by Cydney Posner

On Monday, the SEC approved PCAOB rules requiring that, for each audit report, audit engagement partners be named on a new Form AP. The form will also disclose the names and Firm IDs, locations and extent of participation of any other accounting firms, outside of the principal auditor, that participated in the audit, if their work constituted 5% or more of the total audit hours.  For all other accounting firms whose individual participation was less than 5%, the form would disclose the number and the extent of participation in the aggregate. Where responsibility for the audit was divided, the form would state the name of the firm and Firm ID, location and the proportion of the financial statements audited by the other accounting firm. The form must be filed with the PCAOB by the 35th day after the auditor’s report is first included in a document filed with the SEC, with a 10-day deadline for IPOs. The SEC determined that the new rules would apply to audits of EGCs.  The new Form AP will be accessible by investors through a searchable database. The new rules requiring disclosure of the engagement partner will become effective for auditors’ reports issued on or after January 31, 2017; and the new rules requiring disclosure of other accounting firms will become effective for auditors’ reports issued on or after June 30, 2017. (See this PubCo post.)

The PCAOB has been batting this concept around since 2009, when it floated the idea that the engagement partner actually sign the audit report.  Investors had originally advocated that engagement partners be required to sign the audit report – similar to the signing of certifications by CEOs and CFOs and common practice in the UK—to reinforce their “ownership” of audit reports.  In 2011, the PCAOB issued a proposal on signing of the report by the audit engagement partner; however, in light of comments raising concerns that a signature requirement would minimize the audit firm’s accountability and role in conducting the audit, the proposal provided only that the engagement partner be named in the audit report (and in a report already filed annually with the PCAOB), but not required to sign his or her name to it. A 2013 reproposal, issued by a divided PCAOB, would have required inclusion of the name of the engagement partner in the audit report, but would not have required engagement partners to be named in firms’ annual filings with the PCAOB.  However, comments on the reproposal were remarkably similar to those received on this topic in the past, with audit firms protesting that naming engagement partners would not improve audit quality or increase the auditor’s sense of accountability, but would still expose them to additional liability, especially if they could be deemed to be “experts” under SEC rules and might even be required to provide separate consents. The PCAOB then went back to the drawing board again and came up with the current compromise position that calls for the engagement partner to be named in a new, publicly available form to be filed with the PCAOB.  That concept apparently drew audit firms back into the fold.  (See this PubCo post.  )

The U.S. Chamber of Commerce, however, did not give up. The SEC release notes that the Chamber had commented that the PCAOB should not pursue disclosure requirements for the engagement partner and other participants in the audit unless, among other things, it could be done in a “liability neutral” way.  The PCAOB explained that it believed it had appropriately addressed concerns regarding additional liability consequences, but that it did “not agree with the premise that it should not seek to achieve the anticipated benefits of a new rule – here, increased transparency and accountability for key participants in the audit – unless it can be certain that its actions will not affect liability in any way.” The SEC release also notes that the PCAOB “observed that disclosure on Form AP should not raise potential liability concerns under Section 11 of the Securities Act or trigger the consent requirements of Section 7 of the Act because the engagement partner and other accounting firms would not be named in a registration statement or in any document incorporated by reference into one.” The SEC stated its belief that the PCAOB had reasonably responded to liability concerns: “[s]pecifically, the Commission believes the Board has appropriately considered concerns related to liability neutrality as part of the Final Rule Release and taken reasonable steps to address the comments raised with respect to liability considerations in the Proposed Rules.”

Posted by Cydney Posner