Statement on the Supplemental Request for Comment: Rules to Require Disclosure of Certain Audit Participants on New PCAOB Form  

Date: June 30, 2015

Speaker: Steven B. Harris, Board Member

Event: PCAOB Open Board Meeting

Location: Washington, DC

Mr. Chairman. I commend you for your leadership and perseverance on the difficult transparency issues before the Board.

I am a strong advocate of increased transparency on the part of the audit profession and my views concerning this topic are reflected in my three previous open meeting statements.^[1] As you know, I would have preferred that we were adopting a final standard today. Instead, we are once again seeking comment on an alternative disclosure mechanism, this time involving the introduction of a brand new "Form AP."

Reviewing the history of this reproposal: the Board first considered this subject in 2009 when we issued a concept release related to an engagement partner signature requirement.^[2] I supported that release because I believed then—as I do now—that requiring the engagement partner to actually place his or her signature on the audit report would make him or her feel more individually accountable for the audit, and in addition, provide investors and other stakeholders with improved transparency about the participants in the audit.

When it became clear in 2011 that the signature requirement did not have the necessary Board member support, the Board proposed that the name of the engagement partner be disclosed in the audit report.^[3] In other words, the Board proposed an "identification" as opposed to a "signature" requirement. The Board also proposed that the issuing firm must disclose the names of the other independent public accounting firms and persons who took part in the audit—as well as the extent of their participation—in the report itself.

Although I preferred the signature requirement, in the interests of promoting individual accountability and transparency and providing this critical information to investors and other users of the financial statements, I supported that proposal, as well as the re-proposal in December 2013.^[4]

From the beginning, I believed that this initiative was particularly important because audit quality is not where it should be. PCAOB inspection results and the recent inspection survey conducted by the International Forum of Independent Audit Regulators, a group of some 50 plus independent audit regulators from around the world, show continued deficiencies in key areas of the audit.^[5]

I believe that one way to improve audit quality is to make the audit engagement partner, the person most directly responsible for the audit, feel more individually accountable for the audit by having that person sign the audit report itself.^[6]

I think Ann Yerger, Executive Director of the Council of Institutional Investors, representing investors with combined assets of more than $3 trillion, may have said it best at the PCAOB's Investor Advisory Group meeting on October 16, 2013, when she stated:

I think that there is no simpler or less expensive reform that should and could be put in place than requiring the disclosure of the name of the partner on the engagement. I think nothing sharpens the mind more than a signature.^[7]

Sir David Tweedie, a member of the Accounting Hall of Fame, former Chairman of the International Accounting Standards Board, and former Chairman of the Auditing Practices Committee in the UK conveyed similar sentiments in his March 11, 2014 comment letter to the Board writing:

I firmly believe that the requirement for the auditor to sign in his own name on behalf of the firm improves audit quality and helps the market to identify and weed out weak auditors….The identification of the partner responsible for the audit will focus his mind and give him a greater sense of responsibility—there is no hiding behind a firm's name. He will make absolutely sure that all parts of the audit are done to his satisfaction—including those parts of the audit undertaken by other firms. Ultimately, his reputation is on the line.^[8]

These views supporting a signature or identification requirement in the report itself have been continually echoed by investor representatives and others throughout this project,^[9] including at the Board's recent Standing Advisory Group ("SAG") meeting on June 18, 2015.^[10]

The supplemental request we are considering this morning is a further dilution of previous proposals to identify the engagement partner in the audit report and is largely in response to liability concerns raised by some commenters, which I do not share.

Under the alternative before the Board, audit firms would be required to file a form to disclose the engagement partner and other participants. While the release notes that an audit firm can opt to also disclose the name of the engagement partner in the audit report, they would not have to do so.

This alternative has some benefits. The name of the engagement partner will be available to the public and will be searchable on our website. Over time, investors will know when a particular engagement partner has been associated with a restatement of the financial statements, when an engagement partner is required to rotate off the audit

of a company, and whether an engagement partner has been the subject of any public disciplinary proceedings. In addition, investors will also gain important information about the other participants in the audit, and the extent of their participation.

In my view, however, this alternative complicates what had been, up to this point, a straightforward proposition by requiring the filing of an unnecessary and burdensome new form. The premise underlying previous proposals was that investors, if they were so inclined, could find the name of the engagement partner in the exact same place where they would learn about other details of financial statements and the audit—in the audit report. The audit report is the primary vehicle by which the auditor communicates with investors and where other information about the audit is already found and is available immediately upon filing with the SEC.

This alternative creates a scenario in which an investor must go to another place, outside the audit report, to locate the engagement partner's name. As noted in the Board's economic analysis, it could impose search costs on a user of the financial statements that decrease the benefits investors and other users may have received from our original proposal in 2011 and subsequent re-proposal in 2013. In other words, what was intended as a service to the user could become a burden, as many users would have to look in more than one place in order to find pertinent information about the audit.

The CFA Institute, which is comprised of more than 115,000 certified financial analysts, including portfolio managers, investment analysts, and advisers worldwide, made a similar point writing in a previous comment letter to the Board:

Accessibility of the information is a key quality control factor and investors and others should not be required to dig elsewhere to find the information…. For the PCAOB to claim full success on this matter the disclosure should be transparent and easily accessible by placing the information directly in the auditor's report.^[11]

In their letter related to Board's auditor's report initiative, dated December 30, 2013, the CFA Institute reiterated their support for disclosing the engagement partner's name in the audit report writing, "[w]e also believe that [by] attaching it to the opinion, further accountability would be established."^[12]

The alternative the Board is currently considering also isolates the United States from an emerging global consensus on the manner in which the name of the engagement partner should be disclosed. For example, 16 out of the 20 countries with the largest market capitalization, including 7 European Union member states, already require disclosure of the name of the engagement partner in the auditor's report.^[13]

Finally, I have yet to hear a convincing argument why an audit engagement professional should be treated any differently from other professionals in the United States, such as

architects and engineers, who have lead responsibility for the work products of their group efforts or from a CEO and CFO who are required to attest to the financial statements of their companies under Section 302 of the Sarbanes-Oxley Act of 2002.

Kenneth A. Goldman, CFO of Yahoo, Inc., conveyed the same sentiment during the Board's June 18, 2015 SAG meeting, stating, in part:

I am proud to sign on behalf of my company when I sign. And to me . . . it should be the same . . . in terms of the auditing profession. They should be proud too. And to try to put it on some other piece of paper, which is hard to find . . . . I don't quite see the benefit of doing that, versus signing somewhere very visible, like under the opinion.^[14]

I agree with the sentiments expressed above and view the alternative contained in the supplemental request to be suboptimal.

That said, I understand that the request before us is the best we can do at this time and is being proposed along with the 2013 re-proposal. I look forward to the response from all commentators to the questions posed in the release, particularly to the first question: "Would disclosure on Form AP as described in this release achieve the same potential benefits of transparency and an increased sense of accountability as mandatory disclosure in the auditor's report?"

Mr. Chairman, as I said at the outset, I commend your leadership on these matters. I support the issuance of this supplemental request in order to elicit the additional comments the Board believes necessary to finalize this project, which I hope, after all this time, will be in the near future.

Finally, I want to thank the staff for their extremely hard work on this challenging initiative.