The Board meets today to consider adoption of new rules on audit transparency to require auditors to disclose the name of the engagement partner and information about certain other participants in the audit.
The new rules will, in our own way, bring U.S. audits into line with international standards and practices that have proven effective for issuers, auditors and investors alike in other markets.
The American accounting profession dates back to the 19th century, when a handful of respected accounting experts recognized the importance of a learned profession of public accountants who cultivated, through integrity, expert training and knowledge, a reputation for reliable, independent assessments of accounts.
The modern audit profession has come a long way from these beginnings. But our system of federal securities regulation remains integrally linked to the work of these early accountants and their impeccable reputation for wisdom and integrity.
It was on the basis of the public's trust in these professionals that, starting in the 1930s, the Congress required all publicly traded companies to file with the then-new Commission financial statements that had been audited by an independent public accountant.
To meet the mandate imposed by this franchise, accounting firms have multiplied, through hiring and acquisitions, to include hundreds of thousands of professionals. The largest accounting firms now include hundreds of audit partners.
Irrespective of this institutionalization, auditing is still a business about reputation. The firm name is clearly part of that reputation. But the names of the individuals entrusted with the franchise have been lost in the sea of expansion.
In this regard, the profession is an outlier among participants in the financial reporting chain. The names of corporate board members, CEOs, CFOs and other senior management are already disclosed. It allows the market to provide nuanced signals to dispersed investors about how to price the cost of capital.
Based on nearly thirteen years of experience, PCAOB inspections have revealed that, even within a single firm, and notwithstanding firm-wide or network-wide quality control systems, the quality of individual audit engagements varies.
There are numerous factors required to achieve a high quality audit, but the role of the engagement partner in promoting quality, or allowing it to be compromised, is of singular importance to the ultimate reliability of the audit.
So too, inspections have found that auditors face and make important choices about how to organize multi-national audits. There's no way for an investor to tell today how much of an audit was performed by firms other than the signing firm. In the case, say, of a large financial institution with major operations in two or more financial centers, a significant portion – or even most – of the audit may be performed by other firms.
Transparency about the partner and firms involved should further incentivize the audit firm to organize the audit team conscientiously to give investors comfort that it is reliable.
This project began in earnest in response to a 2008 recommendation of the Treasury Department's Advisory Committee on the Auditing Profession that engagement partners be required to sign their audit reports. Since then, we have engaged in extensive research and deliberation and multiple rounds of public comment to arrive at the proposal before the Board today.
I believe the rules before the Board today reflect a thoughtful and flexible approach that reinforces the PCAOB's mission to protect investors from poor auditing, and promote their interest in more informative, accurate and independent audit reports.
The fact that the new disclosures will be consolidated in a database available on the PCAOB website means investors, analysts, audit committees and others can conduct meaningful comparisons. At the same time, this approach addresses firms' concerns regarding liability consequences to their partners and other firms.
I am grateful for the public comments we have received on our proposals. They have been enormously helpful to confirm the benefit of the disclosures, minimize costs and identify and address unintended consequences.
This action we take today could not have been achieved without the encouragement and support of the Hon. Mary Jo White, Chair of the SEC, and the active involvement of her Chief Accountant, Jim Schnurr. To both, I express my thanks.
I also thank the other SEC staff who worked on this project as well as my fellow Board members for their close consultation in this effort. Their assistance has been critical to helping us bring this project to fruition.
Finally, let me express my deep gratitude to the staff in the PCAOB's Office of the Chief Auditor, the Office of the General Counsel, the Center for Economic Analysis, and the Office of Information Technology. Their indefatigable openness to research and evaluate various approaches to achieve our goal, and their tireless attention to detail, have made today's action possible.