When it comes to auditing financial information, under current professional rules, only the name of the auditing firm appears at the bottom of audit reports. But that is about to change.
The Public Company Accounting Oversight Board (PCAOB) has recently issued its latest attempt to require disclosure of the name of the person who is in charge of the audit for each report issued for all U.S. public companies. This new rule would be a binding federal law.
Is the new rule a good thing? Maybe, maybe not. But despite objections from auditors — myself included — it is time to accept the inevitable and enact the plan.
The PCAOB believes disclosing the signing partner’s personal identity is critical to protecting the interests of investors — that is, all of us who invest in stocks, bonds and mutual funds directly or through employee benefit plans at work.
The latest proposal seeks to include the name of the actual auditor who prepared the report in a separate form filed with the PCAOB, a new document called Form AP (for Audit Participants). The contents of this form will be posted to the PCAOB website and will be fully searchable.
This modified approach is an improvement over previous proposals that would have required auditors’ names and signatures to be included directly in the report itself. Auditors objected to this because of valid concerns of increased personal litigation risk by signing their own names along with their firms’ names, while proponents argued that increased personal liability would improve audit quality.
I disagree. Audit partners already fully understand that regulatory censure and litigation under existing rules can ruin their careers.
The PCAOB says its goals are transparency and increased accountability. However, audits are performed not by one person but by a multimember engagement team supported by a quality review partner, internal specialists, consulting partners and the entirety of the auditing firm.
Naming the signing partner puts too much focus on one individual and distorts the reality of the audit process. Listing one person’s name when in excess of 50 people have had a hand in preparing the final report creates a target, not transparency.
Auditors are also already acutely aware of their responsibilities. We have more-than-adequate methods in place to maintain accountability, such as inspection processes, enforcement by the Securities and Exchange Commission, peer review, internal firm inspections and private litigation.
Concerns also remain about misinterpretation and misuse of the disclosed partner names. The reasons for restatements or revised opinions are often complicated, and to attribute accountability to one individual is too simplistic and often unfair. The inevitable lists of “bad partners” will not benefit anybody.
But, this new rule does more than just list individual audit partners, and this is where the true benefit to investors lies. Because the signing auditing firm often engages other firms to perform significant portions of cross-border audits, the new proposal will require that they disclose the names and locations of any other firm that provides at least 5 percent of the total audit hours for any given report. This includes affiliates and nonaffiliates of the primary (signing) firm.
This is good because audit quality differs materially among various countries due, in part, to cultural factors and the prevailing regulatory environment in other countries. It is important for users of financial statements to understand which public accounting firms are actually performing the audit work and where they are located because many recent accounting fraud cases have involved poorly supervised foreign firms performing low-quality audits.
If investors are aware that the signing firm in the U.S. is performing only minimal work while a foreign audit firm incurs most of the audit hours, many investors might change their investment decisions because of a reduced level of confidence in the audit report. Improved audit quality from this disclosure is a real possibility, and that’s the change we need.
In spite of some reservations about certain elements, this new proposal should be supported for continuing to seek a reasonable compromise on a contentious topic in the face of significant criticism. Investors and the public will be better off because of it.
Jeff Johanns is an accounting lecturer in the McCombs School of Business at The University of Texas at Austin. He is a former partner and U.S. assurance risk management leader at PricewaterhouseCoopers LLP.
A version of this op-ed appeared in The Conversation.
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