Date: June 30, 2015
Speaker: James R. Doty, Chairman
Event: PCAOB Open Board Meeting
Location: Washington, DC
I want to thank Marty Baumann and his staff for bringing forward this supplemental request for public comment on the PCAOB's proposal to require auditors to disclose in the auditor's report the name of the engagement partner and information about certain other participants in the audit.
The supplemental request seeks views on a potential alternative to disclosure of this information in the auditor's report, through disclosure on a new PCAOB form.
With this request, I believe we are nearing our ability to bring U.S. audits into line with international standards and practices that have proven effective for issuers, auditors and investors alike in other markets.
This proposal is a way to use the motivating power of our markets to incentivize higher quality audits. But to do so, the markets need information. As our recent Standing Advisory Group meeting illustrated, there is support for this idea from CFOs, board members and investors.
If the public knew about partner history, and the relative extent of involvement of other firms that have their own records of good or poor auditing, the market could react by appropriately pricing the cost of capital.
This makes intuitive sense, but studies also show that disclosure of the name of the audit engagement partner has made a difference in foreign markets. We have heard many arguments that what works in other markets doesn't necessarily work in the U.S., and we've made several adjustments to account for differences that may be relevant, such as in particular auditors' concerns about liability risk here. That said, we should not ignore the benefits perceived in those markets if they can be obtained here as well with some structuring.
Our inspections of audits are instructive as well. Based on more than ten years of experience, PCAOB inspections have revealed that, even within a single firm, and notwithstanding firm-wide or network-wide quality control systems, the quality of individual audit engagement vary.
There are numerous factors required to achieve a high quality audit, but the role of the engagement partner in promoting quality, or allowing it to be compromised, is of singular importance to the ultimate reliability of the audit.
So too, inspections have found that auditors face and make important choices about how to organize multi-national audits. There's no way for an investor to tell today how much of an audit was performed by firms other than the signing firm. In the case, say, of a large financial institution with major operations in two or more financial centers, a significant portion of the audit may be performed by other firms.
Transparency about the partner and firms involved should incentivize the audit firm to organize the audit team conscientiously to give audit committees and investors comfort that it is reliable.
I am grateful for the comments we have received on the proposal. I also thank the SEC staff for their assistance and close consultation in this effort. Their assistance has helped us evaluate alternatives and design the form.
There is already a robust record on this proposal, which began with a concept release and has been exposed in draft form twice already. The comment has been enormously helpful to confirm the benefit of the disclosures, minimize costs and identify and address any unintended consequences.
I want to thank commenters for helping us to this point, and ask for their time once again to help make the disclosures as useful and effective as possible.