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.

[1] The original discussion of this issue in 2005 was part of a broader discussion by the Board's Standing Advisory Group about how to make audit reports more informative. See PCAOB, SAG Discussion Paper, Auditor's Reporting ModelPDF, pp. 7-8 (Feb. 16, 2005).

[2] U.S. Department of the Treasury, Final Report of the Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury, pg. VII:19-20 (Oct. 6, 2008). The Committee also noted that its recommendation was made in conjunction with another related recommendation for "disclosure of the name(s) of the senior audit partner(s) staffed on the engagement in the proxy statement to increase transparency and affirm the accountability of the auditor." Ibid.

[3] PCAOB Release No. 2009-005 (July 28, 2009).

[4] See PCAOB Release No. 2008-007, pp. 16-18 (Dec. 4, 2008).

[5] Jeanette M. Franzel, Board Member, Statement on the Reproposal on Improving Transparency Through Disclosure of Engagement Partner and Certain Other Participants in Audits, Dec. 4, 2013; Jeanette M. Franzel, Board Member, Statement on the Supplemental Request for Comment: Rules to Require Disclosure of Certain Audit Participants on New PCAOB Form, June 30, 2015.

[6] See PCAOB Release No. 2015-008, pp. 46-62.

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