Securities Regulation Daily SEC approves PCAOB’s requirement to name audit participants
Tuesday, May 10, 2016

SEC approves PCAOB’s requirement to name audit participants

By Jacquelyn Lumb

The SEC has approved the PCAOB’s new rules, form, and amendments that will bring more transparency about the participants in an audit. Under the rules, accounting firms must file with the board on Form AP the name of the engagement partner and other firms that participated in the audit. Audit firms also may voluntarily disclose the information about the engagement partner and the participating firms in the auditor’s report. In approving the PCAOB’s proposal, the SEC also found that applying the rules to the audits of emerging growth companies (EGCs) is necessary or appropriate in the public interest (Release No. 34-77787, May 9, 2016).

The proposal began with a concept release in 2009 seeking views on whether the board should require the engagement partner to sign the audit report, followed by a rule proposal in 2011, a reproposal in 2013, and a supplemental request for comments in 2015, which included the idea of a new form for reporting the name of the engagement partner rather than reporting on current Form 2. The board adopted the new rules and Form AP on December 15, 2015.

Chamber of Commerce concerns. The SEC received four comment letters in response to its notice of the board’s proposal, including one from the Chamber of Commerce, which argued that the rules were not liability neutral and that the board’s economic analysis was not sufficient to justify applying them to EGCs. The chamber also took issue with the proposed 10-digit partner identification number because it had not been subject to a notice and comment period and suggested that the rules sunset after five years unless a post-implementation review confirmed that they promoted investor protection, capital formation, and competition. The chamber wrote that it had expressed these concerns to the PCAOB, but they were not resolved.

Liability. The SEC cited the board’s belief that it had appropriately addressed commenters’ concerns about liability, taking into account the rules’ objectives and their anticipated benefits. In its reproposal, the SEC noted that the board included a detailed discussion about potential liability considerations and had engaged in its own review of the statutory provisions and case law. In response to commenters’ concerns, the board adopted Form AP to allow the reporting of the information outside of the auditor’s report. By reporting on Form AP, the engagement partner and other accounting firms will not be named in a registration statement or in any document incorporated into one by reference.

Economic analysis. The chamber did not indicate why it found the board’s economic analysis insufficient, according to the SEC. The board’s economic analysis described the need for the standard-setting, the baseline for considering the impact of the rules, the impact on different categories of audit firms and smaller companies, and the economic considerations pertaining to audits of EGCs. The final rules also included an economic analysis of the potential liability consequences. In the SEC’s view, the board’s economic analysis reasonably addressed the comments and made a sufficient determination to apply the rules to the audits of EGCs.

The SEC also noted that no other commenters raised concerns about the partner identification number. As for the proposed sunset provision, the board plans to monitor the rules to determine whether any revisions are needed in the future, so the SEC saw no need to include a specific sunset provision.

Effective dates. The requirement to disclose the name of the engagement partner takes effect for auditors’ reports issued on or after January 31, 2017. The disclosure of the other accounting firms takes effect for reports issued on or after June 30, 2017.

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