By Jacquelyn Lumb
The Chamber of Commerce’s Center for Capital Market Competitiveness has written to the SEC in opposition to the PCAOB’s rules to require the disclosure of the engagement partner and other participants in an audit. The center said the rules should not be adopted in their current form because they are not liability neutral. In addition, the center said the board’s economic analysis is not sufficient to subject emerging growth companies to the rules. The center also challenged the 10-digit partner identification number in the rules because this issue was never subject to the notice and comment period and recommended that the rules, if adopted, expire in five years unless a post-implementation review finds that they promote investor protection, capital formation, and competition. The comment period on the rules closed March 8, 2016.
Liability concerns. The center noted that it has raised concerns in three separate comment letters during the time that the transparency project has been underway. The PCAOB’s initiative was prompted by a recommendation from the Treasury Department’s Advisory Committee on the Auditing Profession. The center acknowledged that the proposal has evolved over time, but said it does not resolve the liability concerns. In the center’s view, the information that would be required by the rules should be disclosed voluntarily by audit committees. If the information is required, the center said it should be disclosed in issuers’ proxy statements.
Emerging growth companies. If the SEC chooses to approve the rules, the center said they should not apply to emerging growth companies. The board’s analysis and the application of the rules to emerging growth companies is contrary to the intent of Congress in the passage of the JOBS Act, according to the center.
Identification number. With respect to the 10-digit partner identification number, the center said it is unclear why the requirement was added or at whose request. The center pointed out that the rules were finalized after six years and three comment periods, yet the identification number was not included and published for comment. If the rationale is to avoid confusion, the center noted that the board has found only three instances of possible name confusion based on its evaluation of six years of data on partner names for the four largest accounting firms.
Sunset provision. Since the rules have not been field-tested, the center recommended that if they are approved, they include a sunset provision that will expire after five years unless the board can demonstrate their positive impact on the capital markets. This post-implementation review should determine whether the rules remain in place, expire, or should be modified, the center explained.
Deloitte’s support. Separately, Big Four audit firm Deloitte & Touche LLP wrote in support of the rules, advising that naming the engagement partner and other participants in the audit will provide enhanced transparency to the audit process. The more information of value that audits can provide to users of financial statements, the greater the relevance of audits to the capital markets, in Deloitte’s view. The firm believes the additional transparency will enhance investor confidence in the rigor of the independent audit process.
Deloitte wrote that providing the information in the new Form AP is a practical approach that will provide the requested information in a timely and accessible manner. Deloitte also supports the rules’ phased in approach which will provide firms the time to develop systems for gathering the information about the involvement of other accounting firms.
CFA Institute’s support. CFA Institute urged the SEC to approve the rules without delay. Investors pay for the independent audit, are the principal beneficiaries, and have been requesting this information for years, according to CFA. In CFA’s view, the PCAOB has provided sufficient evidence that the disclosure will improve transparency, heighten the engagement partners’ accountability, and improve audit quality.