On October 11, 2011, the PCAOB released for comment a proposal to require auditors to disclose the name of the audit engagement partner in a company's annual report, as well as other firms or persons not employed by the audit firm who participated in the independent audit of the company. The PCAOB considers this proposal an augmentation of transparency in the audit of public companies.
While I can certainly understand the argument that identification of an individual partner would increase that person's obligation to adhere to all professional standards and the highest ethical guidelines in overseeing an audit, I feel it might further confuse investors. If a company goes under, investors will simply have another person to personally crucify for any fatal risk that may have led to the downfall. While I am not a lawyer, I can foresee a host of legal issues when investors start assuming that an individual partner is solely responsible for their bad investment. The entire structure of the LLC used by public accounting firms is overshadowed by the engagement partner's name in the audit report.
In considering the second item in the PCAOB's proposal, I think it would be helpful to know when something has been outsourced. Consider the recent mess many homeowners facing foreclosure are now dealing with, as they find out that their bank outsourced the processing of their loan to companies who made up signatures and bank presidents to sign false loan documents. Investors certainly deserve to know to what extent a reputable auditor may be relying on the work of a less reputable auditor. Simply naming firms used by the auditor would not necessarily be helpful, unless the extent of their involvement were disclosed. Perhaps setting a threshold for disclosure would be reasonable, e.g. if a third party is involved in the audit of a high risk area or conducts more than 20% of the audit, their involvement should be disclosed.
What do you think, will the added scrutiny of disclosing engagement partners and third parties involved in the audit improve transparent financial reporting and auditing?
I do see the argument stemming from CEOs and CFOs who must put their name on the bottom line of their financial statements, that if they must sign, so should the lead partner on the engagement. It certainly should make a lead partner more scrutinizing before they move the pen. This might not be such a bad thing, given society's negativity toward high executive salaries, bonuses, and corporate America these days. Additionally, I'm thinking informed investors aren't going to be assuming that one person can handle an entire audit single handedly. They'll still go for the jugular when irregularities occur. Overall, this new signature requirement would be little more than window dressing, but even if it's just a baby step, the timing might be right for some steps in the improved transparency direction
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