Who audits public companies? This question is continuously of interest to investors, audit firms and academics alike. Firm-level information is, and always has been, available from the audit opinions included in the annual reports. However, until recently, information regarding engagement partners – the actual people heading the audit – was only available sporadically, from sources such as comment letters or LinkedIn profiles of the audit professionals.
This changed with the adoption of PCAOB Rule 3211 (effective for audit opinions issued on or after January 31, 2017), which requires audit firms to submit names of the engagement partners to the PCAOB.
Form AP engagement partner disclosure is going into its third year, meaning users will now have names of the partners for three consecutive years. Yet, the history is still very limited. Another PCAOB requirement, namely AS 3101 (The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses and Unqualified Opinion), may, in some circumstances, provide additional information.
The rule, effective for fiscal years ending on or after December 15, 2017, incorporates key changes to the Auditor’s Report. These changes address overall form, addressees, auditor independence, auditor reporting regarding ICFR, explanatory and emphasis paragraphs, and information about certain audit participants. In addition, AS 3101 requires a statement about auditor tenure, namely the year the auditor began serving consecutively as the company’s auditor. According to the PCAOB, “the disclosure of tenure should reflect the entire relationship between the company and the auditor, including the tenure of predecessor accounting firms and engagement by predecessors of the company under audit.”
The PCAOB offers guidance for the determination of tenure, as well as the reporting of tenure.
Determination of Tenure:
- In determining the year the auditor began serving consecutively as the company’s auditor, the auditor would look to the year when the firm signs an initial engagement letter to audit a company’s financial statements or when the firm begins performing audit procedures, whichever is earlier.
- Auditor tenure is calculated taking into account firm or company mergers, acquisitions, or changes in ownership structure. When a company acquires another company, if the acquirer’s current auditor continues serving as the combined company’s auditor, auditor tenure would continue. If the acquired company’s auditor is selected to serve as the combined company’s auditor, auditor tenure would begin at that time.
Reporting of Tenure:
- AS 3101 does not specify a required location within the auditor’s report for the statement on auditor tenure. The example auditor’s report includes the statement on auditor tenure at the end of the report; however, auditors have discretion to present auditor tenure in the part of the auditor’s report they consider appropriate.
- If there is uncertainty as to the year the auditor began serving consecutively as the company’s auditor, such as due to firm or company mergers, acquisitions, or changes in ownership structure, the Note to AS 3101.10.b says the auditor should state that the auditor is uncertain as to the year the auditor became the company’s auditor and provide the earliest year of which the auditor has knowledge.
- Auditors have discretion to provide additional information in the auditor’s report about tenure, if the information would provide context or otherwise assist the reader’s understanding of the relationship between the auditor and the company. For example, when tenure is calculated taking into account the tenure of predecessor accounting firms and/or engagement by predecessors of the company under audit, the auditor may wish to provide information about these historical relationships.
For the most part, the tenure data is limited to the audit firm-level disclosure. In some cases, however, the tenure disclosure may provide a rare glimpse into the engagement partners changes during a period prior to the Form AP requirement. For example, see the disclosure below:
We have served as the Company’s auditor since 1990, such date takes into account the merger of Tabb, Conigliaro and McGann, P.C. (“Tabb”) into another firm in approximately 2001 and the former partners of Tabb joining Marcum LLP in 2002.
The requirement to disclose auditor tenure is part of a broader initiative to expand the content and information provided in audit reports. We’ve been keeping a close eye on these disclosures, and plan to provide deeper insight in upcoming posts. For more information, contact us at firstname.lastname@example.org.