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Lead Partner Identification Rule Close to Finish Line

The PCAOB has worked on a long-running project to identify the lead partner in an audit, a rule investors say will make auditors more accountable but a proposal that is resisted by the accounting profession.After addressing concerns raised by auditors, the board is expected to wrap up the project by the end of 2015.

PCAOB Chairman James Doty said that the board is “on track” to finally complete its long-running project to identify lead partners in an audit by the end of the year.

His remarks came during a meeting of the board’s Investor Advisory Group (IAG) in Washington on September 9, 2015.

The PCAOB also has the backing of the SEC’s chief accountant James Schnurr who toldAccounting & Compliance Alert, “I would hope that they would.”

The SEC has to sign off all major decisions that the PCAOB makes.

Getting close to the finish line has not been easy, however.

The audit regulator issued four rulemaking releases over a period of six years because of auditors’ stiff resistance to the proposal to identify engagement partners in the auditor’s report.

The latest, PCAOB Release No. 2015-004 ,Supplemental Request for Comment: Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form, was issued on June 30 and had a comment deadline of August 31.It would require audit firms to disclose the name of the engagement partner and the other participating firms in a new Form AP.

The release is the board’s latest attempt to balance different points of view between investors, who want engagement partners to disclose their name on the auditor’s report, and audit firms who only see the disclosure as a source of extra legal liability and costs.

Investors were lukewarm to the latest plan but still said they would support the board’s effort.

“The most important thing is to just get that information made public,” Brandon Rees, deputy director of the AFL-CIO’s Office of Investment, previously said about the project.

Still, many investor advocates, including Rees, were quick to point out that they prefer earlier versions of the proposal.

The auditor’s report is the primary document an auditor uses to communicate with investors, and the information would be available immediately upon filing with the SEC of a registration statement for a stock or bond offering or a quarterly or annual report.Disclosing the identity in a separate form may decrease the chance that investors will see the information.

Many investors say publicizing the name will make lead auditors 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 and detect partners who may have a track record with clients who have to restate earnings or are investigated by the SEC for accounting problems.

At each turn, however, the board’s planned rule has been watered-down because of strong resistance from audit firms who see a problem with shifting responsibility for the audit to the engagement partner and away from the firm.Audit firms say they are already accountable to multiple parties and fear an increase in the legal liability for lead partners.

Starting in July 2009, the board first floated the idea of requiring engagement partners to sign the auditor’s report.Then it proposed a disclosure of the name of the partner in 2011.Two years later, the PCAOB asked for comments on liability issues the accounting firms raised.Audit firms have referred to Section 11(a) of the Securities Act of 1933 that concerns the liability for investment fraud.In the view of the firms, the requirement that an auditor or participating firm would also have to consent to being named in an audit report could delay submission of some regulatory filings.

With Release No. 2015-004 , the board says disclosure via a new form would address the audit firms’ concerns about liability and the delay.

In response to the latest release, Big Four firms said they support form filings.

“We believe the alternative presented results in achieving the overall objective of providing transparency regarding participants in the audit, while at the same time providing easy access to such information and alleviating many of the practical issues, including those related to the need to obtain consents, previously highlighted by us and others in prior comment letters submitted to the PCAOB,” Deloitte & Touche LLP wrote on August 28.

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