December 4, 2013 / 12:12 PM / in 5 years

U.S. watchdog revives proposal to name audit partners

WASHINGTON (Reuters) - The U.S. watchdog revived a proposal on Wednesday that would require accounting firms to disclose the names of individual partners who work on company audits, more than three years after big accounting firms opposed the plan.

Former KPMG senior auditor Scott London (R) and his lawyer Harland Braun leave the Roybal Federal Court Building after London's hearing in downtown Los Angeles April 11, 2013. REUTERS/David McNew

Under the Public Company Accounting Oversight Board’s (PCAOB) plan, partner names would have to be listed on audit reports, which are easily accessed by investors.

As a result, investors could better understand the quality of auditing at companies and hold auditors more accountable.

Accounting companies would also be required to disclose the names of outside firms that helped on an audit - a provision brought about by a rash of accounting problems at China-based companies listed on U.S. markets.

Many of the audits of those companies were conducted by the Chinese arms of major U.S. audit firms, but U.S. regulators have had limited success in gaining oversight over the work of the China-based auditors.

The PCAOB’s plan was initially proposed in October 2011, but until now has remained largely dormant.

The Big Four audit firms, KPMG, PricewaterhouseCoopers, Deloitte & Touche and Ernst & Young, have opposed naming audit partners, saying it would be of little use to investors, could increase legal liability and deter auditors from tackling high-risk audit jobs.

Jim Doty, the chairman of the PCAOB, compared Wednesday’s plan to other regulations that hold chief executives accountable by requiring them to certify their financial statements and internal controls are sound.

“It holds the promise of improving audit quality by sharpening the mind and reminding auditors of their responsibility to the public,” Doty said.

The proposal got fresh attention earlier this year after veteran KPMG auditor Scott London pleaded guilty to charges he passed confidential details about companies he audited to a friend who made profitable trades on the tips.

The accountant admitted he gave jeweler Bryan Shaw inside information regarding at least 14 earnings announcements or acquisitions by KPMG clients, including Herbalife Ltd and United Rentals Inc. Shaw also pleaded guilty in the case.

When KPMG initially disclosed it had parted ways with the employee responsible and with two corporate audit clients, London’s identity was not disclosed.

Critics said if the PCAOB proposal had been in place, his name would have been disclosed much sooner.

Such information, they said, would have been helpful for shareholders of other companies whose books London audited.

The PCAOB’s Doty said he realizes the industry has long opposed disclosing the name of the audit partner, but remains hopeful it will shift its views.

“With the experience of ... Scott London and the public dismay at Scott London, I have some hope that the industry and the firms will take a fresh look at this and say, this is not so bad,” he told reporters on the sidelines of Wednesday’s public meeting.


The plan unveiled on Wednesday represents a scaled-back version of the 2011 plan.

That would have required audit firms to name the partner in audit reports, as well as in annual report forms filed with the PCAOB.

The new draft still calls for the audit engagement partner to be named, but removes the requirement to name the individual in the annual report form.

The new proposal also eased a transparency measure designed to address cases in which an accounting firm does not perform 100 percent of the work on an audit.

Audit firms will be required to disclose the names of outside firms, such as units based in other countries, if they contribute more than 5 percent of the total hours dedicated to the audit.

Originally, the PCAOB had set a lower disclosure threshold of 3 percent. It had also sought to require firms to identify people by name who worked on the audit outside of the accounting firm.

Although the latest version dropped a few controversial requirements, some PCAOB board members expressed reservations, including Jay Hanson and Jeanette Franzel.

“I cannot say today that I would support the ultimate adoption of the reproposal as currently drafted,” Hanson said, adding that he was concerned the requirement to include the disclosures in the audit report could create “substantial uncertainties and potentially unnecessary risks.”

Franzel said she was unconvinced the plan is necessary and suggested more analysis.

“I’m starting to think that naming the audit engagement partner in the auditor’s report is a solution in search of a problem,” she said.

Doty said he hopes the PCAOB can complete its work by next spring, though he admitted the timeline may be a bit optimistic.


The PCAOB also put the final touches on rules governing the audits of securities broker-dealers.

Prior to the 2010 Dodd-Frank Wall Street reform law, the PCAOB only had authority to inspect and write standards for auditors of public companies.

Congress expanded its authority to include auditors of broker-dealers in the wake of the scandal caused by Bernard Madoff’s $65 billion Ponzi scheme.

Madoff managed to dupe investors for many years in part because of his auditor, David Friehling of Friehling & Horowitz, who pleaded guilty in 2009 to fraud charges. Friehling claimed he did not know Madoff was running a Ponzi scheme.

Wednesday’s final rules expand some of the current requirements for public company auditors to include broker-dealer auditors.

Reporting by Sarah N. Lynch; Editing by Karey Van Hall, Andre Grenon, Andrew Hay and Jeffrey Benkoe

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