Statement on the Supplemental Request for Comment: Rules to Require Disclosure of Certain Audit Participants on New PCAOB Form

Introduction

The Board is issuing today a supplemental request for comment in connection with a project considering potential amendments to PCAOB standards to publicly identify the engagement partner and certain other participants in the audits of public companies and broker-dealers. This project has a long history, dating back to a 2008 recommendation of the U.S. Department of the Treasury's Advisory Committee on the Auditing Profession ("ACAP")[1] for the PCAOB to consider requiring audit partners to personally sign their audit reports. Since then, we have explored a variety of approaches — partner signature, identification of partners and other participants in the auditor's report, disclosure of the relevant information in the PCAOB's Form 2, or some combination of the above.

In the end, much comes down to the appropriate balance between potential costs and benefits. Investors we have heard from have told us that they would find useful the information we propose to require audit firms to disclose — particularly the name of the engagement partner and the names, locations, and extent of participation of other independent public accounting firms that took part in the audit. However, the potential consequences of doing so either through an engagement partner signature or through a disclosure requirement in the auditor's report are great, particularly the costs and uncertainties that could arise from the potential liability of partners and firms under a variety of federal securities laws. The Board, therefore, has expended much time and effort trying to determine how best to give investors the information they want without unduly imposing costs that ultimately would be borne by all participants in the capital markets.

I support the approach on which we are seeking comment today. It remains to be seen how useful the information will be to investors, and we may not know the answer to that question until disclosure has been collected for a period of years and put into context by investors, data aggregators, the media, and others. But in light of investor demand for the information, it is appropriate for us to provide it, assuming that the negative consequences do not outweigh the positive. I believe that disclosure on a separate PCAOB form, rather than in the auditor's report, would accomplish that goal, but I look forward to hearing from commenters on whether they agree.

Focusing for a moment on the more technical details of the proposal, I urge commenters to consider carefully the logistics of the contemplated disclosures and to provide the Board with guidance on these issues. The Board is considering a requirement to file in the PCAOB registration system a form for each audit with the relevant information, that is, the name of the engagement partner and the names, locations, and extent of participation of other independent public accounting firms that took part in the audit. The basic filing deadline would be 30 days after the date the auditor's report is first included in a document filed with the Securities and Exchange Commission, with a shorter deadline of 10 days for initial public offerings. Forms would be searchable on the PCAOB website, for example, by engagement partner name or by company. Do these filing deadlines provide information on a timely basis for investors? Are the deadlines realistic for auditors? What other search features should the Board consider, either now or after initial implementation?

The Board also is seeking comment on whether to:

  • retain its proposal to require disclosure of certain nonaccounting firm participants, as proposed in 2013,
  • narrow that requirement to exclude disclosure if the nonaccounting firm participants are controlled by or under common control with the accounting firm issuing the auditor's report, or
  • omit this requirement from the proposal entirely.

I look forward to commenters' views on that question as well.

You will also hear in just a few minutes about another project underway at the PCAOB which may add to the mix of information available to evaluate the quality of audits. Without getting into the details of the audit quality indicators project before the staff describes it in more detail, I will note only that identifying engagement partners and other firms likely will paint a partial picture of audit quality. But supplementing that information with other information relevant to the evaluation of audit quality — such as detail about the engagement team, auditor workloads, experience and expertise, or the firm's systems of quality control — may help audit committees, investors, and others gain a much more complete understanding of how, and by whom, high quality audits are performed.

Finally, earlier this month, SEC Chief Accountant James Schnurr noted that he expects the SEC to issue in the near future a "concept release intended to seek feedback regarding how investors currently use the information provided in audit committee disclosures as well as feedback on the usefulness of potential enhancements, including additional disclosures."[2] I applaud this important effort by the SEC and look forward to learning the details. Because the issues to be explored by the SEC may overlap with the request for comment we are issuing today, I urge commenters to consider our projects together, and to provide us with feedback on how we should best balance the disclosures to be provided by auditors and those to be provided by audit committees.

Though I meant to keep my statement short, before I yield the floor to Board Member Franzel, let me add my appreciation to that already expressed by my fellow Board members for the tenacious work of the staff on this project. Marty Baumann, Jennifer Rand, Jessica Watts, Lisa Calandriello, Karen Wiedemann, Gordon Seymour, Andres Vinelli, Morris Mittler — all were invaluable members of the team, as were several others who have left the PCAOB, but you know who you are. This has been a long road, and I hope that we are nearing the end. I appreciate the staff's unwavering dedication and patience as we worked through the difficult issues that seemed to confront us in every direction on this project.

I would also like to thank the staff of the SEC for their input, as well as all of the individuals and organizations that provided comments on our prior proposals. I look forward to hearing from all of you during this last phase of the project.

[1] ACAP, Final Report of the Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury (October 6, 2008), at VII:20 (recommending that the PCAOB undertake a standard-setting initiative to consider mandating the engagement partner's signature on the audit report).

[2] James Schnurr, Remarks at the 34th Annual SEC and Financial Reporting Institute Conference (June 5, 2015) available at http://www.sec.gov/news/speech/remarks-34th-sec-financial-reporting-institute-conference.html.