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September 21, 2023

Let’s Argue Over the Best Place to Put Audit Partners’ Names on Reports

You may have noticed an important article Colin shared in ANR this morning, one which explains the most contentious issue in accounting today (besides the GC most overrated list).

From Michael Rapoport over at the Wall Street Journal:

The Public Company Accounting Oversight Board, the government's audit regulator, expects to give final approval in the next few weeks to a long-awaited rule that will mandate accounting firms disclose the name of their lead "engagement partner," their partner in charge, on each public-company audit they perform each year. The move is aimed at increasing accountability for auditors and giving more information to investors.

PCAOB Chairman James Doty wants the name disclosed in the audited company's annual report, also known as the 10-K, in the section in which the auditor's opinion appears. But big accounting firms are pushing for disclosure in a different location: a separate report the auditing firms file with the PCAOB, known as a Form 2.

The guy at the CFA Institute who spoke to WSJ said putting this information in the 10-K would be "accessible and transparent." But pick any big company 10-K, like, say, GE's and you wonder how burying it in 200 pages of 10-K goodness is accessible at all.

Audit firms are scared putting partner names in the annual report would "expose their audit partners to more lawsuits," so naturally they would rather see it put in the more obscure Form 2, which most investors wouldn't know to look for until they are ready to sue the shit out of audit partners, at which point I'm pretty sure they'd be able to find it.

Some people take issue with the Form 2 suggestion since there could be a lag of up to 15 months between the time the 10-K and the Form 2 are filed, meaning those sneaky little audit partners might get away with audit murder and no one will know who they are except for the audit firms protecting them.

PwC told the PCAOB back in 2012 that while they're supportive of this idea in general even though it's totally dumb, Form 2 is definitely the place to stick audit partner names because LITIGATION. No doubt, audit firms are tired of vigorously defending themselves, but better firms as a whole rather than individuals (right?):

Although we are supportive of the Board's objective, we are not convinced that these proposals will in fact provide meaningful information to investors and other users of audit reports and enhance audit quality. We also believe that concerns remain about the potential litigation impact on the persons identified in the report. Nonetheless, we recognize that many members of the investor community, including members of the Board's Investor Advisory Group, ascribe value to information regarding the identity of the engagement partner. Accordingly, in the interests of promoting transparency in audits, we support the identification of the engagement partner in Form 2. To alleviate any misimpressions that the audit report is a product of the engagement partner, rather than the firm, we also recommend that a member or members of firm leadership are also identified in Form 2. Examples could include the firm's audit/assurance leader and/or CEO/senior partner.

You've got to admire that team spirit coming from audit firms. Why throw the audit partner under the bus? It's everyone's fault when an audit goes bad. Blame Bob Moritz. Blame Bob Moritz's mom for giving birth to him. Blame Coopers & Lybrand. Blame Luca Pacioli. Blame everyone!

We'll keep you updated on this bickering as it develops. Our money is on the PCAOB getting their way.

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