differently when they know they are going to be publicly identifiable.” 

However, audit firms opposed the signature requirement amid potential liability concerns, also contending that a signature requirement would minimize the firm’s accountability and role in conducting the audit. This recent NYT DealBook/ ProPublica column reported that the SEC sided with industry on this issue. As a result of the objections raised, in 2011, the PCAOB proposed instead that registered accounting firms be required to disclose in the audit report the name of the engagement partner responsible for the most recent period’s audit. It was reported that the PCAOB was  planning to move forward on the proposal in September, but that was September of 2013. The result was issuance of a reproposal in December 2013.

Now, in this post, “Big Investors Push for Auditors to Sign Financial Statements,” ProPublica  is reporting that the Council of Institutional Investors, a nonprofit association of employee benefit plans, foundations and endowments with combined assets under management exceeding $3 trillion, has written to the PCAOB to voice its dismay that the PCAOB “has decided to dramatically weaken” the final rule as reported in DealBook. Of course,  the move to eliminate the signature requirement occurred quite some time ago, and CII has previously indicated that, while it would have preferred a signature requirement, it recognized that “the required disclosure of the name of the engagement partner has most of the potential benefits as the signature requirement.”  (Perhaps CII misinterpreted the DealBook column to suggest that the identification requirement was being eliminated?) In any event, CII’s current letter seems otherwise to be consistent with its earlier position, indicating that it “strongly supports requiring disclosure in the auditor’s report of the name of the engagement partner.” As a result, it seems unlikely that CII’s recent letter will re-open the issue. According to ProPublica and consistent with the WSJ report above, the final compromise seems to be to require disclosure of the name of the engagement partner without an actual signature, although apparently the precise manner of disclosure has not yet been decided.

Posted by Cydney Posner