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Lead Partner Identification Rule Coming this December

Lead Partner Identification Rule Coming this December

Nov 17 2015

The PCAOB is close to finishing its long-running effort to publicly disclose the lead partner in an audit, a rule investors say will make auditors more accountable. The regulatory board intends to modify the final rule to respond to audit firms’ concerns about heightened legal liability by asking that the disclosure be made via Form AP, which the board is establishing to satisfy the filing requirement.

The PCAOB is planning to complete a long-running project to identify lead partners in an audit engagement in December 2015.

During a meeting of the board’s Standing Advisory Group (SAG) in Washington on November 12, PCAOB Chief Auditor Martin Baumann said there was general support for the board’s latest version of the requirements in Release No. 2015-004, Supplemental Request for Comment: Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form.

The standard will require audit firms to disclose the name of the engagement partner and the other participating firms in a new Form AP. The document was issued in June, and the comment period ended in August.

The requirements in Release No. 2015-004 have been approved by the SEC, which has to endorse PCAOB rules. In September, SEC Chief Accountant James Schnurr told Accounting & Compliance Alert that he hoped the PCAOB would finish the rule by the end of the year.

The relatively simple project has taken several years because of auditors’ resistance. Release No. 2015-004 balances different points of view between investors, who want engagement partners to disclose their name on the auditor’s report, and audit firms who see the disclosure as a source of extra legal liability and costs.

Some investor advocates who prefer to see auditors sign the auditor’s report as was first planned more than six years ago said they would support the board’s latest effort.

Joseph Carcello, an accounting professor at the University of Tennessee and a member of the board’s Investor Advisory Group, wrote in a comment letter that the latest option is “the weakest” of the choices the PCAOB had available to it. Still, he said, “Disclosing the name of the engagement partner on Form AP is a noticeable improvement over current practice and will achieve the transparency benefits that the PCAOB seeks from this project”.

Many investors say publicizing the name will make lead auditors more careful in their work and provide an incentive to resist a client's pressure to bend accounting standards. They also say they will be able to track individual partners’ work over time and detect partners who may have had more than one client restate earnings or undergo an SEC investigation for accounting problems.

At each stage of the PCAOB’s regulatory process, it scaled back the rule’s requirements because of resistance from audit firms who see a problem with the regulatory board’s desire to shift responsibility for the audit to the engagement partner and away from the firm. Audit firms say they are already accountable to multiple parties and fear an increase in the legal liability for lead partners.

Starting in July 2009, the board floated the idea of requiring engagement partners to sign the auditor’s report. Then it proposed a disclosure of the name of the partner in 2011. Two years later, the PCAOB asked for comments on the liability issues the accounting firms raised in their comment letters.

Audit firms have referred to Section 11(a) of the Securities Act of 1933, which concerns the liability for investment fraud. In the view of the firms, the requirement that an auditor or participating firm would also have to consent to being named in an audit report could delay submission of some regulatory filings.

With Release No. 2015-004, the board said disclosure via a new form would address the audit firms’ concerns about liability and the delay. In response to the latest release, Big Four firms said they support filing the information on Form AP.

“We believe the alternative presented results in achieving the overall objective of providing transparency regarding participants in the audit, while at the same time providing easy access to such information and alleviating many of the practical issues, including those related to the need to obtain consents, previously highlighted by us and others in prior comment letters submitted to the PCAOB”, Deloitte & Touche LLP wrote in a comment letter.


**Analysis provided by Thomson Reuters Checkpoint 11/17/15

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