The PCAOB's Proposal For Transparency and Accountability

Posted by Investment Management Group on Dec 6, 2011 6:55:48 PM

Due to the recent events in the national and global business world, there has been an outcry for transparency and accountability from big business. In this spirit, the Public Company Accounting Oversight Board (PCAOB) has issued PCAOB Release No. 2011-007. The proposal suggests three amendments to the PCAOB requirements of registered public accounting firms and their public-company audit reports:

  1. Registered public accounting firms must disclose the name of the responsible “engagement partner” in the audit report of their public company audits. This means that the name of partner who is leading the audit would be identified on the report. Though the engagement partner must be identified, only the firm is required to actually sign the auditor’s report. This new procedure is meant to compel greater integrity and responsibility in the engagement partners, leading to better quality audits. Public company clients will also have the added benefit of being able to research engagement partners who have experience in their desired niche, and avoid those who have been linked with low quality audits.
  1. An amendment would be made to Part IV, of page two, of the Board’s Annual Report Form. According to PCAOB Rule 2201, every registered firm is required to file an annual report on Form 2 by June of each year. This report contains some basic information about the firm and its issuer-related practice over the last year. Detailed in section 4.1 of the form are any audit reports issued during the reporting period, along with the issuer’s name, the issuer’s CIK number, and the date of the audit report. Release No. 2011-007 would add one other item to section 4.1: the name of the engagement partner of each audit. Although the audit reports themselves would already contain this information, the PCAOB feels that this medium would provide investors a more efficient way to search this information.
  1. PCAOB Release No. 2011-007 would also require disclosure of any involved independent public accounting firms or persons supervised by the lead auditor. The auditor’s report must also identify other independent auditors who conducted sections of the audit. Although usually audits are completed by just one firm, often audits are more complicated. The primary firm often outsources work to its subsidiaries, a foreign affiliate, or independent consultants. These companies perform part of the audit, such as auditing the financial statements of a division of the public company, which the “engagement partner” will refer to in the report. Investors are usually unaware of all the outside companies involved in an audit. This new policy would increase transparency in the auditing process.

A similar policy was explored by the Public Company Accounting Oversight Board in 2009, but was eventually dismissed. The policy had called for the engagement partner to sign off on their public-company audit reports. This caused much outrage from many large auditing companies, who believed this policy would put too much liability on the single auditor, when in reality, the entire firm was involved. The PCAOB’s new release is a bit more lenient, but its final outcome is yet to be determined.

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