U.S. Audit Regulator Proposes Naming All Partners on Reports

Accounting firms would have to disclose the name of the partner in charge of a public-company audit as well as all outside firms that worked on the report under a proposal approved today by the industry’s regulator.

The Public Company Accounting Oversight Board’s proposal should encourage better audits after regulators have observed “significant deficiencies in skepticism and objectivity,” Chairman James Doty said in a statement. The disclosure also would tell investors for the first time how many other firms and contractors beyond the primary auditor worked on a report.

Supporters of the change say it will help investors examine the track record of auditors and know if parts of an audit were performed by overseas firms that aren’t inspected by the PCAOB. The European Union and Australia already require disclosure of an audit’s lead partner, PCAOB officials said.

“Increasingly, information is available about other professions -- doctors and lawyers -- and consumers widely use the ratings services and information services about other professions,” PCAOB member Lewis H. Ferguson said today. “I don’t know why it would be any different about auditors.”

The Center for Audit Quality, whose members include the Big Four accounting firms, said disclosure will not improve audit quality.

“We do not believe the auditor’s report is the appropriate place to identify the engagement partner,” CAQ Executive Director Cindy Fornelli said in a statement.

Litigation Concern

The PCAOB first’s effort to force naming of an audit report’s so-called engagement partner was opposed by big accounting firms including PricewaterhouseCoopers LLP and Deloitte LLP when it was proposed in October 2011. The firms said the change could subject auditors to more private litigation when companies restate financial results due to accounting errors that weren’t detected by previous audits.

“Requiring a signature could increase the engagement partner’s liability exposure,” Doty said. “A perceived risk of liability is not necessarily bad, and indeed may contribute to a sense of responsibility.”

The arrest of a former KPMG LLP senior auditor for insider trading in April “rekindled active interest” in the disclosure push, Doty told reporters after today’s meeting. Scott London pleaded guilty in July to leaking confidential information about KPMG’s clients to a friend who made more than $1 million trading on the inside information.

‘Weak’ Evidence

While the proposal passed on a 5-0 vote, PCAOB member Jay D. Hanson said today the plan’s gives “weak” evidence of the benefits of providing the audit partner’s name. The PCAOB has been under pressure to show the benefits of new audit standards outweigh the costs.

Martin F. Baumann, the PCAOB’s chief auditor, said the proposal would give investors insight into the quality of auditors who work on a report.

“We have seen cases where an audit report was signed by a U.S. firm, but the vast majority of the work -- up to 90 percent -- was done by a firm in a country where we could not inspect,” Baumann said. “That was not transparent whatsoever to investors.”

Today’s vote opens the proposal for public comment for 60 days. The board hopes to vote to adopt the new standard in the first half of 2014, Doty said.

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