Global audit firms believe that requiring an engagement partner to sign the audit report would not enhance either transparency or accountability; and may even damage the carefully constructed corporate governance structure that gives a key role to audit committees. In comments on the PCAOB’s concept release on engagement partners signing the public company audit report, the audit networks were not impressed by an EU requirement for engagement partner sign off, citing vast differences in the EU-US litigation environment. The comment period closed on September 11, 2009. The Board’s current standard requires the firm itself to be the signatory on the audit report.
In 2006, the European Union's Audit Directive required the signature of a natural person on company audit reports, compelling a public discussion in the US on partner sign-off. This issue has been discussed by the Board’s own Standing Advisory Group; and the Treasury’s Advisory Committee on the Auditing Profession has recommended that the PCAOB undertake a standard setting initiative mandating that the engagement partner sign the audit report.
While acknowledging that the EU Directive does require the engagement partner to sign the audit report, PricewaterhouseCoopers noted that the EU does not have the uniquely US litigation environment that allows shareholder class actions to be brought against auditors based on a drop in share price. Deloitte & Touche pointed out that liability reform is proceeding in Europe in respects not present in the United States. For example, last year the European Commission called for adoption of one of three approaches to limit the liability risks for auditors: by contract with the client, liability caps, or adoption of proportionate liability. Noting that the engagement partner signature initiative is still in the embryonic stage in the EU, Deloitte asked the PCAOB to wait until it can more thoroughly assess the impact on audit quality, if any, of the signature requirement in the EU.
In its comments, Grant Thornton said that requiring engagement partner sign off could disrupt the intricate corporate governance structure set up by Sarbanes-Oxley, with the audit committee in a key role. In the wake of a signature requirement, posited GT, shareholders may believe it is appropriate to contact the engagement partner directly to ask questions about the audit or the company’s financial statements. This would put both auditors and shareholders in a frustrating position, said GT, because the auditor cannot answer such questions due to confidentiality and other legal requirements.
Auditors are accountable to the shareholders through the audit committee and the board of directors. This governance structure allows decisions to be made by people with an appropriate level of understanding of the company. GT believes that shareholders, operating outside this governance structure, could add confusion, cost, and frustration
to a process that already contains mechanisms in place to hold auditors appropriately accountable.
Similarly on this theme, McGladrey & Pullen noted that the audit committee is responsible for engaging the audit firm. If the audit committee has concerns about the independence or competency of the engagement partner, they would address those concerns with the firm. If the committee was not satisfied with the firm’s response, they would likely consider engaging another audit firm. McGladrey emphasized that these types of decisions are appropriately left with the audit committee and not with the individual shareholders.
In its comment letter, Ernst & Young said that requiring the engagement partner to sign the audit report would not provide appreciable benefit in audit quality. On the issue of accountability, E&Y noted that sufficient mechanisms are already in place to heighten the engagement partner's sense of personal accountability to financial statement users. Indeed, E&Y believes that the engagement partner's signature would dilute if not
put at risk the benefits gained from the collective, firm signature. E&Y feels that the engagement partner's strong sense of personal accountability is already well in place and supported by a firm's system of quality control and PCAOB oversight.
Similarly, PwC said that the signature requirement is premised on the unsupported assumption that engagement partners, as a class, need to have an increased sense of accountability in order to achieve improved audit quality. An audit opinion reflects the cumulative effort of myriad individuals rather than the competence of the engagement partner alone. The current practice of signing the audit report in the firm’s name reflects the reality that the quality of an audit depends on the competence of many people at the firm, as well as the firm’s quality controls. In addition to the auditor’s sense of personal accountability, the SEC can enforce the securities laws against auditors, thus reinforcing that accountability.
The concept release indicates that the signature requirement would increase transparency about who is responsible for performing the audit, which could provide useful information to investors. E&Y is of the view that the benefits of transparency that might be afforded by requiring the engagement partner to sign the audit report are significantly overstated. The identity of the engagement partner is readily known to members of the board of directors and in particular to the audit committee that, on behalf of the shareholders, is vested with the responsibility of evaluating the audit firm, including the engagement partner, and proposing the firm for ratification by the shareholders. Given the limited nature of information that would be afforded by a signature requirement, E&Y believes that the public would be at risk of reaching unjust and inappropriate conclusions regarding the quality of work of an individual engagement partner.
Similarly, KPMG said that the identity of the engagement partner is fully transparent to company management and audit committee members, by way of the direct and frequent interactions that occur with both groups throughout the audit process. In addition, although there is no requirement to do so, the engagement partner usually attends the annual shareholders’ meeting, and typically is available to respond to appropriate questions. Therefore, shareholders attending the annual meeting have a chance to pose questions directly to the engagement partner.
Grant Thornton opined that the engagement partner signature requirement would actually reduce transparency in that it obfuscates how an audit is performed. To imply that an individual is solely responsible for performing the audit is misleading. Furthermore, this requirement may signal to the markets that there has been a fundamental shift in the responsibilities of the audit firm and the engagement partner, which is not the case
The engagement partner is responsible for oversight of the audit, noted GT, but often specialists and national office partners assume significant responsibilities related to some technical matters or complex areas. The confidence in the audit opinion is based on the quality of the firm’s policies and procedures, not just the abilities of the individual partner.
Deloitte wrote that the suggested beneficial effects on accountability and transparency are speculative. The notion that signing the audit report will increase partner accountability does not recognize that audit partners are already held fully accountable through a variety of mechanisms. Audit partners are subject to multiple layers of internal quality control mechanisms and multiple sources of external oversight, such as audit committees, federal and state regulators, and the threat of civil liability.
Moreover, under current PCAOB standards, registered firms are required to establish a system of quality control that provides the firm with reasonable assurance that the engagement partners have a professional responsibility to adhere to PCAOB professional standards. Their work is subject to review by the PCAOB through regular inspections and through PCAOB investigations and enforcement proceedings.
Importantly, the Sarbanes-Oxley Act requires audit committees to be directly responsible for the appointment, compensation, and oversight of the work of the independent auditor. As a result, the engagement partner is accountable to and reports to the audit committee. Further, on a regular basis the engagement partner meets with the audit committee and is required to provide certain communications at the completion of the audit. Throughout the audit process the engagement partner is evaluated by the audit committee.
Auditors, including engagement partners, are also subject to SEC oversight and enforcement. Determinations of improper professional conduct can lead to the suspension or bar of an engagement partner’s ability to practice before the Commission.
The PCAOB indicated that it does not intend for the signature requirement to increase the liability of engagement partners. But, according to Deloitte, the possibility of this increased exposure is real. The Second Circuit, where a large number of securities lawsuits are litigated, holds that a misstatement is actionable under Exchange Act antifraud provisions only if it is attributed to the specific actor alleged to have made it, which in the audit context would typically include the firm.
Thus, in some jurisdictions, depending on the circumstances of the case, engagement partners who do not sign audit reports, as opposed to the firms that sign the audit reports, may be able to argue that they are not subject to fraud claims because they are not the “specific actor” to which a disputed audit report was attributed. The signature requirement could make it more challenging to assert that argument successfully.
The possibility of requiring the disclosure of engagement partners’ names as an alternative to requiring their signatures, as suggested by the Board, would not cure the problem. According to Deloitte, there is no basis to conclude that this alternative would generate less risk of liability or less litigation. For example, the jurisdictions that hold that misstatements are actionable only if attributed to a specific actor do not address a distinction between attribution by signature or by other means. In any event, a disclosure rule would have all the same undesired consequences of making individual audit partners more visible targets in litigation.
BDO Seidman noted that the analogy to the certification of corporate financial statements by the CEO and CFO required by Sec. 302 of Sarbanes-Oxley is not a valid analogy to requiring engagement partner sign off. The purpose of the senior officer’s signature in a filing is to clarify management’s long-standing responsibility for the information included therein. In that regard, Sec. 302 was adopted because some management was attempting to disavow responsibility for the financial statements.
In contrast, reasoned BDO, the engagement partner’s responsibilities for the performance of the audit are set out extensively in professional standards. The effectiveness with which these professional standards have been implemented is routinely monitored as part of a firm’s system of quality control, in addition to periodic inspections by professional and regulatory bodies. There is no similar monitoring by regulators of management’s exercise of its duties.