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Analysis: US profession uneasy over PCAOB rules on audit partner disclosure

At the start of December 2013, the Public Company Accounting Board (PCAOB) re-proposed rules that would require the disclosure of the lead audit partner in the auditor's report, as well as other entities that provided 5% of the total audit hours.

This represents a fairly dramatic shift from current US rules which only require the disclosure of the primary firm which conducted the audit, and would be following the lead of a number of other countries which already have the proposed disclosure requirements.

This was the second time the PCAOB had proposed changes along these lines, after it released a similar set of proposals in 2011, which a number of accounting firms and bodies argued against at the time.

For example PwCUS said it was sceptical naming the audit partner would provide meaningful benefits to investors, highlighting that just the lead audit partner would downplay the importance of other aspects of the audit process and was unsure of the legal implications for the signing partners.

The firm was also concerned that naming other firms or persons could muddy the level of accountability and said it would also not provide any extra useful information.

Re-proposal
As a result of the feedback, the PCAOB reconsidered some of its proposal, and PCAOB chairman James Dotynoted that the comments received in the proposal had helped shape the re-proposal, "in particular to refine and focus our analysis on engagement partner identification and to make the form of the disclosure of other firms that participated in an audit simpler and clearer."

Doty described the proposal as "a way to use the motivating power of our markets to incentivise higher quality audits," at a PCAOB board meeting when the re-proposal was made public.

Now, the PBCAOB has repurposed the idea, with the principle changes based on the feedback being:
- The engagement partner's name must be disclosed only in the audit report, not in the firm's 'Form 2' filed with the PCAOB,
- Would have to disclose only that "persons not employed by our firm" were involved in audit, without needed to identify the persons by name, and
- The threshold for disclosing other participants in audit has been raised from 3% to 5%of the total audit hours.

However it appears that, as far as initial reactions are concerned, these changes have not been enough. For example, when asked for comment PwC US referred only to their comment letter for the initial proposal;and the Center for Audit Quality (CAQ) also told this publication its views had remained consistent since then as well.

CAQ executive director Cindy Fornellisaid the CAQ did not believe the auditor's report was the appropriate place to identify the engagement partner or the names of other contributors, and that other options should be explored.

Increased liability
PCAOB board member and chair of the International Forum of Independent Audit Regulators Lewis Ferguson said the law on liability is developing, and it appears the ultimate outcome of these developments is a bit unclear.

Fornelli said the biggest liability challenge with identificationof the engagement partner is related to consents. "Audit firms have to consent to the use of their audit report in documents that are incorporated by reference for example in debt filings, or registration of stock.

"Currently the 'firm' consents, but if the engagement partner and/or others are also required to consent to their identification in the report, there would be an increase in the liability to those parties," she said.

Doty also said that requiring a signature could increase the engagement partner's liability exposure, however he added "a perceived risk of liability is not necessarily bad."

RSM International global leader of quality and risk Bob Dohrersuggested that even the perception of increased personal liability could increase costs if lead auditors take added precautionary measures to protect themselves.

While Fornelli said the CAQ is yet to explore the possibility of increased costs, she said it's something that needs to be considered, and added that regardless of cost, she didn't feel it would improve audit quality.

"The identification of the engagement partner could lead users to make inappropriate inferences based on circumstances about a company that may not be within the control of the engagement partner or directly relate to the performance of that engagement partner or the quality of the audit, such as bankruptcy filings,"Fornelli said.

Dohrer argued on a similar line, saying there is a danger that incorrect inferences may be drawn by users that a global audit involving more than one foreign audit firm is of lower quality or greater risk than a global audit conducted by a single firm.

Dohrernoted that research done to determine whether the naming of lead auditor in audit reports results in an improvement in quality is inconclusive.

Comments on the proposed amendments are due by 3 February 2014.

Related articles:

PCAOB to reconsider engagement partner disclosure

Critical moment: US audit reports to change after 75 years

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