Update on the current board issues: November 2013

Audit committee issues


PCAOB expected to propose rule requiring disclosure of the lead audit partner’s name

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At their November 13 standing advisory group meeting, Public Company Accounting Oversight Board (PCAOB) officials said they expect to propose a rule that could require the disclosure of the name of the lead audit partner on public companies.

During the meeting PCAOB Chair James Doty said that a re-proposal of a standard requiring the identification of the audit engagement partner is expected to be issued on December 4. He expressed support for the proposal and encouraged opponents and proponents to voice any concerns in what he called a “fish or cut bait” moment.

The proposed rule would require registered accounting firms to disclose the name of the engagement partner in the audit report and on an annual report form registered accounting firms are required to file with the PCAOB. It would also require disclosure in the audit report of other accounting firms and other persons not employed by the auditor that took part in the audit. [See PCAOB press release, October 11, 2011.]

Currently, only the name of an audit firm is signed. The original 2009 concept release would have required the engagement partner to sign his or her name on the audit report, while the initial proposal in 2011 called for the engagement partner’s name to be disclosed.
While PwC expressed general support for the idea of such disclosure in its response to the initial proposal in 2011, the firm suggested also identifying a member or members of firm leadership, and making such disclosure in the PCAOB Annual Report. In the 2011 response, PwC suggests that the requirement be “provisional” — in effect for a limited period of five years subject to review of the legal ramifications at that time. In any event, PwC suggests that the PCAOB defer effectiveness of the naming requirement until the SEC has taken action to assure that partners named in the audit report will not be considered experts and subject to expert additional liability under the Securities Act.

For more details about PwC’s comment letter on the original proposed rule, click here.


CAQ issues financial statement fraud expectation gap roundtable summary

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On April 24, 2013, a roundtable was held on the subject of the “expectation gap” in deterring and detecting financial statement fraud. The objective of this program was to bring together the key players in the financial reporting supply chain (corporate directors, financial executives, external auditors, and internal auditors) to discuss each group’s expectations of the roles of the various players.

The roundtable was convened by the Anti-Fraud Collaboration, which includes the Center for Audit Quality (CAQ), Financial Executives International (FEI), The Institute of Internal Auditors (IIA), and the National Association of Corporate Directors (NACD). The CAQ  recently published a summary of the event: Closing the Expectation Gap in Deterring and Detecting Financial Statement Fraud: A Roundtable Summary.

Key takeaways from the roundtable, according to the summary, are:

  • According to a fall 2012 survey conducted by the Anti-Fraud Collaboration, more respondents believe financial management has primary responsibility in deterring financial reporting fraud rather than detecting it.
  • Expectations vary widely on the responsibility of external and internal audit in the deterrence and detection of material fraud in financial reporting.
  • Audit committees are expected to have the financial expertise to ask the right questions.
  • There is a need for open and honest communication across all groups, particularly between the audit committee and the internal and external auditors.

The outcome of the roundtable discussions can serve as a catalyst for continued dialogue among the financial reporting supply chain participants, the investing public, and other interested parties on the efforts that are undertaken in public companies to deter and detect financial fraud, the CAQ summary concludes.


PCAOB creates Center for Economic Analysis

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The PCAOB recently announced that it is establishing a Center for Economic Analysis to study the role and relevance of the audit in capital formation and investor protection.  It also named economist Luigi Zingales from the University of Chicago Booth School of Business as the Center's founding director.

"The PCAOB is committed to advancing its investment in and attention to the use of economic analysis in its rulemaking. The Center will focus on fostering more economic research in auditing topics and building economic and other analytical tools for use in the PCAOB's work to protect the investing public's interest in high quality auditing," PCAOB Chair James R. Doty said.

The Center is expected to hire staff and begin operations in early 2014. It will host a conference on economic research relating to the role of the audit in the capital markets in 2014 and issue a call for research papers and provide more conference details in the near term.