Statement on Adoption of Rules to Require Disclosure of Engagement Partner and Other Firms Participating in an Audit
Date: Dec. 15, 2015
Speaker: Jeanette M. Franzel, Board Member
Event: PCAOB Open Board Meeting
Location: Washington
I support today's vote on the adoption of rules and amendments to
auditing standards to require the disclosures of the name of the
engagement partner and information about other accounting firms
participating in the audit. I am pleased that we have found a way to
provide information to investors and other users in response to the
various recommendations over the years dealing with this issue.
As the adopting release before us today acknowledges, the Board has
gone through multiple iterations of this project in an attempt to
achieve the potential benefits of the disclosures while seeking to
limit, to the extent consistent with those goals, potential unintended
consequences.
A brief history of these projects provides relevant context for
statements in today's adopting release about how these rules and
standards amendments further the Board's mission of protecting the
interests of investors and furthering the public interest in the
preparation of informative, accurate, and independent audit reports.
In early 2005, the Board considered views that engagement partners
(and concurring partners) did not take sufficient personal
responsibility for or appreciate the importance of diligently performing
an audit.[1]
Some advocated for those partners to sign the audit report in a way
that would be analogous to a company's principal executive officer and
principal financial officer certifying the accuracy of the company's
financial reports.
In 2008, the U.S. Department of the Treasury Advisory Committee on
the Auditing Profession made a recommendation that "urge[d] the PCAOB to
undertake a standard-setting initiative to consider mandating the
engagement partner's signature on the auditor's report," in light of the
Committee's belief "that the engagement partner's signature on the
auditor's report would increase transparency and accountability."[2]
In light of these developments, the Board issued a concept release in
2009 to explore a requirement for the engagement partner to sign the
audit report.[3]
Separately, the Board was seeing that many audit firms issuing audit
reports engaged other accounting firms located in different
jurisdictions to participate in an audit, in some cases, to a
significant extent. After the Board began in 2005 to conduct inspections
of foreign firms, it began to encounter obstacles to inspecting some of
those firms and has found significant variations in quality among other
foreign firms that it can inspect.
Yet, because only the name of the firm issuing the audit report is
included in the audit report, there is little publicly available
information about the extent of participation by other firms in an
audit, the reputation of those firms for quality, or the extent of PCAOB
oversight of them. In 2008, the Board considered proposing, among other
matters, rules to require certain disclosures in the audit report about
whether the principal auditor, or any registered firm whose work the
principal auditor used, failed to provide information to the PCAOB in an
inspection.[4]
In the intervening time, and as I've recounted in my public
statements on successive PCAOB proposals, the Board has studied
empirical evidence related to the concerns that prompted this project,
along with alternative regulatory approaches to addressing those
concerns.[5]
Mandating the disclosure of information can have a "disinfecting"
effect and previous Board proposals sought input on different ways that
the disclosure of the engagement partner and other auditors
participating in the audit can achieve that effect.
The "baseline" conditions in regulatory oversight and audit practice
have evolved since PCAOB initially began exploring these issues in 2005,
including changes in auditing standards, expanded PCAOB inspections and
enforcement oversight (and related public and nonpublic outcomes from
that oversight), and changes in publicly available indicators of
financial reporting and audit quality. Accordingly, the Board has taken
considerable time to assess these problems, as well as the commensurate
benefits and potential impact of alternative regulatory approaches.
Among the most challenging of these considerations has been the
potential for unintended consequences, primarily in the areas of private
litigation and liability risk for individual engagement partners and
other accounting firms participating in an audit; and potentially
creating incentives for those participants to react to market pressures
in ways that are inconsistent with audit quality.
The final rules and amendments before the Board today reflect an
appropriate regulatory response to continued expressions of uncertainty
about audit quality arising from investors' lack of information about
key participants in the audit. At the same time, the Board continues to
press ahead with other projects that are designed to more
comprehensively address the information gap over audit quality, as
mentioned in today's adopting release.
The disclosures about other accounting firms participating in the
audit, in my view, should be immediately useful to investors and other
users when the rule becomes effective. To the extent that the auditor
issuing an audit report discloses its reliance on the work of other
firms that have a poor reputation for quality or have not been subject
to PCAOB oversight, investors will now have an additional tool to demand
accountability for such an audit approach.
Also, as today's adopting release explains, the benefits of the
engagement partner disclosure will be more fully realized over time as a
way to give more information to investors and analysts about who is
leading the audits of the financial statements on which they rely.[6]
* * *
In my view, on balance, the final rules and amendments to the Board's
auditing standards presented today will further the Board's mission of
protecting the interests of investors and furthering the public interest
in the preparation of informative, accurate, and independent audit
reports.
In closing, I would like to join my fellow Board members in thanking
the staff for their efforts in connection with this project. In
particular, I would like to recognize the significant contributions of
the staff from the Office of Chief Auditor, Center for Economic
Analysis, Office of Information Technology, Division of Registration and
Inspections, and the Office of General Counsel.
I would also like to thank the staff of the Securities and Exchange
Commission for their questions, comments, and feedback during this
project.
Related Information
, pp. 7-8 (Feb. 16, 2005).