We know the identities of the top management leading a public company, the names of boards monitoring the performance of the company, names of top owners and blockholders in the company. Yet, the identity of the audit partner signing an audit report remains elusive. The auditor remains a phantom in the US.
The Swiss-styled ‘private bank secrecy’ in the audit industry is about to change. Audit-engagement-partner secrecy is no longer permissible in the U.S. Under the newly approved rules, PCAOB now requires the name of the engagement partner to be disclosed. Accounting firms will be required to file this information in Form AP no more than 35 days after the audit firm files its audit report with the SEC. The form will be publicly available on the PCAOB’s website.
The new accounting-related rule culminates a six-year effort lead by the PCAOB that generated some controversy. Accounting firms were generally opposed to this initiative because they either considered the disclosure to be irrelevant or that such disclosures would subject engagement partners to liability risks. However, political and economic climate in the US prevailed over any opposition from accounting firms.
Over time, Form AP will enable investors or commercial data aggregators to accumulate information about specific partners’ experience and history. This may incrementally increase investors’ ability to make judgments about audit quality and the credibility of financial statements. Academic research suggests that investors and other capital market participants would generally benefit from such disclosures.
Upon SEC approval, the new rules for engagement partner disclosure will apply to auditor’s reports issued on or after Jan. 31, 2017, or three months after SEC approval of the final rules, whichever is later. For disclosure of other accounting firms, the rules will apply to auditor’s reports issued on or after June 30, 2017.
Typical Audit Report (e.g., Walmart 2010 10-K)
…….We have audited the accompanying consolidated balance sheets of Wal-Mart Stores, Inc. as of January 31, 2008 and 2007, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended January 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wal-Mart Stores, Inc. at January 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 31, 2008, in conformity with U.S. generally accepted accounting principles.
Ernst & Young LLP
March 26, 2008
As is evident from this audit report, E&Y is signing the audit report and the name of the engagement partner is not disclosed. The new rule does not require the audit firm to disclose the identity of the engagement partner within the audit report. Instead, the identity is separately disclosed in FORM AP to be filed with the PCAOB.
The accounting firms did prevail over PCAOB!