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Extra Comments to Be Sought for Planned Partner Identification Rule

The PCAOB plans to soon issue a request for additional comments about its rule proposal to identify the lead partners on client engagements. The upcoming document will be the fourth installment on a project that has met with fierce resistance from auditors who are worried about their liability with the public disclosure of their names. Investors support the disclosure requirement because they believe it will increase auditors’ accountability and offset some of the pressure from management.

The PCAOB is close to publishing a document requesting more comments about its contentious project to require disclosure of the name of the lead partner and other participating firms in an audit, Chairman James Doty said on June 18, 2015.

The request is a nod to the harsh criticism audit firms and others gave 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 .

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 prefer that it appear in the annual forms they submit to the PCAOB. The annual forms are available to the public but are viewed infrequently relative to public company SEC filings.

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. They also say they will be able to track individual partners’ work over time.

Opponents of the proposed rule say there is no proof of its benefits. Audit firms say they are 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.

In response, the PCAOB said it will ask for comments about disclosing the name in a new Form 5 the board will create to disclose the name as a way to limit the audit firms’ concerns about liability and delays. If the lead partner has to consent to her or his name appearing in an audit report, that could delay submission of some regulatory filings while the company obtains the consent.

“We’ve been considering using a PCAOB form as an alternative,” Doty said during a meeting of the PCAOB’s Standing Advisory Group (SAG). “I hope this allays auditors’ concerns on liability issues.”

However, several SAG members, including the CFO of Yahoo Inc., said they did not understand why auditors do not just sign the auditor’s report.

“This is going to be contentious, but I will say it anyway,” said Yahoo’s Kenneth Goldman, who was a member of the Treasury Department’s Advisory Committee on the Auditing Profession (ACAP). “When we looked at a number of factors back in [2007, 2008], one of the things we did talk about was the partner … signing the opinion — we are still talking about it.” Goldman was CFO for Fortinet Inc., a network firewall supplier while he was on the ACAP.

“I am proud to sign on behalf of my company,” he said. “I think it should be the same in terms of the auditing profession, they should be proud, too. And try to put it on some other piece of paper, which is hard to find, it will be found anyway. I don’t quite see the benefit of doing that versus signing somewhere very visible.”

The “signature makes a lot of sense,” said Joan Amble, a consultant who was previously an executive vice president and the principal accounting officer for American Express Co.

Investor advocates on the advisory panel urged the board to move without delay.

The project is fast approaching a six-year mark since the PCAOB in July 2009 issued Concept Release No. 2009-005 , Requiring the Engagement Partner to Sign the Audit Report . Audit firms criticized the document, and the board proposed disclosure of the partner’s name without a signature as a compromise in 2011 in Release No. 2011-007 , Improving the Transparency of Audits: Proposed Amendments to PCAOB Auditing Standards and Form 2 . Other participants in the audit would also be disclosed with the partner’s name in the audit report. Release No. 2013-009 asked about liability concerns.

Elizabeth Mooney, vice president of Capital Group Cos., said financial regulators in other major countries require disclosure of audit partners’ names in auditor reports without trouble.

“It doesn’t look so great on the profession to continue to try to hide this information here,” she said.

Former IASB Chairman Sir David Tweedie said that while he does not know the facts about the liability issue because he is not a lawyer, he still supports disclosure.

“I just don’t understand the difference between putting an auditor’s name on a different piece of paper,” Sir David said. “I really think it’s a shame that the U.S. isn’t showing the same sort of leadership shown in other areas. I really would like you to think again, do it properly.”

Doty, a former general counsel of the SEC, said in case law an engagement partner signing on behalf of the firm is not exposed to liability under the fraud restrictions in Rule 10b-5 of the Securities Exchange Act of 1934.

“But what I think as a lawyer is not important,” Doty said. “What we are trying to do at the PCAOB is to move the actual form requirement in a manner that will alleviate, address, and lay to rest the concerns that the partner making the statement subjects the partner to personal liability, although suits against individual engagement partners have not been common.”

On a separate matter, Doty said the PCAOB by the end of June also plans to issue a concept release on a set of measurements to assess the quality of an auditor’s work. (See Concept Release on Audit Quality Indicators Nears Publication in the June 11, 2015, edition of Accounting & Compliance Alert .)

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