Date: June 30, 2015
Speaker: Lewis H. Ferguson, Board Member
Event: PCAOB Open Board Meeting
Location: Washington, DC
I have long supported public disclosure of the names of individual audit engagement partners and the disclosure of the identity of other audit firms that provide significant portions of the audit work. Today, in the United States, where audit reports are signed only with the audit firm's name, it is impossible to tell who actually performed the audit. In this supplemental request for comment, we are seeking information specifically with respect to a new means of disclosing the name of the engagement partner that may mitigate at least some of the concerns under the federal securities law that arise if such information is disclosed in the audit report itself. We also seek comment on disclosures regarding the non-accounting firms participating in the audit, and we consider excluding identification of any specialist engaged by the auditor.
Those who have resisted public disclosure of the engagement partner's name have made two basic arguments: first, that the audit is really a group endeavor and to single out a single individual is misleading and does not provide useful information. Second, securities law liability may be increased by the disclosure of the engagement partner's identity. I disagree with these contentions for two reasons.
First, it is the engagement partner with whom the audit committee has the closest relationship among the audit team. Audit committees are also frequently active participants in the choice of the engagement partner to lead the audit of their companies, and the background, skills, and personal attributes of the engagement partner are matters of great interest and concern to audit committee members. That fact alone suggests to me that the engagement partner's identity may be of interest to investors.
Second, I generally believe that as regulators we are wisest to leave the determination of the usefulness of most information about the audit, including the engagement partner's name, to investors themselves. I do believe that even if the disclosure of a mere name has limited usefulness initially because of limited public information available about particular individuals, over time, a body of data about individual engagement partners will be developed that may be very informative and useful. It seems likely that eventually information will be publicly available about engagement partners such as the companies they have audited, their industry experience, any disciplinary actions in which they have been involved and likely other information. This body of information should be of use to those who use financial information and audit reports. As such, it will enhance the operation of our capital markets because it may enhance users' ability to assess the reliability of the audit report, and to be better informed when voting on whether to approve the selection of auditors.
We have been on a long journey to reach this point and this is still only a way station. In this supplemental request for information, we are seeking comment on a new approach to getting public disclosure of information while limiting to the greatest extent possible the difficulty, costs and liability risks to those providing the information. We have heard commenters object to the project on the grounds that requiring an engagement partner to sign an audit report or to be named in that audit report may increase an auditor's liability in two ways, and this is our second attempt to address those concerns. In my view the proposal in this supplemental request for comment will eliminate the first of the two issues: concern that the engagement partner's signature of, or naming the engagement partner and other audit participants in, the audit report would require auditors to file consents with the Securities and Exchange Commission in the event of inclusion of the audit report in a registration statement, and they would thereby be subject to potential liability under Section 11 of the Securities Act of 1933.
Commenters also had a concern that naming the engagement partner in the audit report would increase the likelihood that auditors could be found liable under Section 10(b) of the Securities and Exchange Act of 1934 for two reasons. First, identification of the individual engagement partner would allow Section 10(b) plaintiffs to establish reliance on the engagement partner, and not only on his or her firm. Second, the engagement partner could be viewed as the "maker" of the statements contained in the audit report. The law in this area is unsettled and developing, but I believe the solution proposed in this supplemental request, disclosure of the information of a new Form AP disclosure may, at least in the minds of commenters, somewhat alleviate the concern, or at a minimum not make it any greater than it was in the previous version of this proposed rule. Does naming the engagement partner make him or her more likely to be named in section 10(b) lawsuit? I do not think so. In any event, I am not convinced that whatever increased risk disclosure of this information may pose under section 10(b) outweighs the public interest in having the information made publicly available.
I am interested in the views of commenters as to whether the proposed disclosure in Form AP is preferable to disclosure in the audit report, and also whether there will be any loss of transparency or additional difficulty in using the information caused by disclosure in a form filed with the PCAOB.
I extend my thanks to the PCAOB staff in many divisions who have worked tirelessly to consider the commenters concerns and draft this supplemental request for comment in an effort to address those concerns while preserving the important objective of this project: greater transparency into the identity of the engagement partner. In particular, thanks to Jessica Watts, Jennifer Rand, Lisa Calandriello, Ekaterina Dizna, Karen Wiedemann, Morris Mitler, Andres Vinelli, and John Powers. Thanks also to the staff in our Office of General Counsel and the Office of Information Technology who have been working to create a Form AP that will be searchable and as simple to submit as possible. As usual, the staff of the Securities and Exchange Commission has provided thoughtful comments on the draft and the project as a whole and their guidance on the implications of the proposal under the federal securities laws, of which they are the principal interpreters, has been invaluable. As mentioned above, I support issuance of this supplemental request for comments and look forward to reaching the point where we are able to issue a proposal on this project.