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NYSSCPA Members Skeptical of Value in Disclosing Auditor Name

Published Date:
Jan 14, 2014

The Public Company Accounting Oversight Board (PCAOB) has reproposed a controversial measure that would require audit reports to disclose the name of the engagement partner, as well as the names, locations and participation of any independent firms or other companies and individuals who aided the audit.  

The reproposal, “Improving Transparency Through Disclosure of Engagement Partner and Certain Other Participants in Audits,” was issued by the board on Dec. 4. It brings new life to the PCAOB’s five-year effort to advance the naming measure, which it says will increase transparency and accountability.

The board first raised the issue in a 2009 concept release, which was followed by a 2011 exposure draft. However, that draft, according to the board’s current proposal, was poorly received by the accounting community. The NYSSCPA itself questioned how useful the measure would be, suggesting in a January 2012 comment letter that it may lead the public to draw inappropriate conclusions about an engagement partner’s authority.

The PCAOB, however, believes that several key factors have changed since it first made the proposal two years ago, both in terms of the contemporary regulatory landscape and the overall mood of the financial community, according to Lewis H. Ferguson, a PCAOB member who spoke to The Trusted Professional. Among other things, Ferguson said that the PCAOB has conducted extensive and increased outreach to investors since the first proposal. He also said that in recent years, there has been more academic research encouraging the idea of using the engagement partner name on the audit report, adding that most jurisdictions, such as the European Union, Japan and Australia, already require it. A proposal by the International Auditing and Assurance Standards Board (IAASB) released in July also included a requirement to include the engagement partner name in the audit report.

In general, Ferguson said, there has been a global push for increased transparency in the audit process.

“The U.S., in many ways, is an outlier on the issue,” he said. “It’s a common practice in the rest of the world.”

Ferguson added that, within the regulatory sphere, the PCAOB has since developed jurisdiction over broker-dealer audits. He also cited the passage of the 2012 Jumpstart Our Business Startups (JOBS) Act, which requires the PCAOB to consider the impact of rulemaking on emerging growth companies, as another factor as to why it reproposed the amendment.

However, while the PCAOB may think enough factors have changed to warrant a re-proposal, some NYSSCPA members remain skeptical.

Michele B. Amato, the immediate past chair of the SEC Committee, said she understands why the PCAOB wants the names of the engagement partner disclosed, but does not agree that it will create greater responsibility. What’s more, she said that instead of including that information in the audit report, the name of the engagement partner and any other auditors used by the firm could be disclosed on Form 2—which is publicly available on the PCAOB’s website—if the PCAOB revised it.

Ferguson, though, in a statement released after he voted to issue the reproposal, said that he has looked at the number of people who come to the PCAOB website for these reports and did not find the numbers encouraging. He said it would be easier to just have all the information in one place.

The proposal isn’t exactly the same as the 2011 version; revisions include raising the disclosure threshold for other participants in the audit from 3 percent of the total audit hours to 5 percent of the total audit hours, and no longer requiring disclosure in the auditor’s report of the names of other persons who are not employed by the auditor when referring to persons or entities other than a public accounting firm. Instead, such persons are to be disclosed as “persons not employed by our firm.” However, for Jeffrey M. Brinn, a past chair of the SEC Committee, there’s cold comfort in the changes.

“Increasing the threshold disclosure and eliminating the rule to identify nonaudit firm employees does reduce the burden somewhat; however, it does nothing to increase the usefulness of the information to investors, which is one of the main reasons why auditors object to this proposal,” Brinn said. “Current audit standards allow for the use of other auditors, individually or as firms.  Requiring the proposed disclosures is only going to look like a modified audit opinion, where there has been no actual modification of performance in accordance with applicable standards.”

Barry T. Goodman, the chair of the Investment Companies Committee, also felt that this information would have little value to investors, though he did see other potential upsides.

“I don’t think it has much value for the investors or the user,” he said. “[But] I think on the other side, it gives the professional a heightened awareness for them to do a good job, as they can’t hide behind the firm. If something goes wrong they’re on the hook rather than the firm, so I think that’s where it would be the most beneficial.”

The proposal is open for public comment until Feb. 3, 2014. The NYSSCPA will submit an official position at that time.     

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