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 Statement on the Reproposal on Improving Transparency Through Disclosure of Engagement Partner and Certain Other Participants in Audits  

DATE: Dec. 4, 2013 
SPEAKER: Steven B. Harris, Board Member 
EVENT: PCAOB Open Board Meeting 
LOCATION: Washington, DC 

Thank you, Mr. Chairman. Engagement partner and other audit firm identification have been before the Board, in one form or another, since at least 2008. I have stated my strong belief at past meetings, in 2009 and 2011, that this rule would significantly advance the Board's mission, by increasing both transparency and accountability.[1] So, I support its re-proposal, with the understanding that the Board will vote on a final standard in the first half of 2014.

Engagement Partner

The Board has heard from numerous commenters over the years that engagement partner identification can improve both audit quality and auditor selection.[2] Our standards make clear that the engagement partner is the person "with primary responsibility for the audit."[3] Investors and others have asserted that disclosure of the engagement partner's name will produce a heightened sense of accountability for the audit on his or her part, which will lead to more robust audit behavior and higher quality audits. This is not surprising, given that personal accountability is a foundation of performance, in all walks of life.

As noted in a January 3, 2012, comment letter from Senator Carl Levin, the Chairman of the Senate Permanent Subcommittee on Investigations of the Homeland Security and Governmental Affairs Committee, the

. . . disclosure of the engagement partner would strengthen both partner and firm accountability for audit failures. Right now, when a company is found to have engaged in misleading or fraudulent accounting, the identity of the engagement partner is not readily apparent; making that information publicly available would facilitate holding particular engagement partners accountable for the audits they oversee. Because both the engagement partner and the public accounting firm would be identified in the audit report, the current proposal intentionally and clearly signals that accountability is intended to attach to both.

I believe these amendments will enable audit committees and the market in general to identify the high quality engagement partners through comparative analyses of engagement partner performance. This identification and analysis should enhance the quality of engagement partners across the board, since they will be conscious of the fact that their work may be monitored and compared with the work of their peers.

In addition, since the market will likely exhibit a preference for the high quality engagement partners over time, audits should improve as a result.

I also believe these amendments will bring U.S. audit professionals into closer alignment with their counterparts in other parts of the world, and with other public company officials and professionals here in the U.S. The European Union, for example, requires its member states to compel the auditor's reports to be "signed by at least the statutory auditor(s) carrying out the statutory audit on behalf of the audit firm."[4] The Sarbanes-Oxley Act includes a number of provisions that are meant to increase the accountability of the senior executives of public companies, most notably the principal executive officer and the principal financial officer certifications under Section 302 of the Act. Today, company senior executive officers sign their names not only to Section 302 certifications but also to other documents filed with the SEC. Further, a majority of the board of directors must sign their names to their company's Form 10-K and offering documents.

The principle of accountability extends to most professionals in the United States who are clearly identified under federal or state law. For example, tax accountants sign tax returns, and engineers and architects sign their engineering and architectural designs. It is hard to understand why auditors should be held to a different standard.

Other Auditors

There are many reasons for the disclosure of other auditors involved in an audit of a multinational company. Without that information, one doesn't know who participated in the audit or to what extent firms beside the firm signing the auditor's report did so. By disclosing the other auditors involved, investors and the markets are able to learn whether the other firms are registered with, and inspected by, the PCAOB. In addition, they are able to evaluate the firms' professional record and practices, any PCAOB inspection findings, and any disciplinary actions taken against the firms by the Board or other regulators. It is not surprising that investor surveys here and abroad have agreed that disclosure of the involvement of firms that do not sign the report is essential.[5]

The proposed amendments will require the auditor to disclose in the auditor's report the name, location, and the extent of participation — as the percentage of the total audit hours — of other independent public accounting firms involved in the audit. The amendments will also require disclosure about the location and extent of participation of persons not employed by the auditor who took part in the most recent year's audit. Also, the amendments require the names of individuals who performed at least 5% of the audit work.

These measures strike the appropriate balance between providing investors and other interested parties with the information they need about the conduct of the audit, and ensuring that they receive only the most pertinent information, which is why I support them.

Liability Considerations

The Board has also given careful consideration to the potential liability implications of requiring the disclosure of the engagement partner's name in the auditor's report.

In our 2011 proposing release, the Board solicited comment specifically on the liability implications of the engagement partner disclosure approach, in light of the United States Supreme Court's 2011 decision in Janus Capital Group, Inc. v. First Derivative Traders.[6] The reproposal before us today has carefully considered developments in the case law since 2011 and the comments received.

The release articulates the Board's analysis on the reproposal's potential liability implications under Section 10(b) of the Securities Exchange Act of 1934 and Section 11 of the Securities Act of 1933. As the release notes, the disclosure of the engagement partner's name should not affect the status quo as it relates to private liability under Section 10(b). In other words, firms will continue to be liable in fraud cases, and the engagement partner's liability should not be increased.

As to any potential liability under Section 11, ultimately, this depends on the SEC's decision as to whether engagement partners and participating accounting firms must file separate consents and whether Section 11 liability should apply in these circumstances. As stated in the release, our proposed amendment assumes that engagement partners and participating accounting firms named in the auditor's report will have to consent to the inclusion of their names in the auditor's report pursuant to Section 7 of the Securities Act and therefore be potentially liable under Section 11.

While some commenters have counseled us to hold off on these amendments for the case law under Janus to develop, such an action would be counter to the Board's mission and recognition of the benefits served by having the engagement partner and participating accounting firms identified in the auditor's report.

The Board plans to remain vigilant in monitoring how the case law develops. And, of course, we can revisit this issue at any time in the future.

Economic Considerations

Finally, I believe the release appropriately discusses the economic rationale and costs, as well as the alternatives considered in crafting the rule, as well as considerations relating to the audits of emerging growth companies as required by the JOBS Act. The release also takes into account various research studies on the disclosure of the name of the engagement partner.

As the release states, the new disclosure requirements will not be costly for accounting firms to implement, including those firms that audit emerging growth companies, since we are asking audit firms to divulge information that they already know — the name of the engagement partner, and the names and locations of other participants in the audit.

Conclusion

As Justice Louis Brandeis stated "sunshine is the best disinfectant." I support these amendments because I believe investors and others deserve to know the names of the engagement partner and other firms participating in the audit. I also strongly believe that the increased transparency and sense of accountability on the part of the engagement partner will benefit investors, audit committees, and the market at large. I also agree with commenters that this enhanced sense of accountability will result in improved audit quality.

I would like to thank Martin Baumann, Jennifer Rand, Jessica Watts, Lisa Calandriello, and Ekaterina Dizna from the Office of the Chief Auditor and Mary Peters and Jacob Lesser from the Office of General Counsel, for their hard work on this reproposal, as well as the staff of the SEC for their assistance. As with all of our proposals, I welcome comments relating to the release we are considering today.

[2] See Letter of Council of Institutional Investors (January 5, 2012) and Letter of CFA Institute (January 23, 2012).

[3] See Appendix A of Auditing Standard No. 9, Audit Planning.

[4] Directive 2006/43/EC of the European Parliament and of the Council, Article 28, Audit Reporting (May 17, 2006) available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32006L0043:en:NOT.

[5] See Report of the Investor Advisory Group Working Group on "The Auditor's Report and The Role of the Auditor" (March 16, 2001), located at: http://pcaobus.org/News/Events/Pages/03162011_IAGMEETING.aspx. See also CFA Institute's surveys: Independent Auditor's Report Survey Results (February 26, 2010), located at http://www.cfainstitute.org/about/research/surveys/pages/index.aspx.

[6] 131 S.Ct. 2296, 2302 (2011).

 

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