Views on improving the integrity of global capital markets
14 January 2014

Audit Transparency and Accountability: The Engagement Partner Should be Disclosed

In December the Public Company Accounting Oversight Board (PCAOB) proposed a standard that would require disclosure of the name of the engagement partner in the auditor’s report. Currently in the U.S., only the audit firm name appears on the audit opinion. The proposal is intended to enhance transparency and thus improve audit quality through the engagement partner’s increased sense of accountability — a move that has strong investor support.

The following statement from PCAOB Chairman James R. Doty captures the sentiment felt by many investors:

“The disclosure would require no new work by the auditor. Yet as with previous accountability reforms like it — such as Sarbanes–Oxley’s requirement that CEOs and CFOs personally certify their company’s financial statements and internal controls — it holds the promise of improving audit quality by sharpening the mind and reminding auditors of their responsibility to the public.”

Many audit firms oppose the idea for a variety of reasons, including investor confusion about who is ultimately responsible (i.e., the partner or the firm), increased cost to disclose, etc. These objections have the effect of clouding the issue. The benefits to investors are obvious. By knowing who the engagement partner is, investors would be able to track certain aspects of the individual engagement partner’s history, including his or her industry expertise, restatement history, and involvement in disciplinary proceedings or other litigation. All of these factors provide valuable information for an investor to fully understand the riskiness of an audit. And as Mr. Doty mentions, it sharpens the mind.

The Voice of Experience and Reason

At the 4 December open meeting, Mr. Doty asked for PCAOB Chief Auditor and Director of Professional Standards Martin Baumann’s opinion on the issue. Mr. Baumann, the individual responsible for leading the effort, answered as follows:

“As an engagement partner I’ll share the fact that if I had to have my name identified or sign the audit report, I don’t think that would have troubled me at all in the context of I felt I was doing the work in accordance with professional standards and I knew what the liability was. I’m just saying that part of this document includes the fact that I have experience in this regard and that I believe that such disclosures are appropriate.”

Mr. Baumann has an extensive and impressive career. In addition to his senior position at the PCAOB, Mr. Baumann was CFO of Freddie Mac, and for 33 years he held many positions at PricewaterhouseCoopers, including partner, deputy chairman of the world financial services practice, and global banking leader. He knows auditing, and as a former partner, the risks involved. The audit firms should listen to one of their own and stand behind the proposal. This requirement would send a signal to investors and others that they personally stand behind their work and are willing to take on the necessary cultural shift to increase transparency for the benefit of audit quality.

The audit profession largely opposes the proposal, but the voices of reason in the form of Mr. Baumann and Mr. Doty, both deeply experienced professionals, support it as the right thing to do. From our perspective, investors and other reasoned parties agree.

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About the Author(s)
Matt Waldron

Matt Waldron was a director of financial reporting policy at CFA Institute. He drafted position papers and comment letters, representing membership interests regarding financial reporting and disclosure proposals issued by the FASB, the IASB, and others.

2 thoughts on “Audit Transparency and Accountability: The Engagement Partner Should be Disclosed”

  1. Sarah Wilson says:

    Perhaps it is worth making an important distinction here: the US audit profession is opposed, the European arm is however, already disclosing this information. But then again, in Europe, auditors are appointed by shareholders and shareholders approve their remuneration. In the US the audit and accounting standards are not seen as a shareholder accountability mechanism but a market accountability mechanism. Major difference.

  2. Matt Waldron, CPA says:

    Thank you for pointing out this distinction. The International Auditing and Assurance Standards Board (IAASB) is including disclosure of the engagement partner in its proposal to enhance the auditor’s reporting model in order to achieve consistency in all jurisdictions. Hopefully the IAASB and PCAOB will see that disclosure of engagement partner is in the best interest of investors and the capital markets.

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