As expected, the SEC last week approved rules proposed by the PCAOB last December that further the PCAOB’s ongoing efforts to enhance audit disclosure practices. (See this Doug’s Note.) The rules require auditors to file with the PCAOB a new Form AP, Auditor Reporting of Certain Participants, for each issuer audit. Form AP discloses:

• The audit engagement partner’s name and partner ID, and
• Certain information regarding other accounting firms participating in an audit, with the scope of required information dependent on (a) whether the percentage of total audit hours of such other firms is greater than or less than 5% of the total audit hours and (b) whether responsibility for the audit is split among firms.

Form AP must 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 the auditor’s report is first included in a Securities Act registration statement. Form AP is filed in a searchable PCAOB database available to the public.

The new disclosure requirement for engagement partners is effective for auditors’ reports issued on or after January 31, 2017. The new disclosure regarding other audit firms is effective for reports issued on or after June 30, 2017.

Auditor consent and liability issues.

The SEC’s adopting release states that the benefits of the new rule include “increased transparency and accountability for key participants in the audit.” The release notes that concerns were raised during the comment period that publicly identifying the engagement partner and other participants could:

• increase potential liability under either Section 11 of the Securities Act (related to statements made in a registration statement) or Rule 10b-5 of the Exchange Act (related to statements made in connection with the purchase or sale of a security), and
• require that the audited company obtain engagement partner or audit participant consents (required of accountants or other persons named as having prepared or certified a report used in connection with a registrations statement).

The rules as originally proposed were subsequently re-proposed to provide that this information be included on a newly created Form AP, which is not filed with the SEC, rather than in the auditor’s report, which is included in, or incorporated by reference in, SEC filing. The PCAOB and the SEC believe, therefore, that compliance with the final rules should not raise Section 11 liability concerns or trigger a consent requirement. Whether such disclosures give rise to Rule 10b-5 liability remains an open issue.

Impact on legal departments.

Although this is an audit firm reporting obligation, company legal departments should consider the following:

• Information contained in Form AP may trigger questions from investors interested in exploring the substance and scope of an audit in which more than one auditor is involved.
• Be sure that the company’s Disclosure Committee, Investor Relations Department and other interested personnel are aware that this new information will soon be available to the public. (No doubt the accounting firms will notify Audit Committees and finance departments.)
• Determine how the new rules may impact auditor behavior. For example, consider the implications of publicly disclosing a change in engagement partner, particularly if the change is requested by the company due to relationship or performance issues, which could draw the attention of a variety of interested persons, including institutional investors. The new rules could also impact the interaction of the various firms involved in multi-participant audits.
• Consider whether changes should be made to the company’s disclosure controls and procedures to reflect the new rules.