Wednesday, June 24, 2015

PCAOB Chairman Doty Emphasizes International Cooperation, Expects Proposal Soon on Engagement Partner Disclosure

By Lene Powell, J.D.

At a conference of the Federation of European Accountants (FEE) in Belgium, PCAOB Chairman James Doty stressed the importance of international cooperation in joint inspections and policy work. The PCAOB is “closely following” implementation of a 2014 EU law expanding audit reports and a new IAASB standard requiring disclosure of key audit matters. In addition, the PCAOB is seeking to align with international standards on disclosure of the audit engagement partner, and Doty expects to seek comment at the end of June on a proposed form that would provide such disclosure.

Engagement partner disclosure. In many jurisdictions including Europe, it is the custom for engagement partners to sign audit reports in their own name in addition to the name of their firms, Doty explained. Recent studies indicate that such disclosure makes a difference to the investing public and the markets. In 2009, the PCAOB issued a concept release exploring this possibility in the U.S., and in 2011 and 2013 developed a proposal on mere disclosure, rather than signature, in response to concerns about litigation risk.

Doty believes there is a “middle ground” that will disclose the information in a way that reduces auditors’ perception of risk. The PCAOB has developed a form that auditors could file with the PCAOB, and Doty expects to seek comment on it at the end of June.

Auditor’s reporting model. The PCAOB continues to explore possibilities to enhance the form and content of the audit report, and has issued a concept release and held two hearings on this subject, Doty said.

According to the chairman, the UK Financial Reporting Council has required expanded audit reports for financial statements for periods that began on or after October 1, 2012, and about 900 UK-reporting companies are subject to the requirement. In its March 2015 report, the FRC said auditors have not only met but in many cases exceeded requirements, providing detailed audit findings relating to identified risks, informative explanatory diagrams and graphs, and well-organized presentations with the opinion located at the beginning of the report instead of the end.

Doty said he is eager to see how implementation of the EU’s April 2014 law expanding auditor reporting will play out, as well as the IAASB’s new reporting standard to disclose key audit matters, effective for audits of financial statements for periods ending on or after December 15, 2016. The Netherlands has early adopted this standard, and soon more than 100 markets across the globe will have expanded audit reports.

Regulatory cooperation on inspections. In the past, national regulators merely hoped to be able to call on other national regulators in a breach, said Doty. Because global audit firms don’t stop at the border, however, audit regulators can’t either. The PCAOB has bilateral cooperation agreements with 19 foreign audit regulators, of whom 11 are in Europe. Doty looks forward to working with EU Commissioner Lord Jonathan Hill, Director Ugo Bassi, and the Head of Unit for Audit and Credit Rating Agencies, Alain Deckers, to continue and deepen cooperative inspection and other oversight arrangements. He noted that to continue the PCAOB’s inspection work in and with European Union member states, another renewal will be needed in 2016 of the European Commission’s Adequacy Decision.

Audit Committee Dialogue. Doty highlighted a new communication series the PCAOB launched in May, the Audit Committee Dialogue, available on the PCAOB website. Based on feedback from audit committee members, the Dialogue is an interactive, digital publication with charts, data and tips for audit committees based on insights the PCAOB has gleaned from its inspections, including key recurring areas of concerns and new risks the PCAOB is monitoring. The PCAOB plans to issue additional Dialogues at least twice a year, said Doty.