Should SEC Filings Name the Lead Audit Partner?

The Public Company Accounting Oversight Board (PCAOB) has unanimously decided to ask for extra comments on a controversial proposal that would require disclosure of the name of the lead audit partner and other participating firms in an audit. PCAOB Release No. 2013-009, Improving the Transparency of Audits: Proposed Amendments to PCAOB Auditing Standards to Provide Disclosure in the Auditor’s Report of Certain Participants in the Audit, pits investors against auditors. Audit clients are caught somewhere in the middle of this ongoing debate.

Naming audit lead partners

Many investors say publicizing lead audit partner names will raise accountability among auditors, make them more careful in their work and provide an incentive to resist pressure from clients to bend accounting standards. Investors also will be able to track an individual partner’s work over time.

However, auditors generally oppose putting the lead partner’s name in the auditor’s report, because partners are accountable to multiple parties, and the disclosure will only raise their liability risks under securities laws. In turn, such increased liability risks could translate into higher audit fees. 

If the lead partner’s name has to be disclosed at all, auditors prefer that it appear in the annual forms they submit to the PCAOB or in proxy filings, which are governed by SEC rules. 

Debating an alternate form

The PCAOB wants public input on an alternate disclosure of the lead audit partner’s name and the names of other participating firms on a new form. It would be called “Form AP — Auditor Reporting of Certain Audit Participants.” 

“A cornerstone of our effort to provide investors [with] more information about the audit and the auditors who conduct them is our consideration of disclosure to investors of the identity of the engagement partner and other firms that conduct an audit,” said PCAOB Chairman James Doty. “Knowing the identity of the engagement partner plays a key role in investor confidence and capital formation in those jurisdictions where it is provided to investors. Form AP is a middle ground approach that would provide investors this disclosure in a manner that responds to auditors’ concerns about risk.”

If the lead partner has to consent to her or his name appearing in an audit report, it could delay submission of some regulatory filings while the company obtains the consent. In addition, the PCAOB has proposed that companies be required to complete Form AP within 30 days of filing the auditor’s report. A shorter deadline of 10 days would apply to initial public offerings. The board believes disclosure in a new form would address audit firms’ concerns about liability and the delay between filing the audit report and filing Form AP. 

But a new form means that an investor must go to another place outside the audit report to locate the lead partner’s name. This extra step could become burdensome because users would be forced to look elsewhere to obtain all the pertinent information about the audit. Although PCAOB annual forms are available to the public in a searchable database on the PCAOB’s website, they rarely get as much scrutiny as company SEC filings.

Considering proposals in tandem

Comments to the PCAOB’s proposed alternate disclosure format are due August 31. In the meantime, the SEC is planning to issue a concept release to get comments on potential enhancements to the audit committee reports. It’s expected to include the name of the engagement partner.

“Because the issues to be explored by the SEC may overlap … 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,” said PCAOB member Jay Hanson.

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