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Auditor Identification Proposal Delayed for an Extra Round of Comments

The PCAOB wants more comments about its planned rule to require public disclosure of the name of the engagement partner in an audit. Officials at the regulatory board want more views about how the disclosure should be made and the legal liability it might cause. Board members have also agreed to revise their proposed rule to expand the auditor’s report to make it more useful to investors.

The PCAOB said it plans to seek more comments on a planned standard to require public disclosure of the name of the lead partner in an audit, according to a September 30, 2014, update of the board’s standard-setting agenda.

The proposal being written by PCAOB staffers reflects the comments submitted by audit firms and other parties in response to the December 2013 proposal in Release No. 2013-009, Improving Transparency Through Disclosure of Engagement Partner and Certain Other Participants in Audits. Some letters addressed an auditor’s legal liability and alternative locations that the disclosure can be made.

PCAOB Chairman James Doty wanted to finalize the rule in September, but the board hasn’t been able to move the rule forward given the contentiousness of the issue.

Audit firms oppose putting the lead partner’s name in the auditor’s report section of a company’s regulatory filing. If the name has to be disclosed at all, they’d prefer that it appear only in the annual reports that audit firms submit to the PCAOB. The annual reports are available to the public but are viewed infrequently relative to public company SEC filings.

Some investors believe that knowing the lead audit partner’s name is useful. From a corporate governance perspective, shareholders may well want to know the people responsible for auditing a company, not just the name of the firm, when they ratify a company’s selection of its auditor during the annual shareholder meeting.

Many investors say publicizing the name will raise accountability among auditors, make them more careful in their work, and provide an incentive to resist a client’s pressure to bend accounting standards.

Opponents of the proposed rule say there’s no proof of its benefits. Audit firms say they’re accountable to multiple parties, and the disclosure will only raise liability risks under securities laws and slow down their work while they get permission from the individuals whose names have to be disclosed in the audit report.

The PCAOB is likely to ask for comments about disclosing the name in a new form the board will create to disclose the name to deal with liability and consent issues.

The audit regulatory board is also considering issuing a revised proposal to make the auditor’s report more useful for investors.

In August 2013, the PCAOB issued a proposal in Release No. 2013-005, Proposed Auditing Standards on the Auditor’s Report and The Auditor’s Responsibilities Regarding Other Information and Related Amendments. The rule calls upon auditors to disclose critical audit matters (CAMs), or issues that they found the most difficult and complex during an audit.

The requirement represents a significant change from the pass-fail model that’s been in place for decades, and the PCAOB has been deliberately taking its time to garner sufficient support for the final rule.

The board also said it will issue a revised version of the 2010 proposal in Release No. 2010-003, Confirmation. The release proposes retaining the requirement from AU-C Section 505, “External Confirmations” formerly AU Section 330, related to the confirmation procedures for receivables. It also calls for expanding the requirement to get confirmations for receivables from more types of transactions, including loans that have been originated or sold. Auditors use the confirmation procedure to gather evidence that can uncover financial fraud.

The agenda also said the board will issue a proposal on supervision of other auditors and audit engagements that involve several locations.

The PCAOB said that in response to comments by the Standing Advisory Group, its staff has been working on proposed amendments to AU-C Section 505, “Subsequent Events and Subsequently Discovered Facts,” AU Section 560, which deals with information a company learns between the end of a fiscal year or quarterly reporting period and the submission of its regulatory filing to the SEC.

The board’s staff is also preparing to issue consultation papers on the use of specialists, going concern evaluations, and quality controls.

The board said because of the increasing number of accounting estimates, specialists are becoming more important, particularly in riskier areas of financial reporting. In August, the staff issued Staff Consultation Paper: Auditing Accounting Estimates and Fair Value Measurements on potential revisions to PCAOB standards on auditing accounting estimates and fair values.

The revised agenda said the paper on specialists will have some overlap with the paper about fair value and estimates but emphasize other issues, such as an auditor’s responsibility for the specialists’ work.

For going concern assessments, the PCAOB staff is studying possible revisions to the current standard and expects to issue a consultation paper by the end of 2014.

In September, the PCAOB issued Staff Audit Practice Alert (APA) No. 13, Matters Related to the Auditor’s Consideration of a Company’s Ability to Continue as a Going Concern, in response to the FASB’s recent adoption of an accounting standard for going concern disclosures by a company in Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.

The board also wants to issue a consultation paper in the first half of 2015 dealing with audit firms’ supervision and employee management policies to help address some of the recurring problems PCAOB inspectors find in audit firms’ work.

The board is also planning to finalize a reorganization of its standards to make them more readable and easier to understand. In March 2013, it issued Release No. 2013-002, Proposed Framework for Reorganization of PCAOB Auditing Standards. The revised format is expected to replace the sequentially numbered standards with a topical structure using a four-digit numbering system.