The PCAOB has adopted new rules and accompanying amendments to auditing standards, which require audit firms to disclose the names of each audit engagement partner, as well as information regarding other audit firms that participated in any audit of a public company. The new rules are intended to provide investors with more information about the partner and firms involved in the audit in order to facilitate evaluating audit quality, and to incentivize auditors to organize audit teams carefully.
The new rules will require auditors to file with the PCAOB a new Form AP, Auditor Reporting of Certain Audit Participants, for each issuer audit, disclosing:
- The name of the engagement partner;
- The names, locations, and extent of participation of other accounting firms that took part in the audit, if their work constituted 5% or more of the total audit hours; and
- The number and aggregate extent of participation of all other accounting firms that took part in the audit whose individual participation was less than 5 percent of the total audit hours.
The new rules are subject to SEC approval. If so approved, the disclosure requirement regarding the engagement partner will apply to auditor’s reports issued on or after the later of January 31, 2017, or three months after SEC approval of the final rules. The disclosure requirements regarding the participation of other accounting firms will be effective for reports issued on or after June 30, 2017. The PCAOB has also recommended that the SEC determine that the new rule apply to audits of emerging growth companies (which the JOBS Act requires if a new PCAOB rules are to apply to EGCs).
Form AP will be due 35 days after the date the auditor’s report is first included in a document filed with the SEC. In the case of an IPO, the Form AP will be due 10 days after the auditor’s report is first included in a document filed with the SEC. So, typically a Form AP will be due 35 days after filing of the issuer’s Form 10-K, but it could also apply to other filings, such Forms 8-K filed to recast previously filed financial statements or certain registration statements for follow-on or secondary offerings. In a confidentially submitted Form S-1 for an IPO, no Form AP will be required until 10 days after the first public filing of the Form S-1.
The PCAOB has been considering enhanced disclosure regarding audit partners for several years, including an unpopular 2009 concept release proposing to have engagement partners sign audit reports, followed by a somewhat less aggressive but still unpopular 2011 proposed rule that the engagement partner be named in (but not sign) the audit report, which was re-proposed in 2013. Identifying the engagement partner in a public company’s filings – whether merely named or also signing the report – raised industry concerns that the partner would face increased liability exposure and potentially become an “expert” under SEC rules. The new rules are something of a compromise position. They would not require naming the engagement partner in the public company’s SEC filings, instead requiring this information in the new Form AP filed by the audit firm with the PCAOB.