Earlier this month the PCAOB adopted rules requiring audit firms to disclose the names of each audit partner and certain information regarding other audit firms participating in each audit. The new rules are subject to SEC approval, which is expected, and are a result of the PCAOB’s ongoing efforts to enhance audit disclosure practices. (See this Doug’s Note.)
New disclosure and filing requirements.
Upon effectiveness, the new rules will require the auditors to file with the PCAOB a new Form AP, Auditor Reporting of Certain Participants, for each issuer audit. Form AP would disclose:
- The engagement partner’s name,
- The names, locations and extent of participation of other accounting firms in the audit if their work constituted 5% or more of the total audit hours, and
- The number and aggregate extent of participation of other accounting firms that took part in the audit whose individual participation was less than 5% of the total audit hours.
Form AP would be required to be filed no later than 35 days after the auditor’s report is first included in a document filed with the SEC (or 10 days after for IPOs). Form AP would be filed in a searchable PCAOB database available to the public.
According to James R. Doty, PCAOB Chairman,
“[t]ransparency about the partner and firms involved should further incentivize auditors to organize audit teams conscientiously…” and “…provide investors…with the information they have continued to request…giving the market valuable information….”
While this might be a bit overstated, it reflects a long-sought compromise between the PCAOB and the accounting profession regarding audit accountability and disclosure, which makes Chairman Doty’s enthusiasm understandable.
The new disclosure requirement for engagement partners would become effective for auditors’ reports issued on or after the later to occur of January 31, 2017 or three months after SEC approval.
The new disclosure regarding other audit firms would become effective for reports issued on or after June 30, 2017.
Impact on legal departments.
Although this is an audit firm reporting obligation, it is conceivable that information contained Form AP will trigger questions among investors interested in exploring the substance and scope of the company’s audit. Therefore, be sure that the company’s Disclosure Committee, Investor Relations Department and other interested personnel are fully informed. (No doubt the accounting firms will take the lead in being sure Audit Committee and finance departments are up to speed.) Consider also whether changes should be made to the company’s disclosure controls and procedures to reflect the new rules.