7928 Federal Register / Vol. 81, No. 30 / Tuesday, February 16, 2016 / Notices 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–77082; File No. PCAOB– 

2016–01] 

Public Company Accounting Oversight 

Board; Notice of Filing of Proposed 

Rules on Improving the Transparency 

of Audits: Rules To Require Disclosure 

of Certain Audit Participants on a New 

PCAOB Form and Related 

Amendments to Auditing Standards 

February 8, 2016. 

Pursuant to Section 107(b) of the 

Sarbanes-Oxley Act of 2002 (the ‘‘Act’’ 

or ‘‘Sarbanes-Oxley Act’’), notice is 

hereby given that on January 29, 2016, 

the Public Company Accounting 

Oversight Board (the ‘‘Board’’ or 

‘‘PCAOB’’) filed with the Securities and 

Exchange Commission (the 

‘‘Commission’’ or ‘‘SEC’’) the proposed 

rules described in Items I and II below, 

which items have been prepared by the 

Board. The Commission is publishing 

this notice to solicit comments on the 

proposed rules from interested persons. 

I. Board’s Statement of the Terms of 

Substance of the Proposed Rules 

On December 15, 2015, the Board 

adopted new rules, a new form, and 

amendments to auditing standards 

(collectively, the ‘‘proposed rules’’) to 

improve transparency regarding the 

engagement partner and other 

accounting firms that participate in 

issuer audits. The text of the proposed 

rules is set out below. 

Rules of the Board and Amendments to 

Auditing Standards 

The Board adopts: (i) New Rule 3210, 

Amendments, and Rule 3211, Auditor 

Reporting of Certain Audit Participants; 

(ii) new Form AP, Auditor Reporting of 

Certain Audit Participants; and (iii) 

amendments to AS 3101 (currently AU 

sec. 508), Reports on Audited Financial 

Statements, and AS 1205 (currently AU 

sec. 543), Part of the Audit Performed by 

Other Independent Auditors. The text of 

these rules, form, and amendments is 

set forth below. 

Rules of the Board 

Section 3. Auditing and Related 

Professional Practice Standards 

Rule 3210. Amendments 

The provisions of Rule 2205 

concerning amendments shall apply to 

any Form AP filed pursuant to Rule 

3211 as if the submission were a report 

on Form 3. 

Rule 3211. Auditor Reporting of Certain 

Audit Participants 

(a) For each audit report it issues for 

an issuer, a registered public accounting 

firm must file with the Board a report 

on Form AP in accordance with the 

instructions to that form. 

Note 1: A Form AP filing is not 

required for an audit report of a 

registered public accounting firm that is 

referred to by the principal auditor in 

accordance with AS 1205, Part of the 

Audit Performed by Other Independent 

Auditors. 

Note 2: Rule 3211 requires the filing 

of a report on Form AP regarding an 

audit report only the first time the audit 

report is included in a document filed 

with the Commission. Subsequent 

inclusion of precisely the same audit 

report in other documents filed with the 

Commission does not give rise to a 

requirement to file another Form AP. In 

the event of any change to the audit 

report, including any change in the 

dating of the report, Rule 3211 requires 

the filing of a new Form AP the first 

time the revised audit report is included 

in a document filed with the 

Commission. 

(b) Form AP is deemed to be timely 

filed if— 

1. The form is filed by the 35th day 

after the date the audit report is first 

included in a document filed with the 

Commission; provided, however, that 

2. If such document is a registration 

statement under the Securities Act, the 

form is filed by the 10th day after the 

date the audit report is first included in 

a document filed with the Commission. 

(c) Unless directed otherwise by the 

Board, a registered public accounting 

firm must file such report electronically 

with the Board through the Board’s 

Web-based system. 

(d) Form AP shall be deemed to be 

filed on the date that the registered 

public accounting firm submits a Form 

AP in accordance with this rule that 

includes the certification in Part VI of 

Form AP. 

Amendments to Board Forms 

Form AP—Auditor Reporting of Certain 

Audit Participants 

General Instructions 

1. Submission of this Report. Effective 

[insert effective date of Rule 3211], a 

registered public accounting firm must 

use this Form to file with the Board 

reports required by Rule 3211 and to file 

any amendments to such reports. Unless 

otherwise directed by the Board, the 

registered public accounting firm must 

file this Form electronically with the 

Board through the Board’s Web-based 

system. 

2. Defined Terms. The definitions in 

the Board’s rules apply to this Form. 

Italicized terms in the instructions to 

this Form are defined in the Board’s 

rules. In addition, as used in the 

instructions to this Form, the term ‘‘the 

Firm’’ means the registered public 

accounting firm that is filing this Form 

with the Board; and the term, ‘‘other 

accounting firm’’ means: (i) A registered 

public accounting firm other than the 

Firm or (ii) any other person or entity 

that opines on the compliance of any 

entity’s financial statements with an 

applicable financial reporting 

framework. 

3. When this Report is Considered 

Filed. A report on Form AP is 

considered filed on the date the Firm 

submits to the Board a Form AP in 

accordance with Rule 3211 that 

includes the certification required by 

Part VI of Form AP. 

Note 1: A Form AP filing is not 

required for an audit report of a 

registered public accounting firm that is 

referred to by the Firm in accordance 

with AS 1205, Part of the Audit 

Performed by Other Independent 

Auditors. 

Note 2: Rule 3211 requires the filing 

of a report on Form AP regarding an 

audit report only the first time the audit 

report is included in a document filed 

with the Commission. Subsequent 

inclusion of precisely the same audit 

report in other documents filed with the 

Commission does not give rise to a 

requirement to file another Form AP. In 

the event of any change to the audit 

report, including any change in the 

dating of the report, Rule 3211 requires 

the filing of a new Form AP the first 

time the revised audit report is included 

in a document filed with the 

Commission. 

4. Amendments to this Report. 

Amendments to Form AP are required 

to correct information that was incorrect 

at the time the Form was filed or to 

provide information that was omitted 

from the Form and was required to be 

provided at the time the Form was filed. 

When filing a Form AP to amend an 

earlier filed Form AP, the Firm must 

supply not only the corrected or 

supplemental information, but it must 

include in the amended Form AP all 

information and certifications that were 

required to be included in the original 

Form AP. The Firm may access the 

originally filed Form AP through the 

Board’s Web-based system and make the 

appropriate amendments without 

needing to re-enter all other 

information. 

Note: The Board will designate an 

amendment to a report on Form AP as 

a report on ‘‘Form AP/A.’’ 

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5. Rules Governing this Report. In 

addition to these instructions, Rules 

3210 and 3211 govern this Form. Read 

these rules and the instructions 

carefully before completing this Form. 

6. Language. Information submitted as 

part of this Form must be in the English 

language. 

7. Partner ID. For purposes of 

responding to Item 3.1.a.6, the Firm 

must assign each engagement partner 

that is responsible for the Firm’s 

issuance of an issuer audit report a 10- 

digit Partner ID number. The Firm must 

assign a unique Partner ID number to 

each such engagement partner and must 

use the same Partner ID for that 

engagement partner in every Form AP 

filed by the Firm that identifies that 

engagement partner. The Partner ID 

must begin with the Firm ID—a unique 

five-digit identifier based on the number 

assigned to the Firm by the PCAOB— 

and be followed by a unique series of 

five digits assigned by the Firm. When 

an engagement partner is no longer 

associated with the Firm, his/her 

Partner ID must be retired and not 

reassigned. 

If the engagement partner was 

previously associated with a different 

registered public accounting firm and 

had a Partner ID at that previous firm, 

the Firm must assign a new Partner ID 

in accordance with the instructions 

above. The new Firm must report, in 

Item 3.1.a.6, the new Partner ID and all 

Partner IDs previously associated with 

the engagement partner. 

Note: The Firm ID can be found by 

viewing the firm’s summary page on the 

PCAOB Web site, where it is displayed 

parenthetically next to the name of the 

firm—firm name (XXXXX). For firms 

that have PCAOB-assigned identifiers 

with fewer than 5 digits, leading zeroes 

should be added before the number to 

make 5 digits, e.g., 99 should be 

presented as 00099. 

Part I—Identity of the Firm 

In Part I, the Firm should provide 

information that is current as of the date 

of the certification in Part VI. 

Item 1.1 Name of the Firm 

a. State the legal name of the Firm. 

b. If different than its legal name, state 

the name under which the Firm issued 

this audit report. 

Part II—Amendments 

Item 2.1 Amendments 

If this is an amendment to a report 

previously filed with the Board: 

a. Indicate, by checking the box 

corresponding to this item, that this is 

an amendment. 

b. Identify the specific Part or Item 

number(s) in this Form (other than this 

Item 2.1) as to which the Firm’s 

response has changed from that 

provided in the most recent Form AP or 

amended Form AP filed by the Firm 

with respect to an audit report related 

to the issuer named in Item 3.1.a.1. 

Part III—Audit Client and Audit Report 

Item 3.1 Audit Report 

a. Provide the following information 

concerning the issuer for which the 

Firm issued the audit report— 

1. Indicate, by checking the box 

corresponding to this item, whether the 

audit client is an issuer other than an 

employee benefit plan or investment 

company; an employee benefit plan; or 

an investment company; 

2. The Central Index Key (CIK) 

number, if any, and Series identifier, if 

any; 

3. The name of the issuer whose 

financial statements were audited; 

4. The date of the audit report; 

5. The end date of the most recent 

period’s financial statements identified 

in the audit report; 

6. The name (that is, first and last 

name, all middle names and suffix, if 

any) of the engagement partner on the 

most recent period’s audit, his/her 

Partner ID, and any other Partner IDs by 

which he/she has been identified on a 

Form AP filed by a different registered 

public accounting firm or on a Form AP 

filed by the Firm at the time when it had 

a different Firm ID; and 

7. The city and state (or, if outside the 

United States, city and country) of the 

office of the Firm issuing the audit 

report. 

b. Indicate, by checking the box 

corresponding to this item, if the most 

recent period and one or more other 

periods presented in the financial 

statements identified in Item 3.1.a.5 

were audited during a single audit 

engagement. 

c. In the event of an affirmative 

response to Item 3.1.b, indicate the 

periods audited during the single audit 

engagement for which the individual 

named in Item 3.1.a.6 served as 

engagement partner (for example, as of 

December 31, 20XX and 20X1 and for 

the two years ended December 31, 

20XX). 

d. Indicate, by checking the box 

corresponding to this item, if the audit 

report was dual-dated pursuant to AS 

3110, Dating of the Independent 

Auditor’s Report. 

e. In the event of an affirmative 

response to Item 3.1.d, indicate the date 

of the dual-dated information and if 

different from the engagement partner 

named in Item 3.1.a.6, information 

about the engagement partner who 

audited the information within the 

financial statements to which the dualdated opinion applies in the same detail 

as required by Item 3.1.a.6. 

Note: In responding to Item 3.1.e, the 

Firm should provide each date of any 

dual-dated audit report. 

Item 3.2 Other Accounting Firms 

Indicate, by checking the box 

corresponding to this item, if one or 

more other accounting firms 

participated in the Firm’s audit. If this 

item is checked, complete Part IV. By 

checking this box, the Firm is stating 

that it is responsible for the audits or 

audit procedures performed by the other 

accounting firm(s) identified in Part IV 

and has supervised or performed 

procedures to assume responsibility for 

their work in accordance with PCAOB 

standards. 

Note: For purposes of Item 3.2, an 

other accounting firm participated in 

the Firm’s audit if (1) the Firm assumes 

responsibility for the work and report of 

the other accounting firm as described 

in paragraphs .03-.05 of AS 1205, Part 

of the Audit Performed by Other 

Independent Auditors, or (2) the other 

accounting firm or any of its principals 

or professional employees was subject 

to supervision under AS 1201, 

Supervision of the Audit Engagement. 

Item 3.3 Divided Responsibility 

Indicate, by checking the box 

corresponding to this item, if the Firm 

divided responsibility for the audit in 

accordance with AS 1205, Part of the 

Audit Performed by Other Independent 

Auditors, with one or more other public 

accounting firm(s). If this item is 

checked, complete Part V. 

Part IV—Responsibility for the Audit Is 

Not Divided 

In responding to Part IV, total audit 

hours in the most recent period’s audit 

should be comprised of hours 

attributable to: (1) the financial 

statement audit; (2) reviews pursuant to 

AS 4105, Reviews of Interim Financial 

Information; and (3) the audit of internal 

control over financial reporting 

pursuant to AS 2201, An Audit of 

Internal Control Over Financial 

Reporting That Is Integrated with An 

Audit of Financial Statements. Excluded 

from disclosure and from total audit 

hours in the most recent period’s audit 

are, respectively, the identity and hours 

incurred by: (1) the engagement quality 

reviewer; (2) the person who performed 

the review pursuant to SEC Practice 

Section 1000.45 Appendix K; (3) 

specialists engaged, not employed, by 

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7930 Federal Register / Vol. 81, No. 30 / Tuesday, February 16, 2016 / Notices 

the Firm; (4) an accounting firm 

performing the audit of the entities in 

which the issuer has an investment that 

is accounted for using the equity 

method; (5) internal auditors, other 

company personnel, or third parties 

working under the direction of 

management or the audit committee 

who provided direct assistance in the 

audit of internal control over financial 

reporting; and (6) internal auditors who 

provided direct assistance in the audit 

of the financial statements. Hours 

incurred in the audit by entities other 

than other accounting firms are 

included in the calculation of total audit 

hours and should be allocated among 

the Firm and the other accounting firms 

participating in the audit on the basis of 

which accounting firm commissioned 

and directed the applicable work. 

Actual audit hours should be used if 

available. If actual audit hours are 

unavailable, the Firm may use a 

reasonable method to estimate the 

components of this calculation. The 

Firm should document in its files the 

method used to estimate hours when 

actual audit hours are unavailable and 

the computation of total audit hours on 

a basis consistent with AS 1215, Audit 

Documentation. Under AS 1215, the 

documentation should be in sufficient 

detail to enable an experienced auditor, 

having no previous connection with the 

engagement, to understand the 

computation of total audit hours and the 

method used to estimate hours when 

actual hours were unavailable. 

In responding to Part IV, if the 

financial statements for the most recent 

period and one or more other periods 

covered by the audit report identified in 

Item 3.1.a.4 were audited during a 

single audit engagement (for example, in 

a reaudit of a prior period(s)), the 

calculation should be based on the 

percentage of audit hours attributed to 

such firms in relation to the total audit 

hours for the periods identified in Item 

3.1.c. 

Indicate, by checking the box, if the 

percentage of total audit hours will be 

presented within ranges in Part IV. 

Item 4.1 Other Accounting Firm(s) 

Individually 5% or Greater of Total 

Audit Hours 

a. State the legal name of other 

accounting firms and the extent of 

participation in the audit—as a single 

number or within the appropriate range 

of the percentage of hours, according to 

the following list—attributable to the 

audits or audit procedures performed by 

such accounting firm in relation to the 

total hours in the most recent period’s 

audit. 

90%-or-more of total audit hours; 

80% to less than 90% of total audit 

hours; 

70% to less than 80% of total audit 

hours; 

60% to less than 70% of total audit 

hours; 

50% to less than 60% of total audit 

hours; 

40% to less than 50% of total audit 

hours; 

30% to less than 40% of total audit 

hours; 

20% to less than 30% of total audit 

hours; 

10% to less than 20% of total audit 

hours; and 

5% to less than 10% of total audit 

hours. 

b. For each other accounting firm 

named, state the city and state (or, if 

outside the United States, city and 

country) of the headquarters’ office and, 

if applicable, the other accounting firm’s 

Firm ID. 

Note 1: In responding to Items 4.1 and 

4.2, the percentage of hours attributable 

to other accounting firms should be 

calculated individually for each firm. If 

the individual participation of one or 

more other accounting firm(s) is less 

than 5%, the Firm should complete Item 

4.2. 

Note 2: In responding to Item 4.1.b, 

the Firm ID represents a unique fivedigit identifier for firms that have a 

publicly available PCAOB-assigned 

number. 

Item 4.2 Other Accounting Firm(s) 

Individually Less Than 5% of Total 

Audit Hours 

a. State the number of other 

accounting firm(s) individually 

representing less than 5% of total audit 

hours. 

b. Indicate the aggregate percentage of 

participation of the other accounting 

firm(s) that individually represented 

less than 5% of total audit hours by 

filling in a single number or by selecting 

the appropriate range as follows: 

90%-or-more of total audit hours; 

80% to less than 90% of total audit 

hours; 

70% to less than 80% of total audit 

hours; 

60% to less than 70% of total audit 

hours; 

50% to less than 60% of total audit 

hours; 

40% to less than 50% of total audit 

hours; 

30% to less than 40% of total audit 

hours; 

20% to less than 30% of total audit 

hours; 

10% to less than 20% of total audit 

hours; 

5% to less than 10% of total audit 

hours; and 

Less-than-5% of total audit hours. 

Part V—Responsibility for the Audit Is 

Divided 

Item 5.1 Identity of the Other Public 

Accounting Firm(s) to Which the Firm 

Makes Reference 

a. Provide the following information 

concerning each other public 

accounting firm the Firm divided 

responsibility with in the audit— 

1. State the legal name of the other 

public accounting firm and when 

applicable, the other public accounting 

firm’s Firm ID. 

2. State the city and state (or, if 

outside the United States, city and 

country) of the office of the other public 

accounting firm that issued the other 

audit report. 

3. State the magnitude of the portion 

of the financial statements audited by 

the other public accounting firm. 

Note: In responding to Item 5.1.a.3, 

the Firm should state the dollar 

amounts or percentages of one or more 

of the following: total assets, total 

revenues, or other appropriate criteria, 

as it is described in the audit report in 

accordance with AS 1205. 

Part VI—Certification of the Firm 

Item 6.1 Signature of Partner or 

Authorized Officer 

This Form must be signed on behalf 

of the Firm by an authorized partner or 

officer of the Firm by typing the name 

of the signatory in the electronic 

submission. The signer must certify 

that: 

a. The signer is authorized to sign this 

Form on behalf of the Firm; 

b. The signer has reviewed this Form; 

c. Based on the signer’s knowledge, 

this Form does not contain any untrue 

statement of a material fact or omit to 

state a material fact necessary to make 

the statements made, in light of the 

circumstances under which such 

statements were made, not misleading; 

and 

d. Based on the signer’s knowledge, 

the Firm has not failed to include in this 

Form any information that is required 

by the instructions to this Form. 

The signature must be accompanied 

by the signer’s title, the capacity in 

which the signer signed the Form, the 

date of signature, and the signer’s 

business telephone number and 

business email address. 

* * * * * 

Amendments to PCAOB Auditing 

Standards for Optional Disclosure of 

Certain Audit Participants in the 

Auditor’s Report 

The amendments below are adopted 

to PCAOB auditing standards. 

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1See, e.g., Letter from Jeff Mahoney, General 

Counsel, Council of Institutional Investors, to the 

Office of the Secretary, PCAOB (Aug. 15, 2014), 

(‘‘[I]nformation about engagement partners’ track 

record compiled as the result of requiring 

disclosure of the partner’s name in the auditor’s 

report would be relevant to our members as longterm shareowners in overseeing audit committees 

and determining how to cast votes on the more than 

two thousand proposals that are presented annually 

to shareowners on whether to ratify the board’s 

choice of outside auditor.’’). 

AS 3101 (Currently AU Sec. 508), 

Reports on Audited Financial 

Statements 

AS 3101 (Currently AU Sec. 508), 

Reports on Audited Financial 

Statements, Is Amended as Follows: 

a. Paragraph .09A is added, as 

follows: 

The auditor may include in the 

auditor’s report information regarding 

the engagement partner and/or other 

accounting firms participating in the 

audit that is required to be reported on 

PCAOB Form AP, Auditor Reporting of 

Certain Audit Participants. If the auditor 

decides to provide information about 

the engagement partner, other 

accounting firms participating in the 

audit, or both, the auditor must disclose 

the following: 

a. Engagement partner—the 

engagement partner’s full name as 

required on Form AP; or 

b. Other accounting firms 

participating in the audit— 

i. A statement that the auditor is 

responsible for the audits or audit 

procedures performed by the other 

public accounting firms and has 

supervised or performed procedures to 

assume responsibility for their work in 

accordance with PCAOB standards; 

ii. Other accounting firms 

individually contributing 5% or more of 

total audit hours—for each firm, (1) the 

firm’s legal name, (2) the city and state 

(or, if outside the United States, city and 

country) of headquarters’ office, and (3) 

percentage of total audit hours as a 

single number or within an appropriate 

range, as is required to be reported on 

Form AP; and 

iii. Other accounting firms 

individually contributing less than 5% 

of total audit hours—(1) the number of 

other accounting firms individually 

representing less than 5% of total audit 

hours and (2) the aggregate percentage 

of total audit hours of such firms as a 

single number or within an appropriate 

range, as is required to be reported on 

Form AP. 

AS 1205 (Currently AU Sec. 543), Part 

of the Audit Performed by Other 

Independent Auditors 

AS 1205 (Currently AU Sec. 543), Part 

of the Audit Performed by Other 

Independent Auditors, Is Amended as 

Follows: 

a. In paragraph .03, the following 

phrase is added to the end of the second 

sentence, ‘‘, except as provided in 

paragraph .04.’’ 

b. In paragraph .04, the last sentence 

is deleted and replaced with the 

following: 

If the principal auditor decides to take 

this position, the auditor may include 

information about the other auditor in 

the auditor’s report pursuant to 

paragraph .09A of AS 3101, Reports on 

Audited Financial Statements, but 

otherwise should not state in its report 

that part of the audit was made by 

another auditor. 

c. In paragraph .07: 

• The last sentence is deleted. 

• Footnote 3 is deleted. 

* * * * * 

II. Board’s Statement of the Purpose of, 

and Statutory Basis for, the Proposed 

Rules 

In its filing with the Commission, the 

Board included statements concerning 

the purpose of, and basis for, the 

proposed rules and discussed any 

comments it received on the proposed 

rules. The text of these statements may 

be examined at the places specified in 

Item IV below. The Board has prepared 

summaries, set forth in sections A, B, 

and C below, of the most significant 

aspects of such statements. In addition, 

the Board is requesting that the 

Commission approve the proposed 

rules, pursuant to Section 103(a)(3)(C) of 

the Sarbanes-Oxley Act, for application 

to audits of emerging growth companies 

(‘‘EGCs’’), as that term is defined in 

Section 3(a)(80) of the Securities 

Exchange Act of 1934 (‘‘Exchange Act’’). 

The Board’s request is set forth in 

section D. 

A. Board’s Statement of the Purpose of, 

and Statutory Basis for, the Proposed 

Rules 

(a) Purpose 

Introduction 

The Board has adopted new rules and 

related amendments to its auditing 

standards that will provide investors 

and other financial statement users with 

information about engagement partners 

and accounting firms that participate in 

audits of issuers. Under the final rules, 

firms will be required to file a new 

PCAOB form for each issuer audit, 

disclosing: the name of the engagement 

partner; the name, location, and extent 

of participation of each other accounting 

firm that took part in the audit whose 

work constituted at least 5% of total 

audit hours; and the number and 

aggregate extent of participation of all 

other accounting firms participating in 

the audit whose individual participation 

was less than 5% of total audit hours. 

The information will be filed on Form 

AP, Auditor Reporting of Certain Audit 

Participants, and will be available in a 

searchable database on the Board’s Web 

site. 

Audits serve a crucial public function 

in the capital markets. However, 

investors have had very little ability to 

evaluate the quality of particular audits. 

Generally, in the United States, investor 

decisions about how much credence to 

give to an auditor’s report have been 

based on proxies of audit quality, such 

as the size and reputation of the firm 

that issues the auditor’s report. Investors 

and other financial statement users 

know the name of the accounting firm 

signing the auditor’s report and may 

have other information related to the 

reputation and quality of services of the 

firm, but they are generally unable to 

readily identify the engagement partner 

leading the audit. They are also unlikely 

to know the extent of the role played by 

other accounting firms participating in 

the audit. 

The Board has adopted these rules 

and amendments after considering four 

rounds of public comment, as well as 

comments from members of the Board’s 

Standing Advisory Group (‘‘SAG’’) and 

Investor Advisory Group (‘‘IAG’’). The 

Board has received consistent comments 

from investors throughout this 

rulemaking that stress the importance 

and value to them of increased 

transparency and accountability in 

relation to certain participants in the 

audit. These commenters indicated that 

access to such information would be 

relevant to their decision making, for 

example, in the context of voting to 

ratify the company’s choice of auditor.1

The Board believes that its approach to 

providing information about the 

engagement partner and the other 

accounting firms that participated in the 

audit will achieve the objectives of 

enhanced transparency and 

accountability for the audit while 

appropriately addressing concerns 

raised by commenters. 

In the Board’s own experience, gained 

through more than ten years of 

overseeing public company audits, 

information about the engagement 

partner and other accounting firms 

participating in the audit can be used 

along with other information, such as 

history on other issuer audits or 

disciplinary proceedings, in order to 

provide insights into audit quality. The 

rules the Board adopted will add more 

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2The Board’s project on the auditor’s reporting 

model, Proposed Auditing Standards—The 

Auditor’s Report on an Audit of Financial 

Statements When the Auditor Expresses an 

Unqualified Opinion; The Auditor’s Responsibilities 

Regarding Other Information in Certain Documents 

Containing Audited Financial Statements and the 

Related Auditor’s Report; and Related Amendments 

to PCAOB Standards, PCAOB Release No. 2013–005 

(Aug. 13, 2013), is also focused on providing the 

market with additional information about the audit. 

In addition, the Board has issued a concept release, 

Concept Release on Audit Quality Indicators, 

PCAOB Release No. 2015–005 (July 1, 2015), 

regarding the content and possible uses of ‘‘audit 

quality indicators,’’ a potential portfolio of 

quantitative measures that may provide new 

insights into how to evaluate the quality of audits 

and how high-quality audits are achieved. 

3Most non-US jurisdictions with highly 

developed capital markets require transparency 

regarding the engagement partner responsible for 

the audit. 

4At this time, the Board is not extending the 

Form AP requirements to audits of brokers and 

dealers pursuant to Rule 17a–5 under the Exchange 

Act. If a broker or dealer were an issuer required 

to file audited financial statements under Section 

13 or 15(d) of the Exchange Act, the requirements 

would apply. 

5See AS 1205 (currently AU sec. 543), Part of the 

Audit Performed by Other Independent Auditors. 

On March 31, 2015, the PCAOB adopted the 

reorganization of its auditing standards using a 

topical structure and a single, integrated numbering 

system. See Reorganization of PCAOB Auditing 

Standards and Related Amendments to PCAOB 

Standards and Rules, PCAOB Release No. 2015–002 

(Mar. 31, 2015). On September 17, 2015, the SEC 

approved the PCAOB’s adoption of the 

reorganization. See Public Company Accounting 

Oversight Board; Order Granting Approval of 

Proposed Rules to Implement the Reorganization of 

PCAOB Auditing Standards and Related Changes to 

PCAOB Rules and Attestation, Quality Control, and 

Ethics and Independence Standards, Exchange Act 

Release No. 34–75935 (Sept. 17, 2015), 80 FR 57263 

(Sept. 22, 2015). The reorganized amendments will 

be effective as of December 31, 2016, and nothing 

precludes auditors and others from using and 

referencing the reorganized standards before the 

effective date. See PCAOB Release No. 2015–002, at 

21. 

6See AS 1201 (currently Auditing Standard No. 

10), Supervision of the Audit Engagement. 

7Louis Brandeis, Other People’s Money and How 

the Bankers Use It 92 (1914). 

specific data points to the mix of 

information that can be used when 

evaluating audit quality.2 Since audit 

quality is a component of financial 

reporting quality, high audit quality 

increases the credibility of financial 

reporting. 

For example, the name of the 

engagement partner could, when 

combined with additional information 

about the experience and reputation of 

that partner, provide more information 

about audit quality than solely the name 

of the firm.3 Through its oversight 

activities, the Board has observed that 

the quality of individual audit 

engagements varies within firms, 

notwithstanding firmwide or 

networkwide quality control systems. 

Although such variations may be due to 

a number of factors, the Board’s staff 

uses engagement partner history as one 

factor in making risk-based selections of 

audit engagements for inspection. Some 

firms closely monitor engagement 

partner quality history themselves, 

utilizing this information to manage risk 

to the firm and to comply with quality 

control standards. 

Under the final rules, investors and 

other financial statement users will have 

access, in one location, to the names of 

engagement partners on all issuer 

audits.4 As this information 

accumulates and is aggregated with 

other publicly available information, 

investors will be able to take into 

account not just the firm issuing the 

auditor’s report but also the specific 

partner in charge of the audit and his or 

her history as an engagement partner on 

issuer audits. This will allow interested 

parties to compile information about the 

engagement partner, such as whether 

the partner is associated with 

restatements of financial statements or 

has been the subject of public 

disciplinary proceedings, as well as 

whether he or she has experience as an 

engagement partner auditing issuers of a 

particular size or in a particular 

industry. While this information may 

not be useful in every instance or 

meaningful to every investor, the Board 

believes that, overall, it will contribute 

to the mix of information available to 

investors. 

The final rules requiring disclosures 

about other accounting firms that 

participate in issuer audits should also 

provide benefits to investors and other 

financial statement users. In many audit 

engagements, especially audits of public 

companies operating in multiple 

locations internationally, the firm 

signing the auditor’s report performs 

only a portion of the audit. The 

remaining work is performed by other 

(often affiliated) accounting firms that 

are generally located in other 

jurisdictions. The accounting firm 

issuing the auditor’s report assumes 

responsibility for the procedures 

performed by other accounting firms 

participating in the audit 5 or supervises 

the work of other accounting and 

nonaccounting firm participants in the 

audit.6 However, under current 

requirements, the auditor’s report 

generally provides no information about 

these arrangements, even though other 

accounting firms may perform a 

significant portion of the audit work. As 

a result, the auditor’s report may give 

the impression that the work was 

performed solely by one firm—the firm 

issuing the auditor’s report—and 

investors have no way of knowing 

whether the firm expressing the opinion 

did all of the work or only a portion of 

it. 

Information provided on Form AP is 

intended to help investors understand 

how much of the audit was performed 

by the accounting firm signing the 

auditor’s report and how much was 

performed by other accounting firms. 

Investors will also be able to research 

publicly available information about the 

firms identified in the form, such as 

whether a participating firm is 

registered with the PCAOB, whether it 

has been inspected and, if so, what the 

results were and whether it has any 

publicly available disciplinary history. 

Investors will also have a better sense of 

how much of the audit was performed 

by firms in other jurisdictions, 

including jurisdictions in which the 

PCAOB cannot currently conduct 

inspections. As with disclosure of the 

name of the engagement partner, these 

additional data points will add to the 

mix of information that investors can 

use. 

In addition to the informational value 

of the disclosures required under the 

final rules, the Board believes the 

transparency created by public 

disclosure should promote increased 

accountability in the audit process. As 

Justice Brandeis famously observed, 

‘‘Sunlight is said to be the best of 

disinfectants; electric light the most 

efficient policeman.’’ 7 Although 

auditors already have incentives to 

maintain a good reputation, such as 

internal performance reviews, 

regulatory oversight, and litigation risk, 

public disclosure will create an 

additional reputation risk, which should 

provide an incremental incentive for 

auditors to maintain a good reputation, 

or at least avoid a bad one. While this 

additional incentive will not affect all 

engagement partners in the same way, 

in the Board’s view, it should provide 

an overall benefit. 

The Board believes additional 

transparency should also increase 

accountability at the firm level. The 

Board has observed that some auditors 

allowed other accounting firms that did 

not possess the requisite expertise or 

qualifications to play significant roles in 

audits. Firms similarly have not always 

given the critical task of engagement 

partner assignment the care it deserves. 

For example, the Board’s inspections 

have found instances in which 

accounting firms lacked independence 

because they failed to rotate the 

engagement partner, as required by the 

Act and the rules of the Commission. 

The Board has also imposed sanctions 

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8See, e.g., Order Instituting Disciplinary 

Proceedings, Making Findings, and Imposing 

Sanctions, In the Matter of Deloitte & Touche, LLP, 

PCAOB Release No. 105–2007–005 (Dec. 10, 2007). 

9For purposes of Form AP, ‘‘other accounting 

firm’’ means (i) a registered public accounting firm 

other than the firm filing Form AP or (ii) any other 

person or entity that opines on the compliance of 

any entity’s financial statements with an applicable 

financial reporting framework. 

on firms that staffed a public company 

audit with an engagement partner who 

lacked the necessary competencies.8

Making firms publicly accountable in a 

way they have not been previously for 

their selections of engagement partners 

and other accounting firms participating 

in the audit should provide additional 

discipline on the process and 

discourage such lapses. 

The requirement to provide disclosure 

on Form AP, rather than in the auditor’s 

report as previously proposed, is 

primarily a response to concerns raised 

by some commenters about potential 

liability and practical concerns about 

the potential need to obtain consents for 

identified parties in connection with 

registered securities offerings. Investors 

commenting in the rulemaking process 

have generally stated a preference for 

disclosure in the auditor’s report. Under 

the final rules, in addition to filing Form 

AP, firms will also have the ability to 

identify the engagement partner and/or 

provide disclosure about other 

accounting firms participating in the 

audit in the auditor’s report. This is not 

required, but firms may choose to do so 

voluntarily. The Board believes that 

providing information about the 

engagement partner and the other 

accounting firms that participated in the 

audit on Form AP, coupled with 

allowing voluntary reporting in the 

auditor’s report, will achieve the 

objectives of enhanced transparency and 

accountability for the audit while 

appropriately addressing concerns 

raised by commenters. 

In response to commenter 

suggestions, the Board adopted a phased 

effective date to give firms additional 

time to develop systems necessary to 

implement the new rules. Subject to 

approval of the new rules and 

amendments by the Commission, Form 

AP disclosure regarding the engagement 

partner will be required for audit reports 

issued on or after the later of three 

months after Commission approval of 

the final rules or January 31, 2017. 

Disclosure regarding other accounting 

firms will be required for audit reports 

issued on or after June 30, 2017. 

The Board adopted two new rules 

(Rules 3210 and 3211) and one new 

form (Form AP). These are disclosure 

requirements and do not change the 

performance obligations of the auditor 

in conducting the audit. The Board also 

adopted amendments to AS 3101 

(currently AU sec. 508), Reports on 

Audited Financial Statements, and AS 

1205 (currently AU sec. 543) related to 

voluntary disclosure in the auditor’s 

report. 

In the Board’s view, the final rules 

and amendments to its auditing 

standards, which the Board adopted 

pursuant to its authority under the 

Sarbanes-Oxley Act, will further the 

Board’s mission of protecting the 

interests of investors and furthering the 

public interest in the preparation of 

informative, accurate, and independent 

audit reports. 

(b) Statutory Basis 

The statutory basis for the proposed 

rules is Title I of the Act. 

B. Board’s Statement on Burden on 

Competition 

Not applicable. 

C. Board’s Statement on Comments on 

the Proposed Rules Received From 

Members, Participants or Others 

The Board released the proposed rule 

amendment for public comment in 

Concept Release on Requiring the 

Engagement Partner to Sign the Audit 

Report, PCAOB Release No. 2009–005 

(July 28, 2009) (‘‘2009 Release’’), 

Improving the Transparency of Audits: 

Proposed Amendments to PCAOB 

Auditing Standards and Form 2, 

PCAOB Release No. 2011–007 (October 

11, 2011) (‘‘2011 Release’’), Improving 

the Transparency of Audits: Proposed 

Amendments to PCAOB Auditing 

Standards to Provide Disclosure in the 

Auditor’s Report of Certain Participants 

in the Audit, PCAOB Release No. 2013– 

009 (December 4, 2013) (‘‘2013 

Release’’), and Supplemental Request 

for Comment: Rules to Require 

Disclosure of Certain Audit Participants 

on a New PCAOB Form, PCAOB Release 

No. 2015–004 (June 30, 2015) (‘‘2015 

Supplemental Request’’). See Exhibit 

2(a)(A). A copy of Release Nos. 2009– 

005, 2011–007, 2013–009, and 2015–004 

and the comment letters received in 

response to the PCAOB’s requests for 

comment are available on the PCAOB’s 

Web site at http://www.pcaobus.org/

Rules/Rulemaking/Pages/

Docket029.aspx. The Board received 

184 written comment letters (including 

one letter which was withdrawn). The 

Board’s response to the comments it 

received and the changes made to the 

rules in response to the comments 

received are discussed below. 

Discussion of the Final Rules 

The required disclosures under the 

final rules principally include: 

• The name of the engagement 

partner; and 

• For other accounting firms 9

participating in the audit: 

5% or greater participation: The 

name, city and state (or, if outside the 

United States, the city and country), and 

the percentage of total audit hours 

attributable to each other accounting 

firm whose participation in the audit 

was at least 5% of total audit hours; 

Less than 5% participation: The 

number of other accounting firms that 

participated in the audit whose 

individual participation was less than 

5% of total audit hours, and the 

aggregate percentage of total audit hours 

of such firms. 

The final rules require this information 

to be filed on Form AP. In addition to 

filing the form, the firm signing the 

auditor’s report may voluntarily provide 

information about the engagement 

partner, other accounting firms, or both 

in the auditor’s report. 

Form AP—Auditor Reporting of Certain 

Audit Participants 

Introduction 

Under the final rules, firms will be 

required to provide specified 

disclosures regarding the engagement 

partner and other accounting firms 

participating in the audit on a new 

PCAOB form, Form AP. Most 

commenters supported Form AP as a 

vehicle for disclosures about the 

engagement partner and other 

participants in the audit. However, 

some commenters criticized the Form 

AP approach generally because they 

disputed the net value of the 

information to be disclosed, regardless 

of the means of disclosure, or believed 

that the information was more 

appropriately presented elsewhere, such 

as in the auditor’s report, the issuer’s 

proxy statement, or PCAOB Form 2. 

Investors and investor groups generally 

preferred auditor signature or disclosure 

in the auditor’s report and characterized 

Form AP as an acceptable second-best 

approach. Most other commenters, on 

the other hand, preferred Form AP, 

generally on the basis that it would help 

mitigate legal and practical issues 

associated with disclosure in the 

auditor’s report. 

As noted in the 2015 Supplemental 

Request, Form AP serves the same 

purpose as disclosure in the auditor’s 

report. Its intended audience is the same 

as the audience for the auditor’s 

report—investors and other financial 

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7934 Federal Register / Vol. 81, No. 30 / Tuesday, February 16, 2016 / Notices 

10Existing PCAOB reporting forms have been 

developed for the principal purpose of registration 

with the Board and reporting to the Board about a 

registered public accounting firm’s issuer, broker, 

and dealer audit practice. These forms are: (1) Form 

1, Application for Registration; (2) Form 1–WD, 

Request for Leave to Withdraw from Registration; 

(3) Form 2, Annual Report; (4) Form 3, Special 

Report; and (5) Form 4, Succeeding to Registration 

Status of Predecessor. 

11Rules on Periodic Reporting by Registered 

Public Accounting Firms, PCAOB Release No. 

2008–004 (June 10, 2008), at 28. 

12The Board has authority under Section 103 of 

the Sarbanes-Oxley Act to adopt, by rule, audit 

standards ‘‘to be used by registered public 

accounting firms in the preparation and issuance of 

audit reports . . . as may be necessary or 

appropriate in the public interest or for the 

protection of investors.’’ In addition, under Section 

102 of the Sarbanes-Oxley Act, the Board has 

authority to require registered public accounting 

firms to submit periodic and special reports, which 

are publicly available unless certain conditions are 

met. If a firm requests confidential treatment of 

information under Section 102(e) of the SarbanesOxley Act, the information is not publicly disclosed 

unless there is a final determination that it does not 

meet the conditions for confidentiality. Because of 

the intended purpose of Form AP and the Board’s 

related authority under Section 103 of the SarbanesOxley Act, confidential treatment of the information 

filed on Form AP will not be available. 

13As described in Daniel Aobdia, Chan-Jane Lin, 

and Reining Petacchi, Capital Market Consequences 

of Audit Partner Quality, 90 The Accounting 

Review 2143 (2015), the Taiwan Economic Journal 

collects data that covers all public companies in 

Taiwan and includes, among other things, the 

names of the engagement partners, the accounting 

firm issuing the auditor’s report, the regulatory 

sanction history of the partners, and the audit 

opinions. Professor Aobdia is a research fellow at 

the PCAOB. His research cited above was 

undertaken prior to joining the PCAOB. 

statement users—and its filing is tied to 

the issuance of an auditor’s report. In 

that respect, it differs from the PCAOB’s 

existing forms,10 which are intended 

primarily to elicit information for the 

Board’s use in connection with its 

oversight activities, with a secondary 

benefit of making as much reported 

information as possible available to the 

public as soon as possible after filing 

with the Board.11 Form AP is primarily 

intended as a vehicle for public 

disclosure, much like the auditor’s 

report itself.12 While information on 

Form AP could also benefit the Board’s 

oversight activities, that is ancillary to 

the primary goal of public disclosure. 

Disclosures About the Engagement 

Partner 

Since the inception of this 

rulemaking, the Board has explored a 

variety of means of providing public 

disclosure of the name of the 

engagement partner, including 

engagement partner signature on the 

auditor’s report, identification of the 

engagement partner in the auditor’s 

report, and identification of the name of 

the engagement partner on Form 2. The 

2013 Release contemplated identifying 

the engagement partner in the auditor’s 

report. The 2015 Supplemental Request 

solicited comment on the potential use 

of Form AP, with optional additional 

disclosure in the auditor’s report. 

Commenters on the 2013 Release and 

on the 2015 Supplemental Request 

expressed divergent views on a 

requirement to disclose the name of the 

engagement partner. Commenters that 

supported the disclosure requirement 

argued that it would provide 

information that would be useful to 

investors and other financial statement 

users (for example, in connection with 

a vote on ratification of auditors), or 

could improve audit quality by 

increasing the sense of accountability of 

engagement partners. Commenters that 

opposed the requirement generally 

claimed that identification of the 

engagement partner would give rise to 

unintended negative consequences, 

particularly with respect to liability; 

would not be useful information for 

investors and other financial statement 

users; could incentivize engagement 

partners to act in ways that protect their 

reputations but potentially conflict with 

the audit quality goals of their audit 

firms or with broader indicators of audit 

quality; and could mislead or confuse 

users about the role of the engagement 

partner, in particular by 

overemphasizing the role of the 

engagement partner as compared to the 

role of the firm. Several of the 

commenters that previously opposed 

disclosure in the auditor’s report were 

more supportive of disclosure in a 

PCAOB form, if the Board determined to 

mandate disclosure. 

The Board believes that disclosure of 

the name of the engagement partner 

will, overall, be useful to investors and 

other financial statement users. 

Although the disclosure of the name of 

the engagement partner might provide 

limited information initially, it is 

reasonable to expect that, over time, the 

disclosures will allow investors and 

other financial statement users to 

consider a number of other data points 

about the engagement partner, such as 

the number and names of other issuer 

audit engagements in which the partner 

is the engagement partner and other 

publicly available data. Such bodies of 

information have developed in some 

other jurisdictions, such as Taiwan, 

where public companies are required to 

disclose the names of the engagement 

partners,13 and some commenters 

believe that, in the United States, thirdparty vendors will supply information 

in addition to what is provided by Form 

AP. 

Some commenters on the 2015 

Supplemental Request suggested that 

disclosure regarding a number of these 

matters, such as industry experience, 

partner tenure, restatements and 

disciplinary actions, be added to Form 

AP or linked to Form AP data. One of 

these commenters pointed out that the 

academic literature supports the 

potential usefulness of metrics, such as 

the number of years the individual has 

served as the engagement partner or the 

engagement partner for prior years as 

signals of audit quality, and that, by 

requesting additional background 

information in the first year of 

implementation, the PCAOB could 

accelerate the usefulness of Form AP 

data. In striking a balance between the 

anticipated benefits of the rule and its 

anticipated costs, including the costs 

and timing of initial implementation, 

the Board has determined not to expand 

the disclosures required on Form AP at 

this time. 

Some commenters raised concerns 

that public identification of the 

engagement partner could lead to a 

rating, or ‘‘star,’’ system resulting in 

particular individuals being in high 

demand, to the unfair disadvantage of 

other equally qualified engagement 

partners. These commenters also 

suggested that, if such a system were 

created, engagement partners may not 

be willing to accept the most 

challenging audit engagements. The 

Board is aware that, as a consequence of 

the required disclosures, certain 

individuals may develop public 

reputations based on their industry 

specializations, audit history, and track 

records. The Board does not believe that 

such information would necessarily be 

harmful and could, to the contrary, be 

useful to investors and other financial 

statement users. In recent years, detailed 

information about the backgrounds, 

expertise, and reputations among clients 

and peers has become commonly 

available regarding other skilled 

professionals and such information is 

widely available to consumers of those 

services. The role of an auditor, 

including an engagement partner, differs 

from that of other professions, but the 

underlying principle that consumers of 

professional services could make better 

decisions with more information still 

applies. Further, investors generally 

commented that they would benefit 

from information about the identity of 

those who perform audits. 

Some commenters were concerned 

that identification of the engagement 

partner may confuse investors by 

putting a misleading emphasis on a 

single individual when an audit, 

particularly a large audit, is in fact a 

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Federal Register / Vol. 81, No. 30 / Tuesday, February 16, 2016 / Notices 7935 

14See Appendix A of AS 2101 (currently 

Auditing Standard No. 9), Audit Planning, and 

Appendix A of AS 1201 (currently Auditing 

Standard No. 10). 

15 Directive 2006/43/EC of the European 

Parliament and of the Council, Article 28, Audit 

Reporting (May 17, 2006). 

16 In order to evaluate the potential extent of 

confusion about partner names, staff researched six 

years of partner name data for the largest four 

accounting firms. Three scenarios of potential name 

confusion were constructed and quantitatively 

evaluated. The first scenario was two partners in a 

firm sharing the exact same name. The second 

scenario was a lead engagement partner changing 

audit firms. The final scenario was a partner 

changing last names. The total incidence of such 

scenarios appeared to affect less than 0.5% of the 

partner population in the sample. 

group effort. One commenter suggested 

that the disclosure should be expanded 

to include members of firm leadership 

to help clarify the responsibility for the 

audit; other commenters suggested 

adding context, such as disclosure of the 

proportion of total audit hours 

attributable to the engagement partner; 

identification of other parties that play 

a role in the engagement; identification 

of the engagement quality reviewer; or 

a sentence that explains the roles of the 

engagement partner and the firm signing 

the auditor’s report in the performance 

of the audit. 

It is true that an audit is often a group 

effort and that a large audit of a 

multinational company generally 

involves a very large team with more 

than one partner involved. Nevertheless, 

the engagement partner, who is the 

‘‘member of the engagement team with 

primary responsibility for the audit,’’ 14

plays a unique and critical role in the 

audit. It is not unusual in audits of large 

companies for audit committees to 

interview several candidates for their 

engagement partner when a new 

engagement partner is to be chosen 

because the qualifications and personal 

characteristics of the engagement 

partner are viewed by the audit 

committee and senior management as 

particularly important. Because of the 

engagement partner’s key role in the 

audit, it is appropriate when 

shareholders are asked to ratify the 

company’s choice of the registered firm 

as its auditor to be well informed about 

the leader of the team that conducted 

the most recently completed audit. 

Public identification of the name of the 

engagement partner will help serve that 

end. The role played in the audit by 

others such as the engagement quality 

reviewer, while important, is not 

comparable and, in the Board’s view, 

does not warrant separate identification 

at this time. 

Some commenters on the 2013 and 

2011 Releases expressed concerns that 

public identification of engagement 

partners may make them susceptible to 

threats of violence and suggested adding 

an exception to the disclosure 

requirement analogous to that in the 

EU’s Eighth Company Law Directive, 

which allows for an exception ‘‘if such 

disclosure could lead to an imminent 

and significant threat to the personal 

security of any person.’’ 15 However, 

other commenters on the 2011 Release 

indicated that auditors should not be 

treated differently, for security 

purposes, than other individuals 

involved in the financial reporting 

process who are publicly associated 

with a company in its SEC filings. The 

Board notes that a requirement to 

disclose the names of financial 

executives, board members, and audit 

committee members has been in place 

in the U.S. for quite some time, yet there 

is no indication that personal security 

risks have increased for these 

individuals. Therefore, the final rules do 

not include an exception to the required 

disclosure. 

Many commenters have also 

suggested that the simple act of naming 

the engagement partner will increase the 

engagement partner’s sense of 

accountability. Some of these 

commenters argued that increased 

accountability would lead to changes in 

behavior that would enhance audit 

quality. In their view, the availability of 

information about engagement partner 

history, and the potential that 

individuals may develop public 

reputations based on their industry 

specializations, audit history, and track 

records could be a powerful antidote to 

internal pressures or may foster 

improved compliance with existing 

auditing standards. Many accounting 

firms, associations of accountants, and 

others disputed this argument, claiming 

that engagement partners are already 

accountable as a result of internal 

performance reviews, regulatory 

oversight, and litigation risk. The Board 

believes allowing investors and other 

financial statement users to distinguish 

not just among firms, but also among 

partners, should enhance the incentive 

for engagement partners to develop a 

reputation for performing high-quality 

audits. 

Public disclosure of the engagement 

partner’s name could also have a 

beneficial effect on the engagement 

partner assignment process at some 

firms. In many public companies, 

particularly larger ones, the choice of an 

engagement partner is determined by 

both the firm and the audit committee. 

As discussed above, firms would be 

publicly accountable for these 

assignments in a way that they have not 

been previously. Some commenters 

noted that audit committees are 

currently able to obtain non-public 

information about engagement partners. 

These commenters suggested that 

mandated disclosure would not be 

useful to audit committees, since audit 

committees already know the 

information being disclosed. However, 

as noted by another commenter, 

disclosure would lead to more 

information becoming publicly available 

about all engagement partners on audits 

of issuers conducted under PCAOB 

standards, which should provide audit 

committees with additional context and 

benchmarking information when 

participating in the assignment process. 

Some commenters suggested that, 

because the financial statements and the 

auditor’s report are retrospective, the 

disclosure required under the proposed 

amendments would not be useful for 

shareholders deciding whether to ratify 

the audit committee’s choice of auditor. 

Under the final rules, shareholders will 

be able to find the identity of the 

engagement partner for the most 

recently completed audit but not for the 

next period. Other commenters, 

however, claimed that historical 

information would provide insight into 

the audit process and would enable 

investors to better evaluate the audit, 

which would assist them in making the 

ratification decision. 

For the reasons discussed above, the 

Board believes that disclosure of the 

name of the engagement partner will 

benefit investors and other financial 

statement users by providing more 

specific data points in the mix of 

information that can be used when 

evaluating audit quality and hence 

credibility of financial reporting. At the 

same time, the disclosure should, at 

least in some circumstances, enhance 

the accountability of both engagement 

partners and accounting firms. 

In commenting on the 2015 

Supplemental Request, some academics 

noted potential uncertainty or ambiguity 

that could arise if engagement partners’ 

names were not presented consistently 

in Form AP, if an engagement partner 

changed his or her name or changed 

firms, or if two engagement partners had 

the same name. Some commenters 

suggested that the PCAOB include a 

unique partner identifying number to 

ensure that partners could be 

unambiguously identified over time. 

Evidence available to PCAOB staff 

indicates that the problem of partner 

name confusion among the largest audit 

firms would be quite limited.16

However, because it may improve the 

usability of the data, Form AP includes 

a field for such a partner identifying 

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7936 Federal Register / Vol. 81, No. 30 / Tuesday, February 16, 2016 / Notices 

17See general instruction 7 and Item 3.1.a.6 of 

Form AP. The firm is required to assign a 10-digit 

Partner ID number, beginning with the Firm ID (a 

unique five-digit number based on the number 

assigned to the firm by the PCAOB) followed by a 

unique series of five digits assigned by the firm. The 

unique series element can be any series of numbers 

of the firm’s choosing that is unique to each 

engagement partner associated with the firm. For 

example, the unique series element could be 

sequential numbers, numbers based on the year the 

partner was admitted into the partnership, or 

random numbers. 

18See SEC Practice Section (‘‘SECPS’’) Section 

1000.45 Appendix K, SECPS Member Firms With 

Foreign Associated Firms That Audit SEC 

Registrants. The Board adopted Appendix K as part 

of its interim standards. See Rule 3400T(b), Interim 

Quality Control Standards; SECPS Section 

1000.08(n). Appendix K requires accounting firms 

associated with international firms to seek the 

adoption of policies and procedures consistent with 

certain objectives, including having policies and 

procedures for certain filings of SEC registrants 

which are the clients of foreign associated firms to 

be reviewed by persons knowledgeable in PCAOB 

standards. 

19For example, in their most recent audited 

financial statements filed as of May 15, 2015, 

approximately 51% and 41% of the population of 

companies in the Russell 3000 Index reported 

segment sales and assets, respectively, in 

geographic areas outside the country or region of 

the accounting firm issuing the auditor’s report. For 

the population of companies in the Russell 3000 

Index that reported segment sales or assets in 

geographic areas outside the country or region of 

the accounting firm issuing the auditor’s report, 

approximately 40% and 35% of those segment sales 

and assets, respectively, were in geographic areas 

outside the country or region of the accounting firm 

issuing the auditor’s report. 

20See Auditor Considerations Regarding Using 

the Work of Other Auditors and Engaging Assistants 

from Outside the Firm, PCAOB’s Staff Audit 

Practice Alert No. 6 (July 12, 2010) (discussing the 

trend of smaller U.S. firms’ auditing companies 

with operations in emerging markets and reminding 

auditors of their responsibilities in such audits). 

Staff Audit Practice Alert No. 6, at 2, noted that ‘‘in 

a 27-month period ending March 31, 2010, at least 

40 U.S. registered public accounting firms with 

fewer than five partners and fewer than ten 

professional staff issued audit reports on financial 

statements filed with the SEC by companies whose 

operations were substantially all in the China 

region.’’ See also Activity Summary and Audit 

Implications for Reverse Mergers Involving 

Companies from the China Region: January 1, 2007 

through March 31, 2010, PCAOB Research Note No. 

2011–P1 (Mar. 14, 2011) (discussing available 

information on the role of registered public 

accounting firms in auditing issuers in the China 

region). 

21AS 1205.02 (currently AU sec. 543.02) requires 

the auditor to decide whether his own participation 

is sufficient to enable him to serve as the principal 

auditor and to report as such on the financial 

statements. Current auditing standards state that the 

firm may serve as principal auditor even when 

‘‘significant parts of the audit may have been 

performed by other auditors.’’ AS 1205.02. The 

PCAOB has a project on its agenda to improve the 

auditing standards that govern the planning, 

supervision, and performance of audits involving 

other auditors. See Standard-Setting Agenda, Office 

of the Chief Auditor (Dec. 31, 2015). 

number, and the final rules require each 

registered accounting firm to assign a 

10-digit partner identifying number— 

Partner ID—to each of its partners 

serving as the engagement partner on 

audits of issuers.17 The number will be 

identified to a particular partner and 

will not be reassigned if the partner 

retires or otherwise ceases serving as 

engagement partner on issuer audits 

conducted by that firm. If an 

engagement partner changes firms, the 

new firm must assign a new Partner ID 

to the engagement partner. The new 

firm will be responsible for reporting on 

Form AP the engagement partner with 

his or her new Partner ID and all Partner 

IDs previously associated with the 

engagement partner. The Board believes 

that the ability to unambiguously 

identify each engagement partner with 

his or her issuer audit history may 

improve the usability of the data 

gathered on Form AP and the overall 

cost of implementation should be low. 

Disclosure About Other Participants in 

the Audit 

Introduction 

In the 2013 Release, the Board 

proposed disclosure in the auditor’s 

report of: (1) The names, locations, and 

extent of participation of other 

independent public accounting firms 

that took part in the audit and (2) the 

locations and extent of participation, on 

an aggregate basis by country, of certain 

other persons not employed by the 

auditor that took part in the audit. 

Extent of participation would have been 

determined as a percentage of total audit 

hours, excluding hours attributable to 

the engagement quality reviewer, 

Appendix K 18 review and internal 

audit. Extent of participation would 

have been disclosed as a number or 

within a range (less than 5%, 5% to less 

than 10%, 10% to less than 20%, and 

so on in 10% increments) and would 

have been based on estimates of audit 

hours. Other accounting firms whose 

participation was less than 5% of total 

audit hours were not required to be 

individually identified; rather, the 

number of such other accounting firms 

and their aggregate participation would 

have been disclosed. Similarly, for 

nonaccounting firm participants in the 

same country whose aggregate 

participation was less than 5%, 

disclosure of the number of such 

countries and the aggregate 

participation of nonaccounting firm 

participants in such countries would 

have been required. 

The 2015 Supplemental Request 

solicited comment on limiting 

disclosures with respect to 

nonaccounting firm participants, 

including the possibility of eliminating 

such disclosures altogether or tailoring 

the requirements so that disclosure 

would only be provided with respect to 

nonaccounting firms that were not 

entities controlled by or under common 

control with the auditor or employees of 

such entities. In addition, unlike the 

2013 Release (but aligned with the 2011 

Release), the disclosure requirements 

and computation of total audit hours 

presented in the 2015 Supplemental 

Request excluded specialists engaged, 

not employed, by the auditor. 

Some commenters generally 

supported the requirements in the 2013 

Release and asserted that disclosure of 

the other accounting firms involved in 

the audit would provide useful 

information to investors. Other 

commenters opposed the requirement, 

because of potential consent 

requirements and liability under the 

Securities Act of 1933 (‘‘Securities 

Act’’), or based on the belief that 

disclosures were not useful information, 

could confuse financial statement users 

about the degree of responsibility for the 

audit assumed by the accounting firm 

signing the auditor’s report, or could 

contribute to information overload. 

Others suggested that the current 

auditing standards (for example, AS 

1205 (currently, AU sec. 543)) in this 

area are adequate. Many commenters on 

the 2015 Supplemental Request 

supported other accounting firm 

disclosures on Form AP (even some 

who disagreed with engagement partner 

disclosure requirements). Most 

commenters supported having no 

required disclosure of nonaccounting 

firm participants. 

The Board believes that information 

about other accounting firms 

participating in the audit is of 

increasing importance as companies 

become more global.19 Many companies 

with substantial operations outside the 

United States are audited by U.S.-based, 

PCAOB-registered public accounting 

firms.20 The Board’s inspection process 

has revealed that the extent of 

participation by firms other than the one 

that signs the auditor’s report ranges 

from none to most of the audit work (or, 

in extreme cases, substantially all of the 

work).21 In many situations, the 

accounting firm signing the auditor’s 

report uses another accounting firm in 

a foreign country to audit the financial 

statements of a subsidiary in that 

country. These arrangements are often 

used in auditing today’s multinational 

corporations. At the same time, the 

quality of the audit is dependent, to 

some degree, on the competence and 

integrity of the participating accounting 

firms. This is especially true when the 

firm signing the auditor’s report has 

reviewed only a portion of the work 

done by the other accounting firm, as is 

permitted under AS 1205 (currently AU 

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22See AS 1205 (currently AU sec. 543) for a list 

of matters the auditor is required to review. 

23See Audit Risk in Certain Emerging Markets, 

PCAOB’s Staff Audit Practice Alert No. 8, at 19 

(Oct. 3, 2011) (‘‘Through the Board’s oversight 

activities, the Board’s staff has observed instances 

in certain audits of companies in emerging markets 

in which the auditor did not properly coordinate 

the audit with another auditor.’’); see also Order 

Instituting Disciplinary Proceedings, Making 

Findings, and Imposing Sanctions, In the Matter of 

Clancy and Co., P.L.L.C. et al., PCAOB Release No. 

105–2009–001 (Mar. 31, 2009) (imposing sanctions 

in a case in which a U.S. firm used a significant 

amount of audit work performed by a Hong Kong 

firm without adequately coordinating its work with 

that of the Hong Kong firm). 

24PCAOB Rule 1001(p)(iii), Definition of Terms 

Employed in Rules. 

25This number can be found by viewing the 

firm’s summary page on the PCAOB Web site, 

where it is displayed parenthetically next to the 

name of the firm—firm name (XXXXX). If the 

number assigned to the firm by the PCAOB has 

fewer than five digits, leading zeroes should be 

added before the number to make the five digit Firm 

ID, for example, 99 should be presented as 00099. 

For example, all currently-registered firms have a 

number assigned by the PCAOB. 

sec. 543).22 The Board and its staff 

previously conveyed their concern 

about some practices they have seen in 

these arrangements.23 In addition to 

providing potentially valuable 

information to investors and other 

financial statement users about who 

actually performed the audit, the 

disclosure of other accounting firms 

participating in the audit could provide 

other potentially valuable information, 

such as the extent of participation in the 

audit by other accounting firms in 

jurisdictions in which the PCAOB 

cannot conduct inspections. 

Some commenters expressed concern 

that including information in the 

auditor’s report about other participants 

in the audit might confuse financial 

statement users as to who has overall 

responsibility for the audit or appear to 

dilute the responsibility of the firm 

signing the auditor’s report. Other 

commenters, including investors and 

other financial statement users, 

expressed support for the disclosure and 

indicated that investors and other 

financial statement users are able to 

distinguish and evaluate many 

disclosures made by management. 

These commenters have also asserted 

that they would be able to consider the 

information appropriately. To address 

concerns about potential confusion 

regarding who has overall responsibility 

for the audit or potential dilution of the 

responsibility of the signing firm, the 

final rules provide that if disclosure 

regarding other accounting firms is 

voluntarily included in the auditor’s 

report, the auditor’s report must also 

include a statement that the firm signing 

the auditor’s report is responsible for 

the audits and audit procedures 

performed by the other accounting firms 

and has supervised or performed 

procedures to assume responsibility for 

the work in accordance with PCAOB 

standards. 

Participants for Which Disclosure Is 

Required 

Other Accounting Firms 

Under the final rules, disclosure is 

required with respect to all other 

accounting firms that participated in the 

audit. The final rules define an ‘‘other 

accounting firm’’ as (i) a registered 

public accounting firm other than the 

firm filing Form AP, or (ii) any other 

person or entity that opines on the 

compliance of any entity’s financial 

statements with an applicable financial 

reporting framework. 

For purposes of Form AP, an other 

accounting firm participated in the 

audit if (i) the firm filing Form AP 

assumed responsibility for the work and 

report of the other accounting firm as 

described in paragraphs .03–.05 of AS 

1205 (currently AU sec. 543), or (ii) the 

other accounting firm or any of its 

principals or professional employees 

was subject to supervision under AS 

1201 (currently Auditing Standard No. 

10). 

As noted above, the 2013 Release 

contemplated that disclosure would be 

required with respect to other ‘‘public 

accounting firms’’ that took part in the 

audit. Under the Board’s rules, ‘‘public 

accounting firm’’ means ‘‘a 

proprietorship, partnership, 

incorporated association, corporation, 

limited liability company, limited 

liability partnership, or other legal 

entity that is engaged in the practice of 

public accounting or preparing or 

issuing audit reports.’’ 24 The change in 

the definition is intended to facilitate 

compliance and avoid potential 

uncertainty about the entities for which 

disclosure must be provided on Form 

AP. 

The amount of disclosure required 

varies with the level of participation in 

the audit. For each other accounting 

firm whose participation accounted for 

at least 5% of total audit hours, the 

following information must be 

provided: Legal name; a unique fivedigit identifier (‘‘Firm ID’’) for firms that 

have a publicly available PCAOBassigned number; 25 headquarters office 

location (city and state (or, if outside the 

US, city and country)); and extent of 

participation, expressed as a percentage 

(either as a single number or within a 

range) of total audit hours. 

Form AP includes a new requirement 

to provide the Firm ID for all currentlyregistered firms as well as other 

accounting firms that have a publicly 

available PCAOB-assigned number. 

Although commenters did not raise a 

concern about needing unique 

identifiers for firms as they did for 

engagement partners, the staff is aware 

that some accounting firms in the same 

country may have the same or very 

similar names. To alleviate possible 

confusion among accounting firm names 

and to ensure that firms that have a 

publicly available PCAOB-assigned 

number can be more easily linked to 

other PCAOB registration and 

inspection data, Form AP requires 

disclosure of the Firm ID. 

Some commenters expressed concern 

that disclosure of other accounting firms 

participating in the audit may provide 

information about the issuer’s 

operations that would not otherwise be 

required to be disclosed (for example, 

countries in which the issuer operates). 

Given that the reporting provides 

information about where the audit was 

conducted and not necessarily where 

the issuer’s business operations are 

located and that the names and 

locations of other accounting firms are 

only identified if their work constitutes 

at least 5% of total audit hours, the 

Board has not revised the proposed 

requirements to address this concern. 

For other accounting firms that 

participated in the audit but whose 

individual participation accounted for 

less than 5% of total audit hours, the 

following aggregated information is 

required: The number of such other 

accounting firms; and the aggregate 

extent of participation of such other 

accounting firms, expressed as a 

percentage of total audit hours. 

Similar to comments received on the 

2011 Release, a few commenters on the 

2013 Release suggested that the Board 

should consider requiring disclosure 

regarding the nature of the work of or 

areas audited by other accounting firms. 

Further, some commenters suggested 

that the Board require the addition of 

clarifying language regarding the 

structure of the firm, the firm’s system 

of quality controls, and the work 

performed by the firm signing the 

auditor’s report over the work of other 

accounting firms participating in the 

audit. 

After considering comments on the 

2011 and 2013 Releases, no requirement 

was added for additional clarifying 

language because the Board does not 

believe that requiring the disclosure of 

this more detailed information is 

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26See AS 1205.03, .06–.09 (currently AU sec. 

543.03, .06–.09). 

27Additionally, the amendments to AS 1205 

(currently AU sec. 543) remove, as unnecessary, the 

requirement to obtain express permission of the 

other accounting firm when deciding to disclose the 

firm’s name in the auditor’s report because, as 

discussed below, the SEC rules already include a 

requirement that the auditor’s report of the referredto auditor be filed with the SEC. 

28Under PCAOB Rule 2100, Registration 

Requirements for Public Accounting Firms, each 

public accounting firm that ‘‘plays a substantial role 

in the preparation or furnishing of an audit report 

with respect to any issuer, broker, or dealer must 

be registered with the Board.’’ 

29See AS 1205.07 (currently AU sec. 543.07). 

Existing PCAOB standards require that the auditor 

disclose the magnitude of the portion of the 

financial statements audited by the referred-to 

accounting firm by stating the dollar amount or 

percentages of one or more of the following: total 

assets, total revenues, or other appropriate criteria, 

whichever most clearly reveals the portion of the 

financial statements audited by the referred-to 

accounting firm. 

30PCAOB Release No. 2011–007, at 18. 

31The 2011 Release noted that some accounting 

firms had begun a practice, known as offshoring, 

whereby certain portions of the audit are performed 

by offices in a country different than the country 

where the firm is headquartered. The Board 

understands that offshored work may be performed 

by another office of or by entities that are distinct 

from, but that may be affiliated with, the registered 

firm that signs the auditor’s report. The Board notes 

that the practice of sending some audit work to 

offshore service centers, typically in countries 

where labor is inexpensive, has been increasing in 

recent years. 

32The Board’s standards describe alternative 

practice structures as ‘‘nontraditional structures’’ 

whereby a substantial (the nonattest) portion of an 

accounting firm’s practice is conducted under 

public or private ownership, and the attest portion 

of the practice is conducted through the accounting 

firm. ET section 101.16, 101–14—The effect of 

alternative practice structures on the applicability 

of independence rules. 

33Unless the context dictates otherwise, 

‘‘nonaccounting firm participant’’ as used in this 

release means any person or entity other than the 

principal auditor or any other accounting firm that 

participates in an audit. 

necessary to meet the Board’s overall 

objective of this rulemaking. Moreover, 

the final rules require the firm preparing 

Form AP to acknowledge its 

responsibility for the audits or audit 

procedures performed by other 

accounting firms that participated in the 

audit. 

Referred-To Auditors 

In situations in which the auditor 

makes reference to another accounting 

firm in the auditor’s report,26 the 2015 

Supplemental Request suggested that 

the auditor would also disclose the 

name of the other public accounting 

firm (‘‘referred-to auditor’’), the city and 

state (or, if outside the United States, 

city and country) of the office of the 

other public accounting firm that issued 

the other audit report, and the 

magnitude of the portion of the financial 

statements audited by the referred-to 

auditor on Form AP. The Board adopted 

these requirements substantially as 

described in the 2015 Supplemental 

Request.27 The requirement to file Form 

AP does not apply to referred-to 

auditors, since the referred-to auditor 

may not be required to register with the 

PCAOB28 and would not generally be 

conducting the audit of an issuer, but 

rather a subsidiary or business unit of 

an issuer. 

Unlike the disclosures for other 

accounting firm participants, which are 

based on the percentage of total audit 

hours, Form AP disclosures for referredto auditors effectively incorporate the 

existing requirements for disclosure of 

the magnitude of the portion of the 

financial statements audited by the 

referred-to auditor.29 In addition, Form 

AP requires the name, the city and state 

(or, if outside the United States, city and 

country) of headquarters’ office location, 

and Firm ID, if any, of the referred-to 

auditor. 

Nonaccounting Firm Participants 

Under the 2013 Release, disclosure 

would have been required with respect 

to all ‘‘persons not employed by the 

auditor’’ 30 that the auditor was required 

to supervise pursuant to AS 1201 

(currently Auditing Standard No. 10). 

Such nonaccounting firm participants 

would not have been identified by 

name. Rather, these participants would 

have been identified in the auditor’s 

report as ‘‘persons in [country] not 

employed by our firm.’’ These 

disclosures would have permitted 

investors to determine how much of the 

audit was performed by nonaccounting 

firm participants in a particular 

jurisdiction but not the nature of the 

work performed by those nonaccounting 

firm participants or whether they were, 

for example, offshore service centers, 

consultants, or another type of entity. 

Commenters’ reactions to the 

reproposed disclosure requirements 

were mixed. Some commenters argued 

for uniform treatment of accounting firm 

participants and nonaccounting firm 

participants, either to make disclosure 

easier to understand or to avoid the 

creation of incentives to engage 

nonaccounting firm participants rather 

than other accounting firms. Some of 

these commenters suggested that the 

nature of services performed by persons 

not employed by the auditor should also 

be disclosed. Other commenters 

questioned the value of the disclosures 

or suggested that the disclosures could 

be confusing or subject to 

misinterpretation. Some commenters 

were particularly critical of requiring 

disclosures regarding ‘‘offshored’’ 

work 31 and work performed by leased 

personnel (often in firms that have an 

alternative practice structure 32). These 

commenters asserted that work 

performed by nonaccounting firm 

participants under the direct 

supervision and review of the firm 

signing the auditor’s report should not 

be required to be separately identified, 

regardless of who performed the work 

and where the work was performed. 

One commenter further asserted that 

disclosure should not be required 

regarding subsidiaries of, or other 

entities controlled by, the registered 

firm issuing the auditor’s report or 

entities that are subject to common 

control (for example, sister entities that 

perform tax, valuation, or other 

assistance to the registered firm), 

arguing that the manner in which a 

registered firm is structured should not 

trigger a disclosure requirement. 

The 2015 Supplemental Request 

solicited comment on eliminating 

disclosures regarding nonaccounting 

firm participants or tailoring them to 

eliminate disclosure for entities that are 

controlled by or under common control 

with the auditor, and the employees of 

such entities. While some commenters 

supported the disclosure requirements, 

most argued that disclosure would not 

be useful and may be confusing or 

inconsistent, given the differences in 

legal structures and practice 

arrangements across global networks. 

After considering the comments and 

the intention of the disclosure, the 

requirement to disclose the location and 

extent of participation of nonaccounting 

firm participants has been eliminated 

from the final rule.33 The Board 

recognizes that, while nonaccounting 

firms may participate in the audit, the 

Board’s intent is to provide information 

about the participation of accounting 

firms. Accounting firms are responsible 

for supervising the work of 

nonaccounting firm participants. In 

addition, the Board’s Web site includes 

names of registered accounting firms 

and inspection reports, as well as 

disciplinary actions with respect to 

registered public accounting firms. 

Information about nonaccounting firm 

audit participants may not be as 

meaningful to users since similar 

information is not available for these 

participants. The Board can monitor 

trends in the use of nonaccounting 

firms, which could have an effect on 

audit quality, and analyze whether such 

trends are related to the requirements of 

Form AP. 

Nonaccounting firm participants 

participate in audits at the request of 

and in support of the audit work of 

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34See AS 1220 (currently Auditing Standard No. 

7), Engagement Quality Review. 

35AS 1210 (currently AU sec. 336), Using the 

Work of a Specialist, describes a specialist as ‘‘a 

person (or firm) possessing special skill or 

knowledge in a particular field other than 

accounting or auditing.’’ Examples of specialists 

include, but are not limited to, actuaries, appraisers, 

engineers, environmental consultants, and 

geologists. Income taxes and information 

technology are specialized areas of accounting and 

auditing and, therefore, persons or firms possessing 

such skills are not considered specialists. AS 

1210.01. 

36See paragraph 17 of AS 2201 (currently 

Auditing Standard No. 5), An Audit of Internal 

Control Over Financial Reporting That Is Integrated 

with An Audit of Financial Statements. 

37See paragraph .27 of AS 2605, Consideration of 

the Internal Audit Function (currently AU sec. 322, 

The Auditor’s Consideration of the Internal Audit 

Function in an Audit of Financial Statements). 

38Nonetheless, the engagement quality reviewer 

has an important role in the audit. The engagement 

quality reviewer performs an evaluation of the 

significant judgments made by the engagement team 

and the related conclusions reached in forming the 

overall conclusion on the engagement and in 

preparing the engagement report, if a report is to be 

issued, in order to determine whether to provide 

concurring approval of issuance. See AS 1220 

(currently Auditing Standard No. 7). 

39See Financial Accounting Standards Board 

(‘‘FASB’’) Accounting Standards Codification 

(‘‘ASC’’) Topic 323, Investments—Equity Method 

and Joint Ventures. 

40Under AS 1215 (currently Auditing Standard 

No. 3), the audit documentation should be in 

sufficient detail to enable an experienced auditor, 

having no previous connection with the 

engagement, to understand the computation of total 

audit hours and the method used to estimate hours 

when actual hours were unavailable. 

accounting firms participating in the 

audit. For that reason, unless expressly 

excluded from the computation of total 

audit hours, hours incurred by 

nonaccounting firm participants in the 

audit are included in the calculation of 

total audit hours and should be 

allocated among the other accounting 

firms that participated in the audit on 

the basis of which accounting firm 

commissioned and directed the 

applicable work of the nonaccounting 

firm. 

Exclusions From Disclosure and 

Computation of Total Audit Hours 

The 2015 Supplemental Request 

indicated that the following persons 

would be excluded from the disclosures 

and from the computation of total audit 

hours: the engagement quality 

reviewer; 34 persons performing a 

review pursuant to Appendix K; 

specialists engaged, not employed, by 

the auditor; 35 internal auditors, other 

company personnel, or third parties 

working under the direction of 

management or the audit committee, 

who provided direct assistance in the 

audit of internal control over financial 

reporting; 36 or internal auditors who 

provided direct assistance in the audit 

of the financial statements.37 While 

some commenters on the 2015 

Supplemental Request suggested that 

excluding the engagement quality 

reviewer and Appendix K review from 

calculation of audit hours would add 

administrative effort, commenters at 

earlier stages of the rulemaking were 

supportive of these exclusions. The 

Board continues to believe that the 

exclusion of the engagement quality 

reviewer is appropriate because he or 

she is not under the supervision of the 

engagement partner.38 Similarly, the 

Appendix K review is excluded because 

the engagement partner does not 

supervise or assume responsibility for 

that work. 

The hours incurred by persons 

employed or engaged by the company 

who provided direct assistance to the 

auditor are excluded because 

determining the extent of their 

participation in the audit may be 

impractical. Such persons also may 

perform other tasks for the company not 

related to providing direct assistance to 

the auditor or may not track time spent 

on providing the direct assistance. 

Under the 2013 Release, the hours of 

persons with specialized skill or 

knowledge (‘‘specialists’’) engaged by 

the auditor were included in the 

calculation of audit hours. This was a 

change from the 2011 Release, under 

which engaged specialists were 

excluded from total audit hours. One 

commenter on the 2013 Release 

suggested that including specialists in 

the calculation of audit hours and 

disclosure of persons not employed by 

the auditor may put firms that engage 

specialists at a competitive disadvantage 

compared to firms that employ 

specialists. Some commenters also 

expressed concerns that it may be 

challenging to obtain hours incurred by 

the specialists, especially in cases where 

the engagement is on a fixed-fee basis. 

After considering comments, the Board 

determined to exclude specialists 

engaged, not employed, by the auditor 

from disclosure and the computation of 

total audit hours. 

Some commenters requested 

clarification regarding the treatment of 

audit hours related to investments 

accounted for using the equity method 

of accounting.39 The final rules have 

been revised to clarify that hours 

incurred in the audit of entities in 

which the issuer has such an investment 

are not part of total audit hours. 

Extent of Participation in the Audit— 

Percentage of Total Audit Hours 

Audit Hours as a Metric for 

Participation in the Audit 

Under the 2013 Release, the extent of 

participation in the audit would have 

been determined using the percentage of 

total audit hours as the metric. 

Most commenters agreed with 

measurement based on the percentage of 

audit hours. Some commenters 

suggested using other metrics, including 

audit fees, the percentage of assets or 

revenue that the auditor and other 

participants were responsible for 

auditing, and the magnitude of the 

company’s segment or subsidiary 

audited by the other participants. 

After consideration of the comments 

received, the Board believes that 

percentage of total hours in the most 

recent period’s audit is an appropriate 

and practical metric for the extent of 

other accounting firms’ participation in 

the audit, for the purpose of disclosure 

on Form AP. Audit fees may not fairly 

represent the extent of other accounting 

firms’ participation in the audit. Audit 

fees in the proxy disclosure may include 

fees for other services (for example, 

other regulatory and statutory filings) 

and may exclude fees paid directly to 

other accounting firms rather than to the 

auditor. Further, because labor rates 

vary widely around the world, audit 

fees would result in an inconsistent 

metric compared to audit hours. The use 

of revenue or assets tested may not be 

suitable in all circumstances, 

particularly when other accounting 

firms and the auditor perform audit 

procedures on the same location, 

business unit, or financial statement 

line item. 

The firm should document in its files 

the computation of total audit hours on 

a basis consistent with AS 1215 

(currently Auditing Standard No. 3), 

Audit Documentation.40

Elements of Total Audit Hours 

In general, total audit hours will be 

comprised of the hours of the principal 

auditor, nonaccounting firm 

participants that assist the principal 

auditor or other accounting firms, and 

other accounting firms participating in 

the audit. Total audit hours exclude 

hours incurred by the engagement 

quality reviewer, Appendix K reviewer, 

specialists engaged by the auditor, 

internal audit, among others. 

Disclosure Threshold 

The 2013 Release set 5% of total audit 

hours as the threshold for identification 

of other participants in the audit. Many 

commenters supported the 5% 

threshold. Other commenters suggested 

various other thresholds, such as 3%, 

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41On the 2011 Release, commenters suggested 

10% to be consistent with certain requirements in 

accounting standards, such as the 10% of revenue 

threshold for disclosing sales to a single customer 

under FASB pronouncements. See FASB ASC, 

Topic 280, Segment Reporting, subparagraph 10– 

50–42. 

42According to paragraph (p)(ii), ‘‘Play a 

Substantial Role in the Preparation or Furnishing of 

an Audit Report,’’ of PCAOB Rule 1001, ‘‘[t]he 

phrase ‘play a substantial role in the preparation or 

furnishing of an audit report’ means—(1) to perform 

material services that a public accounting firm uses 

or relies on in issuing all or part of its audit report, 

or (2) to perform the majority of the audit 

procedures with respect to a subsidiary or 

component of any issuer, broker, or dealer the 

assets or revenues of which constitute 20% or more 

of the consolidated assets or revenues of such 

issuer, broker, or dealer necessary for the principal 

auditor to issue an audit report [on the issuer].’’ 

Under Rule 2100, each public accounting firm that 

‘‘plays a substantial role in the preparation or 

furnishing of an audit report with respect to any 

issuer, broker, or dealer must be registered with the 

Board.’’ 

43PCAOB staff analyzed information provided by 

auditors of more than 100 larger issuers with 

respect to audit engagements conducted in 2013 

and 2014. The selected information included the 

names of other accounting firms that participated in 

the audit and their individual extent of 

participation as a percentage of the total audit 

hours, without using a threshold. The Board’s staff 

used this information to determine the approximate 

number of other accounting firm participants in 

larger audit engagements that would be required to 

be disclosed individually using 3%, 5%, and 10% 

thresholds. 

44Section 11 of the Securities Act imposes 

liability on certain participants in a securities 

offering, including every accountant who, with his 

or her consent, has been named as having prepared 

or certified any part of the registration statement or 

any report used in connection with the registration 

statement. Section 7 of the Securities Act requires 

that the consent of every accountant so named in 

a registration statement must be filed with the 

registration statement. 

10%,41 or the PCAOB’s substantial role 

threshold of 20%.42

The Board’s intention is to provide 

meaningful information to investors and 

other financial statement users about 

participants in the audit, without 

imposing an undue compliance burden 

on auditors. Based on PCAOB staff 

analysis of available data about the 

participation of other accounting firms 

in the audit, the Board believes using a 

5% threshold would, in most cases, 

result in disclosing the names of other 

accounting firms that collectively make 

up most of the audit effort (measured by 

hours) beyond that of the firm signing 

the auditor’s report, and would result in 

identification of one or two other 

participant(s) on average.43 The final 

rule therefore retains the threshold at 

5% of total audit hours. The final rule 

also requires firms to disclose the total 

number of other accounting firms that 

were individually less than 5% and 

their total extent of participation to 

provide investors and others with a 

complete picture of the effort by 

participating firms. 

Presentation as a Single Number or 

Within a Range 

The 2013 Release would have 

required firms to disclose the percentage 

of total audit hours of other participants 

either as a single number or within a 

series of ranges. Commenters supported 

the ability to present the disclosure of 

other participants in ranges or as a 

single number. This requirement was 

adopted in Form AP as reproposed to 

provide firms flexibility in completing 

the disclosures while providing 

investors and other financial statement 

users meaningful information about the 

relative extent of participation of other 

accounting firms and to allow firms 

flexibility to choose the method of 

presentation, i.e., as a single number or 

within a range, that best suits their 

circumstances, for all other accounting 

firms required to be identified. 

Use of Estimates 

The 2013 Release stated that auditors 

would be able to use estimates of audit 

hours when actual hours were not 

available. Many commenters on the 

2015 Supplemental Request requested 

clarification that estimation of audit 

hours would be permitted. To respond 

to commenters’ concerns, the 

instructions to Form AP provide that 

firms may use a reasonable method to 

estimate audit hours when actual hours 

have not been reported or are otherwise 

unavailable. The firm should document 

in its files the method used to estimate 

hours when actual audit hours are 

unavailable on a basis consistent with 

AS 1215 (currently Auditing Standard 

No. 3). 

Liability Considerations 

Throughout the Board’s rulemaking 

process, commenters have expressed 

concern about the impact that public 

identification of key audit participants, 

particularly in the auditor’s report, 

could have on the potential liability or 

litigation risks of those participants 

under the federal securities laws. The 

Board takes these concerns seriously 

and has sought comment throughout 

this rulemaking on various means of 

disclosure—from engagement partner 

signature on the auditor’s report, to 

disclosure in the auditor’s report, to 

disclosure on Form AP—in part to 

respond to them. The Board believes the 

final rule accomplishes its disclosure 

goals while appropriately addressing 

these concerns by commenters. 

As noted in the 2015 Supplemental 

Request, some commenters on the 2013 

Release suggested that identifying the 

engagement partner and the other 

participants in the audit in the auditor’s 

report could create both legal and 

practical issues under the federal 

securities laws by increasing the named 

parties’ potential liability and could 

require their consent if the auditors’ 

reports naming them were included in, 

or incorporated by reference into, 

registration statements under the 

Securities Act.44 In addition, some 

commenters expressed concerns about 

the possible effects of the engagement 

partner’s name appearing in the 

auditor’s report on liability and 

litigation risk under Section 10(b) of the 

Exchange Act and Rule 10b–5 

thereunder. In their view, identification 

in the auditor’s report could make it 

more likely that identified persons 

would be named in a lawsuit or could 

affect their liability position. Many 

commenters on the 2013 Release urged 

the Board to proceed with the new 

disclosure requirements, if it 

determined to do so, by mandating 

disclosure on an amended PCAOB Form 

2, firm’s annual report, or on a newly 

created PCAOB form as a means of 

responding to such concerns. 

Other commenters stated that, in view 

of the PCAOB’s investor protection 

mission, the 2013 Release gave too 

much weight to commenters’ concerns 

about liability. These commenters 

asserted that naming the engagement 

partner, in itself, would not affect the 

basis on which liability could be 

founded. 

The 2015 Supplemental Request 

solicited comment on whether 

disclosure on Form AP would mitigate 

commenters’ concerns about liabilityrelated consequences under federal or 

state law. While some commenters 

asserted that requiring disclosure on 

Form AP would not reduce litigation 

risk, others argued that there was no risk 

that Form AP disclosure would give rise 

to additional liability. Most accounting 

firms that commented on the issue 

agreed that Form AP would address 

some or all of their liability concerns. 

Several commenters asserted that the 

use of Form AP would eliminate the 

need to obtain consents under Section 7 

of the Securities Act and mitigate or 

eliminate concerns about potential 

liability under Section 11 of the 

Securities Act. Commenter views on the 

impact of Form AP on potential liability 

under Exchange Act Section 10(b) and 

Rule 10b–5 were less uniform, with 

some saying that disclosures on Form 

AP would not have an impact on 

potential liability under Section 10(b) 

and Rule 10b–5, some suggesting the 

disclosures on Form AP would increase 

potential liability, and others saying that 

the impact would be uncertain because 

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45While the requirement to file Form AP is 

triggered by the issuance of an auditor’s report, the 

form would not automatically be incorporated by 

reference into or otherwise made part of the 

auditor’s report. 

46See AU sec. 1205.03, .06–.09 (currently AU sec. 

543.03, .06–.09). 

47See Rule 2–05 of Regulation S–X, 17 CFR 

210.2–05. 

of continued development of the law in 

the area. 

The Board believes that disclosure on 

Form AP appropriately addresses 

concerns raised by commenters about 

liability. As commenters suggested, 

disclosure on Form AP should not raise 

potential liability concerns under 

Section 11 of the Securities Act or 

trigger the consent requirement of 

Section 7 of that Act because the 

engagement partner and other 

accounting firms would not be named in 

a registration statement or in any 

document incorporated by reference 

into one.45 While the Board recognizes 

that commenters expressed mixed views 

on the potential for liability under 

Exchange Act Section 10(b) and Rule 

10b–5 and the ultimate resolution of 

Section 10(b) liability is outside of its 

control, the Board nevertheless does not 

believe any such risks warrant not 

proceeding with the Form AP approach. 

Finally, one commenter asserted that 

the Board should not pursue disclosure 

requirements for the engagement partner 

and other participants in the audit 

unless it can be done in a ‘‘liability 

neutral’’ way. The Board’s purpose in 

this project is not to expose auditors to 

additional liability, and, consistent with 

that, it has endeavored to reduce any 

such liability consequences. The Board 

does not agree, however, that it should 

not seek to achieve the anticipated 

benefits of a new rule—here, increased 

transparency and accountability for key 

participants in the audit—unless it can 

somehow be certain that its actions will 

not affect liability in any way. On the 

whole, the Board believes it has 

appropriately addressed the concerns 

regarding liability consequences of its 

proposal in a manner compatible with 

the objectives of this rulemaking, and in 

view of the rulemaking’s anticipated 

benefits. 

Voluntary Disclosure in the Auditor’s 

Report 

The 2015 Supplemental Request 

solicited comment on whether, in 

addition to filing Form AP, auditors 

could voluntarily provide the same 

information in the auditor’s report. 

Comments on this issue were mixed. 

Several commenters noted that they 

preferred disclosure of this information 

in the auditor’s report, although they 

were willing to accept Form AP as a 

compromise. Another commenter stated 

that optionality about whether to 

provide disclosure in the auditor’s 

report could also provide a signal for 

differentiation. 

Other commenters, including almost 

all the accounting firms that 

commented, suggested that the Board 

should prohibit or not encourage 

voluntary disclosure in the auditor’s 

report. They stated that voluntary 

disclosure in the auditor’s report would 

give rise to the same legal and practical 

challenges as the previously proposed 

required auditor’s report disclosure. 

Some of these commenters suggested 

that if the auditor chose to add 

disclosures in the auditor’s report then 

related costs would also increase. Some 

other commenters were concerned that 

information in some, but not all, 

auditors’ reports may confuse financial 

statement users about where to obtain 

the information. 

The amendments will permit 

voluntary disclosure in the auditor’s 

report. AS 3101 (currently AU sec. 508) 

is amended to permit voluntary 

disclosure in the auditor’s report of the 

engagement partner and other 

accounting firms. AS 1205 (currently 

AU sec. 543) is amended to permit firms 

to disclose in certain circumstances that 

other accounting firms participated in 

the audit, which had been previously 

prohibited. Under these amendments, 

auditors can provide information in the 

auditor’s report about the engagement 

partner, other accounting firms, or both, 

choosing if any information is disclosed 

in the auditor’s report. However, Form 

AP will provide investors and financial 

statement users with all of the required 

disclosures. 

If disclosure is made in the auditor’s 

report about other accounting firms, the 

disclosure must include information 

about all of the other accounting firms 

required on Form AP, so that auditors 

cannot choose to include some other 

accounting firms and exclude others. 

The auditor’s report must also include 

a statement confirming the principal 

auditor’s responsibility for the work of 

other auditors and that it has supervised 

or performed procedures to assume 

responsibility for their work in 

accordance with PCAOB standards, to 

avoid potential confusion about the 

respective responsibilities of the 

principal auditor and the other 

accounting firms. When making these 

disclosures in the auditor’s report, the 

language should be consistent with 

PCAOB standards. In particular, any 

additional language that could be 

viewed as disclaiming, qualifying, 

restricting, or minimizing the auditor’s 

responsibility for the audit or the audit 

opinion on the financial statements is 

not appropriate and may not be used. 

The Board also adopted amendments 

to AS 1205 (currently AU sec. 543) to 

remove, as unnecessary, the 

requirement to obtain express 

permission of the other accounting firm 

when deciding to disclose the firm’s 

name in the auditor’s report when 

responsibility for the audit is divided 

with another firm.46 Because the 

Commission rules already include a 

requirement that the auditor’s report of 

the referred-to firm should be filed with 

the Commission, the name of the firm is 

already made public.47

Allowing voluntary disclosure in the 

auditor’s report responds to some 

investors’ preference regarding location 

and timing for disclosures. Some 

auditors may choose to make the 

disclosures in the auditor’s report, and 

this might provide auditors a way to 

differentiate themselves. Auditors are 

not required to include anything in the 

auditor’s report and would presumably 

do so only if they choose, taking into 

account, for example, any costs 

associated with disclosure in the 

auditor’s report, such as obtaining 

consents pursuant to the Securities Act, 

if required, and the resulting potential 

for liability. Inconsistency across 

auditor’s reports should not be a source 

of concern because complete data will 

be available on the PCAOB’s Web site as 

a result of mandatory disclosures on 

Form AP for all issuer audits. 

Filing Requirements 

Filing Deadline 

The 2015 Supplemental Request 

contemplated a filing deadline for Form 

AP of 30 days after the date the auditor’s 

report is first included in a document 

filed with the SEC, with a shorter 

deadline of 10 days for initial public 

offerings (‘‘IPOs’’). This period was 

intended to balance the time needed to 

compile the required information, 

particularly for firms that submit 

multiple forms at the same time, with 

investor preference that the information 

be made available promptly. 

Comments on the filing deadline were 

mixed. Some commenters preferred a 

shorter filing deadline, suggesting that 

the form should be filed concurrently 

with the issuance of the auditor’s report 

or within 10 days of initial SEC filing, 

similar to the deadline for IPOs. In their 

view a shorter deadline would make it 

more likely that the information would 

be available for investors to consider in 

connection with their voting and 

investment decisions. 

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48AS 1215 (currently Auditing Standard No. 3) 

requires that a complete and final set of audit 

documentation should be assembled for retention as 

of a date not more than 45 days after the report 

release date. 

49While there is no requirement under federal 

securities laws for an issuer to have an annual 

meeting of shareholders and therefore no uniform 

deadline for such a meeting, PCAOB staff review 

indicates that approximately 98% of annual 

meetings are held 35 days or later after the date of 

the auditor’s report. 

50 In addition, Form AP would not be required to 

be filed in connection with attestation engagements, 

for example, compliance with servicing criteria 

pursuant to SEC Rule 13a-18—Regulation AB. 

51For example, if a previously issued audit report 

is reissued and dual-dated to refer to the addition 

of a subsequent events note in the financial 

statements, a new Form AP filing would be 

required. When completing the new form, the firm 

should consider if any other information should be 

changed, including information regarding the 

participation of other accounting firms. 

Other commenters suggested a longer 

filing deadline, which would provide 

firms with additional time to gather the 

information. Some of these commenters 

also indicated that with a longer 

deadline the information regarding the 

extent of participation of other 

accounting firms would be more 

accurate, requiring less estimation. 

These commenters suggested several 

alternative deadlines, including: 45 days 

after the report issuance, to coincide 

with the documentation completion 

date; 48 60 days after report issuance, 

which would include the 45-day 

documentation completion date plus 

extra time to gather the information; 

monthly filings, due, for example, at the 

end of the month subsequent to 

inclusion in an SEC filing; and quarterly 

or annual filings. 

There were very few comments on the 

IPO deadline. Of those that commented, 

most considered the 10-day filing 

deadline to be appropriate, while some 

other commenters suggested the 

deadline be extended, for example to 14 

days. 

After considering comments, the 

Board believes the information on Form 

AP should be made available so that it 

is useful to investors, while also 

affording firms sufficient time to 

compile the necessary information. For 

audits of non-IPOs, a key consideration 

is making the identity of the engagement 

partner publicly available before the 

shareholder vote to ratify the 

appointment of the auditor. For audits 

of IPOs, a key consideration regarding 

timing is ensuring that the information 

is available before any IPO roadshow, if 

applicable. 

Taking into account investors’ 

preference for timely access to the 

information together with commenter 

suggestions to provide firms with 

sufficient time to file Form AP, the 

Board has modified the deadline for 

filing Form AP to be 35 days after the 

date the auditor’s report is first included 

in a document filed with the 

Commission. Based on PCAOB staff’s 

analysis of available data regarding the 

timing of annual shareholders’ 

meetings, the Board believes that this 

filing deadline would likely allow 

information to be provided to investors 

prior to the annual shareholders’ 

meeting in most cases, thus making the 

information available in time to inform 

voting decisions.49 Filing deadlines of 

45 days or greater may not achieve the 

intended benefits of providing investors 

with timely information. Firms have the 

ability to file Form APs in batches, so 

that firms that prefer to file periodically 

(for example, every month or twice a 

month) will be able to do so. 

The deadline for filing Form AP in an 

IPO situation is adopted as 

contemplated in the 2015 Supplemental 

Request, as 10 days after the auditor’s 

report is first included in a document 

filed with the Commission. This 

deadline is intended to facilitate making 

the information available prior to the 

IPO roadshow, if applicable. The text of 

the rule has been simplified and 

clarified. 

Other Filing Considerations 

Many firms commenting on the 2015 

Supplemental Request requested 

additional clarification or guidance 

about how Form AP requirements 

would apply in particular 

circumstances, such as filing 

requirements for reissued auditor’s 

reports and reporting on mutual fund 

families, the allocation of audit hours 

between audits of consolidated financial 

statements and statutory audits of issuer 

subsidiaries, and batch filing of Form 

APs. Some commenters recommended 

Form AP include other information, 

such as notification of a change in the 

engagement partner. 

Form AP provides information only 

about completed audits, so there is no 

requirement to file in connection with 

interim reviews (although the hours 

incurred for interim reviews are 

included in total audit hours).50 Form 

AP is required to be amended only 

when there was an error or omission in 

the original submission. Changes from 

one year to the next (for example, a 

change in engagement partner from the 

one assigned in the prior year) do not 

necessitate an amendment and are 

reflected on a Form AP that will be filed 

when the next auditor’s report is issued. 

If the auditor’s report is reissued and 

dual-dated, a new Form AP is required 

even when no information on the form, 

other than the date of the report, 

changes.51 If the auditor’s report date in 

Form AP matches the date on the 

auditor’s report, users will be able to 

match the auditor’s report with the 

related Form AP. To clarify the filing 

requirements for reissued reports, a note 

has been added to Rule 3211. The note 

provides that the filing of a report on 

Form AP regarding an audit report is 

required only the first time the audit 

report is included in a document filed 

with the Commission. Subsequent 

inclusion of precisely the same audit 

report in other documents filed with the 

Commission does not give rise to a 

requirement to file another Form AP. In 

the event of any change to the audit 

report, including any change in the 

dating of the report, Rule 3211 requires 

the filing of a new Form AP the first 

time the revised audit report is included 

in a document filed with the 

Commission. 

For audits of mutual funds, Form AP 

permits one form to be filed in cases 

where multiple audit opinions are 

included in the same auditor’s report— 

such as in the case for mutual fund 

families. If multiple audit opinions 

included on the same auditor’s report 

involved different engagement partners, 

a Form AP would be filed for each 

engagement partner, covering the audit 

opinions for the funds for which he or 

she served as engagement partner. 

When actual hours are not available, 

auditors may estimate audit hours for 

purposes of calculating the extent of 

participation of other accounting firms. 

This situation may arise, for example, in 

the context of statutory audits. 

Accounting firms that participate in 

audits of multinational issuers often 

perform local statutory audits of 

subsidiaries in addition to their 

participation in the issuer’s audit. The 

materiality threshold and legal 

requirements for the statutory audit may 

necessitate a different level of work than 

would have been required for the 

issuer’s audit. In these cases, it may be 

difficult for the auditor to determine 

how much work performed at the 

subsidiary relates solely to the 

participation in the issuer’s audit. The 

auditor may use a reasonable method to 

estimate the components of this 

calculation, such as 100% of actual 

hours incurred by other accounting 

firms during the issuer’s audit or 

estimating the hours incurred by the 

other accounting firm participating to 

perform work necessary for the issuer’s 

audit. 

To ease compliance, firms must, 

unless otherwise directed by the Board, 

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52Form AP is not required to be filed for audit 

reports issued in connection with non-issuer audits, 

even when those audits are conducted in 

accordance with PCAOB standards. 

53See, e.g., Rules on Periodic Reporting by 

Registered Public Accounting Firms, PCAOB 

Release No. 2008–004 (June 10, 2008), at 36–38. 

54See id. at 37–38 n.38. 

55See Exchange Act Rule 17a–5, 17 CFR 240.17a– 

5. 

56See Exchange Act Rule 17a–5(e)(3), 17 CFR 

240.17a–5(e)(3). 

57See also Exchange Act Rule 17a–5(c)(2), 17 CFR 

240.17a–5(c)(2), regarding audited statements 

required to be provided to customers. 

file Form AP through the PCAOB’s 

existing web-based Registration, 

Annual, and Special Reporting system 

(‘‘RASR’’) using the username and 

password they were issued in 

connection with the registration 

process.52 The system requirements for 

filing Form AP are similar to the system 

requirements for filing annual and 

special reports with the PCAOB. 

Some accounting firms commented 

that they would like the ability to file 

Form APs in batches to reduce their 

administrative burden. Some of these 

firms also stated that they would like 

the ability to file information about 

more than one audit report on a single 

Form AP. As described in the 2015 

Supplemental Request, the Board has 

developed a template, also known as a 

schema, that will allow firms to submit 

multiple forms simultaneously using an 

extensible markup language (‘‘XML’’). 

Firms will be able to submit multiple 

forms simultaneously in a batch when 

utilizing the schema provided by the 

Board. Unlike other PCAOB forms, the 

schema for Form AP will enable firms 

to complete the entire form using XML 

rather than only portions of it. After 

considering commenters’ concerns and 

the technological constraints of RASR, 

no changes were made regarding to the 

ability to file information about more 

than one audit report on a single Form 

AP. 

Form APs filed with the Board will be 

available on the Board’s Web site. The 

Board’s Web site will allow users to 

search Form APs by engagement 

partner, to find the audits of issuers that 

he or she led, and by issuer, to find the 

engagement partner and other 

accounting firms that worked on its 

audit. Over time, the PCAOB anticipates 

enhancing the search functionality and 

plans to allow users to download search 

results. The information filed on Form 

AP is anticipated to be available on the 

Board’s Web site indefinitely. 

A commenter noted that there would 

be a potential redundancy between 

Form AP and the list of audit clients 

and audit reports required on Form 2, 

and suggested that the Board consider 

eliminating the Form 2 requirement. 

After considering the commenter’s 

concern and evaluating the potential 

redundancies, the Board has determined 

not to amend Form 2 at this time. While 

some information on Form 2 does 

overlap with Form AP, more 

information is collected on Form 2 than 

would be filed on Form AP; for 

example, Form 2 also requires the dates 

of any consents to an issuer’s use of an 

auditor’s report previously issued. 

One commenter suggested that Form 

AP allow a firm to assert that it cannot 

provide information called for by Form 

AP without violating non-U.S. laws, 

which would make Form AP consistent 

with other forms filed with the Board. 

The Board is committed to cooperation 

and reasonable accommodation in its 

oversight of registered non-U.S. firms, 

and has provided non-U.S. firms the 

opportunity to at least preliminarily 

withhold some information from 

required PCAOB forms on the basis of 

an asserted conflict with non-U.S. laws. 

Generally, the Board has not provided 

for firms to assert such a conflict with 

respect to all information required by 

PCAOB forms. In considering whether 

to allow the opportunity to assert 

conflicts, the Board has considered both 

whether it is realistically foreseeable 

that any law would prohibit providing 

the information and, even if it were 

realistically foreseeable, whether 

allowing a firm preliminarily to 

withhold the information is consistent 

with the Board’s broader responsibilities 

and the particular regulatory 

objective.53 In addition, even where the 

Board has allowed registered firms to 

assert legal conflicts in connection with 

Forms 2, 3, and 4, that accommodation 

does not entail a right for a firm to 

continue to withhold the information if 

it is ‘‘sufficiently important.’’ 54 In this 

case, nothing has been brought to the 

Board’s attention indicating a realistic 

possibility that any law would prohibit 

a firm from providing the information, 

and the information is categorically of 

sufficient importance that the Board 

sees no reason to allow a firm to 

withhold it on the basis of an asserted 

conflict. 

The 2015 Supplemental Request 

proposed to apply PCAOB Rule 2204, 

Signatures, to Form AP. Application of 

the rule would have required firms to 

electronically sign and certify and retain 

manually signed copies of Form APs 

filed with the Board. Some commenters 

identified the manual signature 

requirement as an administrative 

burden that would be time consuming 

and costly. After considering these 

views, the Board determined to simplify 

the requirements for Form AP. Firms 

will be required to have each Form AP 

signed on behalf of the Firm by typing 

the name of the signatory in the 

electronic submission, but there is no 

requirement for manual signature or 

retention of manually signed or record 

copies. 

Audit of Brokers and Dealers Under 

Exchange Act Rule 17a–5 

Pursuant to Exchange Act Rule 17a– 

5, brokers and dealers are generally 

required to file annual reports with the 

Commission and other regulators.55 The 

annual report includes a financial 

report, either a compliance report or 

exemption report, and reports by the 

auditor covering the financial report and 

the compliance report or exemption 

report. The annual report is public, 

except that, if the statement of financial 

condition in the financial report is 

bound separately from the balance of 

the annual report, the balance of the 

annual report is deemed confidential 

and nonpublic.56 Therefore, in 

situations in which the broker or dealer 

binds the statement of financial 

condition separately from the balance of 

the annual report, the auditor generally 

would issue two separate auditor’s 

reports that would have different 

content: (1) An auditor’s report on the 

statement of financial condition that 

would be available to the public and (2) 

an auditor’s report on the complete 

annual report that, except as provided 

in paragraph (c)(2)(iv) of Exchange Act 

Rule 17a–5, would be confidential and 

not available to the public.57

As discussed in the 2013 Release, 

ownership of brokers and dealers is 

primarily private, with individual 

owners generally being part of the 

management team. The 2015 

Supplemental Request sought comment 

about whether Form AP posed specific 

issues with respect to brokers and 

dealers. Some commenters asserted that 

the disclosure requirements should 

apply to all audits conducted under 

PCAOB standards. However, others 

asserted that the value of the disclosures 

for brokers and dealers would be 

significantly limited because of the 

closely held nature of brokers and 

dealers. These commenters suggested 

that the engagement partner and other 

participants in the audit would be 

known to the management team, who 

are the owners in many instances. 

While economic theory suggests that 

there are benefits resulting from 

enhanced transparency, commenters 

suggested that the benefits may be 

relatively less for brokers and dealers. 

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58 If a broker or dealer were an issuer required to 

file audited financial statements under Section 13 

or 15(d) of the Exchange Act, the requirements 

would apply. 

59Economists often describe information 

asymmetry as an imbalance, where one party has 

more or better information than another party. 

There is likely a lesser degree of 

information asymmetry between owners 

and managers for entities that are mostly 

private, closely-held, and small. 

However, information regarding the 

auditor may benefit those who are not 

part of management of the broker or 

dealer, such as customers. Although 

these benefits should be considered 

when determining whether to apply the 

new rules to brokers and dealers, they 

must be assessed relative to the 

potential costs of the required 

disclosures, which could be 

disproportionately high for smaller 

accounting firms that audit brokers and 

dealers. Overall, it appears likely that 

the net benefit of the required 

disclosures would be less for brokers 

and dealers than for issuers. 

Accordingly, at this time, the Board is 

not extending the Form AP filing 

requirements to brokers and dealers.58

The Form AP filing requirements are 

therefore limited to issuer audits. As the 

PCAOB and registered public 

accounting firms gain experience in 

filing and administering Form AP, and 

as more information is gathered on 

broker and dealer audits through the 

PCAOB’s inspections and other 

oversight functions, the Board will 

continue to consider whether to make 

the Form AP requirement applicable to 

broker and dealer audits and could 

revisit its decision to limit the Form AP 

filing requirements to issuer audits. 

Audits of Employee Stock Purchase 

Plans 

One commenter on the 2013 Release 

recommended that the reproposed 

amendments not apply to the audits of 

employee stock purchase, savings, and 

similar plans that file annual reports on 

Form 11–K. This commenter did not 

believe that disclosure of the name of 

the engagement partner or information 

about other participants in the audit 

would be meaningful for participants in 

an employee benefit plan that is subject 

to PCAOB auditing standards. 

The Board believes similar 

transparency and accountability 

rationales apply to employee stock 

purchase, savings and similar plans that 

file annual reports on Form 11–K. For 

example, disclosing the name of the 

engagement partner and other 

accounting firms that participated in the 

audit on Form AP could increase audit 

quality by increasing auditors’ sense of 

accountability. In the Board’s view, 

increasing the audit quality in audits of 

employee stock purchase, savings and 

similar plans is important for the 

protection of employee benefit plan 

participants. Disclosure of the 

engagement partner’s name for the 

audits of employee benefit plans will 

provide additional information about an 

engagement partner’s experience for 

those engagement partners that also 

audit other issuers. 

Effective Date 

The 2015 Supplemental Request 

suggested making the requirements 

effective for auditors’ reports issued or 

reissued on or after June 30, 2016 or 

three months after approval by the SEC, 

whichever occurs later. Many 

commenters generally advocated a later 

effective date, although some suggested 

a phased approach, with disclosure of 

the engagement partner implemented 

first and disclosure of other participants 

delayed for six months to a year after 

that to provide time for firms to develop 

data gathering systems and processes. 

Commenters that suggested a phased 

approach said that since the engagement 

partner was already known by the firm, 

a June 30, 2016 effective date would be 

appropriate. Some commenters 

suggested not linking the effective date 

to a calendar year-end to allow firms to 

test and implement new systems at a 

less busy time of year. 

After considering comments, the 

Board has chosen a phased effective 

date. If approved by the Commission, 

the new rules of the Board and 

amendments to auditing standards will 

take effect as set forth below: 

• Engagement partner: Auditors’ 

reports issued on or after January 31, 

2017, or three months after SEC 

approval of the final rules, whichever is 

later 

• Other accounting firms: Auditors’ 

reports issued on or after June 30, 2017. 

A phased effective date will provide 

investors with the engagement partner’s 

name as soon as reasonably practicable. 

Providing a later effective date for the 

other accounting firms’ disclosure 

allows firms time to develop a 

methodology to gather information 

regarding the other accounting firms’ 

participation. 

D. Economic Considerations and 

Application to Audits of Emerging 

Growth Companies 

Economic Considerations 

The Board is mindful of the economic 

impacts of its standard setting. The 

following discussion addresses in detail 

the potential economic impacts, 

including potential benefits and costs, 

most recently considered by the Board. 

The Board has requested input from 

commenters several times over the 

course of the rulemaking. Commenters 

provided views on a wide range of 

issues pertinent to economic 

considerations, including potential 

benefits and costs, but did not provide 

empirical data. The potential benefits 

and costs considered by the Board are 

inherently difficult to quantify, 

therefore the Board’s economic 

discussion is qualitative in nature. 

Commenters who commented 

specifically on the economic analysis in 

the Board’s 2015 Supplemental Request 

provided a wide range of views. Some 

commenters provided academic 

research in support of their views for 

the Board to consider. Some 

commenters expressed concern that the 

economic analysis in the Board’s 2015 

Supplemental Request was 

unpersuasive or incomplete. Other 

commenters said that the Board’s 

economic analysis carefully reviewed 

the relevant evidence on the potential 

costs and benefits attributable to the 

disclosures. The Board has considered 

all comments received and has sought to 

develop an economic analysis that 

evaluates the potential benefits and 

costs of mandating the disclosures in 

Form AP, as well as facilitates 

comparisons to alternative approaches. 

Need for Mandatory Disclosure 

There exists an information 

asymmetry 59 between users of the 

financial statements and management 

about the company’s performance, and 

high quality financial information can 

help mitigate this information 

asymmetry. Audit quality matters to 

users of the financial statements, 

because audit quality is a component of 

financial reporting quality, in that high 

audit quality increases the credibility of 

financial reports. Thus, better 

knowledge of audit quality can help 

mitigate the information asymmetry 

between users of the financial 

statements and management about 

company performance. 

Users of financial statements are 

generally not in a position to observe 

the quality of the audit of a public 

company or the factors that drive audit 

quality. In addition to relying on the 

audit committee, which, at least for 

listed companies, is charged with 

overseeing the external auditor, users of 

financial statements may rely on proxies 

such as the reputation of the accounting 

firm issuing the auditor’s report, 

aggregated measures of auditor expertise 

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60See, e.g., Linda Elizabeth DeAngelo, Auditor 

Size and Audit Quality, 3 Journal of Accounting 

and Economics 183 passim (1981); and Jere R. 

Francis, What Do We Know About Audit Quality?, 

36 The British Accounting Review 345 passim 

(2004). 

61See PCAOB Release No. 2015–005. 

62See PCAOB Release No. 2013–005. 

63See, e.g., W. Robert Knechel, Ann Vanstraelen, 

and Mikko Zerni, Does the Identity of Engagement 

Partners Matter? An Analysis of Audit Partner 

Reporting Decisions, 32 Contemporary Accounting 

Research 1443 (2015); Daniel Aobdia, Chan-Jane 

Lin, and Reining Petacchi, Capital Market 

Consequences of Audit Partner Quality, 90 The 

Accounting Review 2143 (2015); and Carol 

Callaway Dee, Ayalew Lulseged, and Tianming 

Zhang, Who Did the Audit? Audit Quality and 

Disclosures of Other Audit Participants in PCAOB 

Filings, 90 The Accounting Review 1939 (2015). 

Professors Dee and Aobdia are former and current 

research fellows at the PCAOB. Their research cited 

above was undertaken prior to joining the PCAOB. 

On the point of whether audit quality varies within 

accounting firms, a commenter suggested additional 

research to consider. See Steven F. Cahan and Jerry 

Sun, The Effect of Audit Experience on Audit Fees 

and Audit Quality, 30 Journal of Accounting, 

Auditing and Finance 78 (2015) (clients of more 

experienced CPAs have lower absolute 

discretionary accruals than clients of less 

experienced CPAs); Kim Ittonen, Karla Johnstone, 

and Emma-Riikka Myllyma ̈ki, Audit Partner PublicClient Specialisation and Client Abnormal 

Accruals, 24 European Accounting Review 607 

(2015) (a significant negative association between 

greater public-client specialization and absolute 

abnormal accruals); and Ferdinand A. Gul, Donghui 

Wu, and Zhifeng Yang, Do Individual Auditors 

Affect Audit Quality? Evidence from Archival Data, 

88 The Accounting Review 1993 passim (2013) 

(individual audit partners affect audit quality in 

ways that are both economically and statistically 

significant). 

64 Information economics frequently treats 

information as consisting of two components: a 

signal that conveys information and noise which 

inhibits the interpretation of the signal. Precision is 

the inverse of noise so that decreased noise results 

in increased precision and a more readily 

interpretable signal. See, e.g., Robert E. Verrecchia, 

The Use of Mathematical Models in Financial 

Accounting, 20 Journal of Accounting Research 1 

passim (1982). 

65There is a long stream of research regarding the 

effects that information asymmetry about product 

features, such as quality, and disclosure have on 

markets. See, e.g., George A. Akerlof, The Market 

for ‘‘Lemons’’: Quality Uncertainty and the Market 

Mechanism, 84 The Quarterly Journal of Economics 

488 passim (1970); and Robert E. Verrecchia, Essays 

on Disclosure, 32 Journal of Accounting and 

Economics 97 (2001). 

66See, e.g., George J. Stigler, Perfect Competition, 

Historically Contemplated, 65 The Journal of 

Political Economy 1 passim (1957). 

67Academic research finds that accountability is 

a complex phenomenon and is affected by 

numerous factors. See, e.g., Jennifer Lerner and 

Philip Tetlock, Accounting for the Effects of 

Accountability, 125 Psychological Bulletin 255 

passim (1999). See also Todd DeZoort, Paul 

Harrison, and Mark Taylor, Accountability and 

Auditors’ Materiality Judgments: The Effects of 

Differential Pressure Strength on Conservatism, 

Variability, and Effort, 31 Accounting, 

Organizations and Society 373 (2006). 

(for example, dollar value of issuer 

market capitalization audited or audit 

fees charged), or information about the 

geographic location of the office where 

the auditor’s report was signed as a 

signal for audit quality.60 Users of 

financial statements could seek to 

reduce the degree of information 

asymmetry between them and 

management by gathering information 

about the skills, expertise, and 

independence of the engagement 

partner and firms that participate in the 

audit. 

The Board is considering a number of 

ways to provide more information 

related to audit quality. In addition to 

the disclosures of the engagement 

partner and certain audit participants 

mandated in Form AP, these efforts 

include formulation of a series of audit 

quality indicators, a portfolio of 

quantitative measures that may provide 

new insights into how quality audits are 

achieved.61 The Board is also 

considering a standard that would 

update the form and content of the 

auditor’s report to make it more relevant 

and informative by, among other things, 

including communication of critical 

audit matters.62 The Board intends that, 

over time, these and other efforts will 

provide investors and other financial 

statement users with additional 

information they can use when 

evaluating audit quality. When used in 

conjunction with other publicly 

available data (including any audit 

quality indicators that are made 

publicly available), the name of the 

engagement partner and information 

about other participants in the audit, 

collectively, could provide more 

information about audit quality. 

PCAOB oversight activities have 

revealed that audit quality varies among 

engagement partners within the same 

firm. PCAOB oversight activities also 

reveal variations in audit quality among 

firms, including variations among firms 

in the global networks established by 

large accounting firms. In addition to a 

number of other factors, the PCAOB 

uses information about engagement 

partners and other participants in the 

audit to identify audit engagements for 

risk-based selections in its inspections 

program. Academic research also 

analyzes variations in audit quality at 

both the firm and engagement partner 

levels.63 These findings suggest that 

firm reputation is an imprecise signal 64

of audit quality because engagement 

partners and other audit participants 

differ in the quality of their audit work. 

The difficulty that investors and other 

financial statement users have in 

evaluating audit quality may have 

important effects for accounting firms 

and the functioning of the audit 

profession and capital markets.65 The 

capacity to differentiate between 

alternative products is a fundamental 

requirement of competitive markets.66

One way to improve the functioning of 

a market is to provide mechanisms that 

enable market participants to better 

evaluate quality, thereby reducing the 

degree of information asymmetry. 

Mandating public disclosure of the 

name of the engagement partner and 

other accounting firms that participated 

in an audit provides financial markets 

with information that may have 

otherwise been more costly or difficult 

to obtain. It enables the development of 

a standardized and comprehensive 

source of data that can facilitate 

comparison and analysis, which would 

be more valuable than a potentially 

piecemeal data source that could 

develop under a voluntary disclosure 

regime. Mandating public disclosure 

also assures that the information is 

accessible to all market participants, so 

that any value-relevant information can 

more readily be incorporated into 

market prices. 

This information may influence 

investors’ decisions and allow them to 

make better informed investment 

decisions. The disclosure of information 

may also lead the identified parties to 

change their behavior because they 

know their performance can be more 

broadly and easily observed by investors 

and other financial statement users. In 

general, an important feature of 

accountability is identifiability.67 In the 

context of the audit, transparency will 

allow market participants to separately 

identify auditors from the accounting 

firm signing the auditor’s report. This 

disclosure will impose incremental 

reputation risk, which should, at least in 

some circumstances, lead to increased 

accountability because the ability for 

investors and other financial statement 

users to identify and evaluate the 

performance of engagement partners 

and other accounting firms may induce 

changes in behavior. 

Because of the influence that 

engagement partners and other 

accounting firms participating in the 

audit can exert over the audit process, 

information about the people and 

entities who actually performed the 

audit of a particular company will be a 

useful addition to the mix of 

information related to the audit that 

investors can use to assess audit quality 

and hence credibility of financial 

reporting. As identifying information 

becomes publicly available, it could also 

provide a further incentive to 

engagement partners and other 

accounting firms that participate in the 

audit to develop and enhance a 

reputation for providing reliable audits 

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68Adverse audit outcomes may include financial 

statement restatements for errors, nontimely 

reporting of internal control weaknesses, and 

nontimely reporting of going concern issues, among 

others. 

69For example, the Taiwan Economic Journal 

collects data that covers all public companies in 

Taiwan and includes, among other things, the 

names of the engagement partners, the accounting 

firms issuing auditors’ reports, the regulatory 

sanction history of the partners, and the audit 

opinions. 

70See Non-U.S. Firm Inspections on the PCAOB’s 

Web site for information about firms in non-U.S. 

jurisdictions that deny PCAOB inspection access. 

71There is an emerging body of academic 

research analyzing market reactions to disclosure of 

the engagement partner and the firms participating 

in audits. See Knechel et al., Does the Identity of 

Engagement Partners Matter? An Analysis of Audit 

Partner Reporting Decisions; Aobdia et al., Capital 

Market Consequences of Audit Partner Quality; and 

Dee et al., Who Did the Audit? Audit Quality and 

Disclosures of Other Audit Participants in PCAOB 

Filings. 

72The unintended consequence of engagement 

partner disclosure creating an incentive for some 

engagement partners to avoid challenging an 

aggressive accounting treatment in an effort to 

protect their reputations is discussed below. 

73For example, the auditor is required to 

communicate the names, locations, and planned 

responsibilities of other independent public 

accounting firms or other persons not employed by 

the auditor that perform audit procedures. See 

paragraph 10.d of AS 1301 (currently Auditing 

Standard No. 16), Communications with Audit 

Committees. 

and to avoid being associated with 

adverse audit outcomes that could be 

attributed to deficiencies in their audit 

work.68

Under the disclosures adopted by the 

Board, investors would gain additional 

information that could help them assess 

the reputation of not only the firm, but 

also of the engagement partner on the 

audits of companies in which they 

invest, which they can use as a signal 

for audit quality. Likewise, investors 

will have visibility into the extent of the 

audit work being performed by other 

accounting firms that participated in the 

audit, including accounting firms in 

jurisdictions where the PCAOB has been 

unable to conduct inspections. 

Collectively, the disclosures, when used 

in conjunction with other publicly 

available data, can facilitate investors’ 

ability to assess audit quality and hence 

credibility of financial reporting by 

providing investors with information 

about who conducted the audit and the 

extent to which the accounting firm 

signing the auditor’s report used the 

audit work performed by other 

accounting firms. 

Although the disclosure of the name 

of the engagement partner might 

provide limited information initially, 

experience in other countries suggests 

that over time the disclosures would 

enable databases to be developed that 

would allow investors and other 

financial statement users to evaluate a 

number of data points about the 

engagement partner,69 including: 

• Number and names of other issuer 

audits for which the partner is the 

engagement partner; 

• Industry experience of the 

engagement partner; 

• Number and nature of restatements 

of financial statements for which he or 

she was the engagement partner; 

• Number and nature of going 

concern report modifications on 

financial statements for which he or she 

was the engagement partner; 

• Number of auditors’ reports citing a 

material weakness in internal control 

over financial reporting where he or she 

was the engagement partner; 

• Number of years as the engagement 

partner of a particular company; 

• Disciplinary proceedings and 

litigation in which the engagement 

partner was involved; and 

• Other information about the 

engagement partner in the public 

domain, such as education, professional 

titles and qualifications, and association 

memberships. 

Additional databases may also 

develop about other accounting firms 

that participate in public company 

audits, and additional data points 

should contribute to the mix of 

information that investors would be able 

to use, such as: 

• The extent of the audit performed 

by the firm signing the auditor’s report; 

• The extent of participation in the 

audit by other accounting firms in other 

jurisdictions, including jurisdictions in 

which the PCAOB cannot currently 

conduct inspections; 70

• Whether the other accounting firms 

are registered with the PCAOB, have 

been inspected, and the inspection 

results, if any; 

• Industry experience of the other 

accounting firms; 

• Whether the other accounting firms 

belong to a global network; 

• Trends and changes in the level of 

participation of other accounting firms 

in the audit work; and 

• Disciplinary proceedings and 

litigation involving the other accounting 

firms. 

These data points, when analyzed 

together with the audited financial 

statements, potential audit quality 

indicators, and information provided on 

Form AP, should provide investors with 

more information about the audit and, 

therefore, the reliability of the financial 

statements. As a result, this should 

reduce the degree of information 

asymmetry about financial reporting 

quality between investors and company 

management. 

Providing investors with data at this 

level of specificity will add to the mix 

of information that they can use. This 

could induce changes in the market 

dynamics for audit services because 

investors would have additional 

information about the identity of 

engagement partners and other 

accounting firms participating in the 

audit. If investors are able to identify 

certain engagement partners and other 

accounting firms that participated in the 

audit who consistently perform highquality audit work, the companies 

audited by these engagement partners 

and other accounting firms should 

benefit from a lower cost of capital 

relative to those companies whose 

auditor’s performance record suggests a 

higher risk.71

As some engagement partners and 

other accounting firms that participated 

in the audit develop a reputation for 

performing reliable audits, a further 

incentive may develop for others to 

attract similarly favorable attention. 

Conversely, as some engagement 

partners and other accounting firms are 

associated with adverse audit outcomes 

that could be attributed to deficiencies 

in their audit work, others may have 

additional incentives to perform audits 

that comply with applicable standards 

in order to avoid similar association.72

The disclosures may also create 

additional incentives for audit 

committees to engage auditors with a 

reputation for performing reliable 

audits. As a result, the disclosures may 

also promote increased competition 

based on audit quality. 

Baseline 

Current PCAOB rules and standards 

do not require registered firms to 

publicly disclose the name of the 

engagement partner or information 

about other accounting firms 

participating in the audit. The identity 

of the engagement partner is known by 

people close to the financial reporting 

process, for example by company 

management and the audit committee, 

that interact directly with the 

engagement partner. Additionally, 

auditors are required to communicate to 

the audit committee certain information 

about other accounting firms and other 

participants in the audit.73

Today, the name of the engagement 

partner is disclosed in auditors’ reports 

filed with the SEC in only a small 

percentage of cases, such as when the 

audit is conducted by a firm having only 

one certified public accountant whose 

name appears in the firm’s name or by 

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74See Henry Laurion, Alastair Lawrence, and 

James Ryans, U.S. Audit Partner Rotations (Sept. 

14, 2015) (working paper, available in Social 

Science Research Network (‘‘SSRN’’)). 

75The sentence in AS 1205.04 (currently AU sec. 

543.04) that states that if the principal auditor 

decides not to make reference to the work of other 

auditors, the principal auditor ‘‘should not state in 

his report that part of the audit was made by 

another auditor because to do so may cause a reader 

to misinterpret the degree of responsibility being 

assumed’’ is deleted under the amendments. In the 

Board’s view, the language included on Form AP 

clearly states the auditor’s responsibility regarding 

the work of other participants in the audit and 

should not cause financial statement users to 

misinterpret or be confused about the degree of 

responsibility being assumed by the accounting 

firm signing the auditor’s report. 

76PCAOB Form 2 requires independent public 

accounting firms that audited no issuers during the 

applicable reporting period to provide information 

on each issuer for which they ‘‘play[ed] a 

substantial role in the preparation or furnishing of 

an audit report,’’ as defined by PCAOB Rule 

1001(p)(ii). 

77 Item 9(e)(6) of Schedule 14A (17 CFR 240.14a101) requires disclosure of the percentage of hours 

expended on the audit of the financial statements 

for the most recent fiscal year by persons other than 

the principal accountant’s full-time, permanent 

employees, if greater than 50% of total hours, but 

does not require identification of such persons. 

78See, e.g., Knechel et al., Does the Identity of 

Engagement Partners Matter? An Analysis of Audit 

Partner Reporting Decisions; Aobdia et al., Capital 

Market Consequences of Audit Partner Quality; and 

Dee et al., Who Did the Audit? Audit Quality and 

Disclosures of Other Audit Participants in PCAOB 

Filings. 

79See above for a discussion of commenter 

reactions to the disclosure requirements. 

a foreign firm in a jurisdiction in which 

local requirements or practice norms 

dictate identification of the engagement 

partner. The identity of the engagement 

partner is also sometimes made 

available to investors attending an 

annual shareholders’ meeting in person. 

It is possible that engagement partners 

could be identified in other ways; for 

example, an academic study inferred 

that in instances where accounting firm 

personnel are copied on issuers’ 

correspondence with the SEC’s Division 

of Corporation Finance, the copy party 

is the engagement partner.74 However, 

because there is no current requirement 

to disclose information about 

engagement partners, the process of 

acquiring this information may be costly 

and the information may be less useful 

relative to a database that covers audits 

across time and is available to all 

interested users. 

With respect to other accounting firms 

participating in the audit, AS 1205.04 

(currently AU sec. 543.04) has 

prohibited principal auditors from 

disclosing in the auditor’s report the 

involvement of other accounting firms 

that participated in the audit unless 

responsibility for the audit has been 

divided.75 However, investors and other 

financial statement users have been able 

to obtain information about a limited 

subset of other accounting firms from 

PCAOB Form 2.76

There are no other current 

requirements under which the identity 

of other accounting firms participating 

in the audit would be publicly disclosed 

and, to the Board’s knowledge, firms 

generally do not make such information 

public.77

The Impact of Disclosure 

The final rules adopted by the Board 

impact certain participants in the audit, 

financial statement users, and 

companies to the extent that this 

information is currently not publicly 

available and affects participants’ 

decision making. As discussed below, 

not all of these market participants are 

affected in the same ways or to the same 

degree. 

The Benefits of Disclosure 

The final rules adopted by the Board 

aim to improve the transparency and 

accountability of issuer audits by adding 

to the mix of information available to 

investors. Among other things, the 

disclosures would allow investors to 

research whether engagement partners 

have been associated with adverse audit 

outcomes that could be attributed to 

deficiencies in their audit work or have 

been sanctioned by the PCAOB or SEC. 

The disclosures could also allow 

financial statement users to understand 

how much of the audit was performed 

by the firm issuing the report and how 

much was performed by other 

accounting firms, including those in 

jurisdictions where the PCAOB has been 

unable to conduct inspections. 

Moreover, as the disclosed information 

accumulates and is aggregated and 

analyzed in conjunction with other 

publicly available information, investors 

and financial intermediaries (for 

example, research analysts and credit 

rating agencies) would have a basis to 

evaluate additional data points, together 

with the information disclosed on Form 

AP, that may give them insight into 

individual audits. While this 

information may not be useful in every 

instance or meaningful to every 

investor, as discussed in more detail 

below, academic research suggests that, 

overall, the disclosures add to the mix 

of information used by investors.78

Disclosures regarding the engagement 

partner and the other accounting firms 

that participated in the audit would 

allow investors and other financial 

statement users to supplement the 

accounting firm’s name with more 

granular information when assessing 

audit quality and hence the credibility 

of financial reporting. The disclosed 

information will provide investors and 

other financial statement users with 

more information about individual 

audits in accounting firms that conduct 

a large number of issuer audits. This 

information should be particularly 

valuable to investors where there is a 

greater degree of information 

asymmetry, as may be the case for 

smaller and less seasoned public 

companies. 

The new disclosures should, at least 

in some circumstances, also increase 

accountability for auditors through 

Justice Brandeis’ ‘‘disinfectant’’ effect: 

disclosure of their names, when 

accompanied by other information 

about their history, should create 

incentives for the engagement partner 

and other accounting firms to take 

voluntary steps that could result in 

improved audit quality. The additional 

incentives likely will be a result of Form 

AP disclosures imposing additional 

reputation risk on engagement partners 

and other accounting firms. The effect 

on accountability is not expected to be 

uniform across all engagement partners 

and other accounting firms. 

Transparency 

The PCAOB uses various data, 

including information about 

engagement partners and other 

accounting firms, to identify audit 

engagements for its risk-based 

inspections program. Over time, 

financial statement users would be able 

to combine the disclosed information 

with other financial information, such 

as any previous adverse audit outcomes 

that could be attributed to deficient 

audit work, which would allow them to 

better assess the quality of individual 

audits. For example, investors and other 

financial statement users would be able 

to observe whether financial statements 

audited by the engagement partner have 

been restated or whether the 

engagement partner has been sanctioned 

by the PCAOB or SEC, and investors 

and other financial statement users 

could also research other publicly 

available information about the 

engagement partner. 

Commenters provided mixed views 

regarding the usefulness of the 

disclosures. While some commenters 

argued that the information would not 

be useful or could be confusing,79 other 

commenters indicated that this 

information may be useful for 

investment decisions and decisions 

about whether to ratify the appointment 

of an accounting firm. On the point of 

whether investors may misunderstand 

the role of engagement partners, for 

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80See Letter from Maureen McNichols, Marriner 

S. Eccles Professor of Public and Private 

Management and Accounting, Stanford University 

Graduate School of Business, to the Office of the 

Secretary, PCAOB (Aug. 31, 2015). The commenter 

references several academic papers in support of 

the argument that investors are able to incorporate 

information into security prices. See Maureen 

McNichols, Evidence of Informational Asymmetries 

from Management Earnings Forecasts and Stock 

Returns, 64 The Accounting Review 1 (1989) (The 

differential response to forecasts which are ex post 

too high or too low indicates that, in the aggregate, 

investors do not take management forecasts at face 

value.), or Maureen F. McNichols and Stephen 

Stubben, The Effect of Target-Firm Accounting 

Quality on Valuation in Acquisitions, 20 Review of 

Accounting Studies 110 (2015) (accounting 

information helps mitigate information asymmetry 

between acquirers and target firms). 

81See Knechel et al., Does the Identity of 

Engagement Partners Matter? An Analysis of Audit 

Partner Reporting Decisions. 

82See William R. Kinney, Discussion of ‘‘Does the 

Identity of Engagement Partners Matter? An 

Analysis of Audit Partner Reporting Decisions,’’ 32 

Contemporary Accounting Research 1479 (2015). 

83 Kinney suggests that other papers referenced in 

the Board’s 2013 release could benefit from 

additional effort to bolster the validity of the 

research methodologies. For example, Kinney 

suggested that the authors of these papers could 

work with accounting firms to compare the proxies 

for audit quality used in academic research, such 

as discretionary accruals or the accuracy of going 

concern evaluations, with the accounting firms’ 

proprietary assessment of engagement partner 

quality. The Board recognizes that discretionary 

accruals and the accuracy of going concern 

evaluations are only proxies for audit quality. 

However, a recent academic study has assessed the 

validity of commonly used proxies for audit quality 

by analyzing their associations with PCAOB 

inspection findings, which may be a more precise 

measure of audit quality. See Daniel Aobdia, The 

Validity of Publicly Available Measures of Audit 

Quality: Evidence from the PCAOB Inspection Data 

(June 30, 2015) (working paper, available in SSRN). 

84See Aobdia et al., Capital Market Consequences 

of Audit Partner Quality. 

85See Kinney, Discussion of ‘‘Does the Identity of 

Engagement Partners Matter? An Analysis of Audit 

Partner Reporting Decisions.’’ 

86See Wuchun Chi, Linda A. Myers, Thomas C. 

Omer, and Hong Xie, The Effects of Audit Partner 

Pre-Client and Client-Specific Experience on Audit 

Quality and on Perceptions of Audit Quality (Jan. 

2015) (working paper, available in SSRN) (Auditor 

experience is an important factor in determining 

audit quality and the perceived level of audit 

quality as measured by the bank loan interest rate 

spread). 

87See Wuchun Chi, Ling Lei Lisic, Linda A. 

Myers, and Mikhail Pevzner, Information in 

Financial Statement Misstatements at the 

Engagement Partner Level: A Case for Engagement 

Partner Name Disclosure? (Jan. 2015) (working 

paper, available in SSRN). There is an additional 

paper with similar results about the effects of 

engagement partner performance history and the 

likelihood of restatement. See also Yanyan Wang, 

Lisheng Yu, and Yuping Zhao, The Association 

between Audit-Partner Quality and Engagement 

Quality: Evidence from Financial Report 

Misstatements, 34 Auditing: A Journal of Practice 

and Theory 81 (2015). 

example, a commenter cited academic 

research suggesting that, ‘‘. . . investors 

process public information in a 

sophisticated manner and investor 

responses to public disclosures cause 

relevant information to be reflected in 

security prices.’’ 80

Disclosure Regarding the Engagement 

Partner 

Other countries have adopted or may 

soon adopt requirements to disclose the 

name of the engagement partner. 

Experiences from countries that have 

already adopted similar disclosure 

requirements are important in assessing 

possible consequences, intended or not, 

of any changes in this area. Recent 

academic research conducted using data 

from those jurisdictions has studied 

how investors and other financial 

statement users use the information to 

assess audit quality, and hence 

credibility of financial reporting. 

Disclosures of this type have been found 

to have informative value in other 

settings, and empirical studies using 

data from the jurisdictions where the 

disclosures are available, discussed 

below, suggest that these disclosures 

would be useful to investors and other 

financial statement users. However, in 

considering the implications of these 

studies for the audits under the Board’s 

jurisdiction, the Board has been 

mindful, as some commenters 

suggested, of the specific characteristics 

of the U.S.-issuer audit market, which 

may make it difficult to generalize 

observations made in other markets. For 

example, results from non-U.S. studies 

may depend on different baseline 

conditions (for example, market 

efficiency, affected parties, policy 

choices, legal environment, or 

regulatory oversight) than prevail in the 

United States. 

Several studies have examined 

whether engagement partner disclosure 

requirements affect the price of 

securities and promote a more efficient 

allocation of capital. Knechel et al. 

found ‘‘considerable evidence that 

similar audit reporting failures persist 

for individual partners over time’’ and 

that, in Sweden, where engagement 

partners’ names are disclosed, ‘‘the 

market recognizes and prices differences 

in audit reporting style among 

engagement partners’’ of public 

companies.81

In a critique that will be published 

alongside the original manuscript, 

Kinney described several issues that 

challenge the validity of the results from 

the Knechel et al. paper.82 In particular, 

Kinney argued that it may be difficult to 

generalize the results from the Knechel 

et al. paper because many of the results 

from the original paper were obtained 

using data on private companies that 

undergo statutory audits under Swedish 

law. In addition, Kinney argued that the 

accuracy of going concern evaluations is 

a relatively poor measure of audit 

quality compared to financial statement 

misstatements. Kinney also noted that 

the Knechel et al. paper does not 

attempt to control for the effects of the 

mechanism by which audit partners are 

assigned to specific engagements. 

Kinney argued that if accounting firms 

assign high-quality audit partners to 

risky audit engagements, then the 

results from the Knechel et al. paper 

would have the opposite interpretation. 

Ultimately, Kinney argued that it may 

be inappropriate to conclude that 

engagement partner names would 

provide useful information to U.S. 

financial markets based on evidence 

obtained from the available studies.83

Other papers using data from foreign 

jurisdictions also analyze whether 

capital markets react to data on 

engagement partner quality and 

experience. For example, Aobdia et al. 

used data from Taiwan and found that 

both debt and equity markets priced 

engagement partners’ quality, where 

higher quality is measured by the 

companies’ lower level of discretionary 

accruals.84 Results are similar when the 

authors used regulatory sanctions 

history as an alternate measure of 

engagement partner quality, which they 

argue is less subject to measurement 

error than estimates of discretionary 

accruals. This result partially addresses 

the concerns raised in Kinney’s 

discussion paper about using 

discretionary accruals as a measure of 

audit quality.85 Evidence from another 

study using data from Taiwan is 

consistent with these results.86

Another paper using data from 

Taiwan found that recent financial 

statement restatements disclosed by an 

engagement partner’s client are 

associated with a higher likelihood of 

that engagement partner’s other clients 

misstating in the current year.87

However, the authors find that this 

effect was mitigated by the engagement 

partner’s experience. Although these 

results are based on evidence from a 

non-U.S. jurisdiction, they suggest that 

the disclosures could provide investors 

with useful information about the 

reliability of other financial statements 

audited by individual engagement 

partners who have been associated with 

a recent financial statement restatement. 

The limited research on engagement 

partner identification in the United 

States provides some support that the 

name of the engagement partner may be 

used as a signal of audit quality. Using 

data collected from SEC comment 

letters, Laurion et al. find substantial 

increases in the number of material 

restatements of previously issued 

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88See Laurion et al., U.S. Audit Partner Rotations. 

Engagement partner rotation was inferred from 

changes in accounting firm personnel copied on 

issuer correspondence with the SEC’s Division of 

Corporation Finance. 

89See Dee et al., Who Did the Audit? Audit 

Quality and Disclosures of Other Audit Participants 

in PCAOB Filings. 

90Academic research suggests that the financial 

markets’ reaction to earnings surprises depends, 

among other things, upon the extent to which the 

disclosed earnings are perceived to be reliable. 

Thus, if markets react less to earnings surprises 

after an event, it could suggest that the earnings are 

perceived to be less reliable after the event. 

Academic research has tied this to perceived audit 

quality by investors. See, e.g., Siew Hong Teoh and 

T.J. Wong, Perceived Auditor Quality and the 

Earnings Response Coefficient, 68 The Accounting 

Review 346 (1993). 

91On whether reputational effects may incent 

global network firms to monitor audit work 

performed by an affiliate, there is a paper 

documenting that global audit firm networks have 

created a network-wide reputation that is 

susceptible not only to failures of the U.S. Big 4, 

but also to those of non-U.S. affiliates. See Yoshie 

Saito and Fumiko Takeda, Global Audit Firm 

Networks and Their Reputation Risk, 29 Journal of 

Accounting, Auditing and Finance 203 (2014). 

financial statements and total valuation 

allowances after engagement partner 

rotations.88 While the authors do not 

explicitly analyze potential benefits 

related to engagement partner 

disclosure, they argue that engagement 

partner disclosures would reveal partner 

rotations, thus providing meaningful 

information to investors, supporting the 

PCAOB’s rulemaking initiative. 

The Board believes that a requirement 

to disclose the name of the engagement 

partner may provide useful information 

to financial markets based on extensive 

public outreach and its own experience 

conducting its inspection program. The 

Board notes that it may not be possible 

to generalize results of academic 

studies, including those based on data 

in foreign jurisdictions. However, the 

papers discussed above typically find 

evidence consistent with a broad stream 

of academic literature demonstrating 

that markets benefit from more 

information associated with quality. 

Disclosure Regarding Other Participants 

in the Audit 

Empirical evidence also suggests that 

the market values information about 

other participants in the audit. Dee et al. 

examined the effect on issuers’ stock 

prices 89 when investors learn (from 

participating auditors’ Form 2 filings) 

that these issuers’ audits included the 

substantial use of other accounting firms 

that do not audit other issuers. Using 

event study methodology, the authors 

find that, when accounting firms 

disclosed in Form 2 the identity of 

issuer audits in which they substantially 

participated, the stock prices of these 

issuers were negatively affected. The 

authors also find that earnings surprises 

for these issuers are less informative to 

the stock market after these disclosures 

in Form 2 are made, meaning that 

investors perceive earnings quality to be 

lower.90 The authors concluded that the 

results of the study suggested ‘‘that 

PCAOB mandated disclosures by 

auditors of their significant 

participation in the audits of issuers 

provides new information, and investors 

behave as if they perceive such audits 

in which other participating auditors are 

involved negatively.’’ It should be noted 

that the negative market reaction in this 

instance may, at least to some extent, 

reflect the fact that the other 

participants in the study were auditors 

that have no issuer clients themselves 

but play a substantial role (i.e., 

participate at least 20%) in an audit of 

an issuer. The disclosures being adopted 

would also apply to other accounting 

firms that take a smaller role in the 

audit and/or may have more experience 

in the application of PCAOB standards 

to audits of issuers. Market reaction to 

disclosures regarding these types of 

participants may differ. 

To the extent that investors and other 

financial statement users are better able 

to assess the level of audit risk 

stemming from multi-location 

engagements, it should incent the 

accounting firm signing the auditor’s 

report to use higher-quality, less risky 

firms as other audit participants. If 

investors react negatively to the use of 

an affiliated accounting firm that was 

previously associated with a failed 

audit, it may encourage the accounting 

firm signing the auditor’s report to 

enhance their supervision and risk 

management practices.91 It should also 

provide other accounting firms 

incentives to increase the quality of 

their audit work to help ensure that they 

can continue to receive referred audit 

work. 

Accountability 

Public disclosure of the name of the 

engagement partner and other 

accounting firms may create incentives 

for the engagement partner and other 

accounting firms to take voluntary steps 

that could result in improved audit 

quality. As discussed above, the Board 

expects that external sources would 

develop a body of information about the 

histories of engagement partners and 

other accounting firms. Although 

auditors already have incentives to 

maintain a good reputation, such as 

internal performance reviews, 

regulatory oversight, and litigation risk, 

such public disclosure likely will create 

an additional reputation risk, which 

should provide an incremental 

incentive for auditors to maintain a 

good reputation, or at least avoid a bad 

one. While this would not affect all 

engagement partners and all other 

accounting firms participating in audits 

to the same degree, as some already 

operate with a high sense of 

accountability, others may respond to 

the additional incentives to deliver high 

quality audits. 

The additional incentives likely will 

be a result of Form AP disclosures 

imposing additional reputation risk on 

engagement partners and other 

accounting firms. As described in the 

economic literature, reputation risk is 

not imposed by regulators or courts, but 

rather by the market through actions 

such as the threat of termination of 

business relationships. Auditors and 

other accounting firms that participated 

in audits already face some degree of 

reputation risk. For example, auditors’ 

names are known by their issuers’ audit 

committees, within their audit firms, 

and to some extent in the audit 

industry; these parties can potentially 

alter or terminate current business 

relationships with the partners or 

reduce the probability of their being 

hired in the future, thereby imposing 

reputation risk on engagement partners. 

Form AP, by making names publicly 

available, will further increase 

reputation risk. 

Disclosure Regarding the Engagement 

Partner 

Form AP will make the names of 

engagement partners known to investors 

and audit committees of companies that 

have not worked with the engagement 

partner. To the extent such knowledge 

affects their current business 

relationships or future job market 

prospects, Form AP disclosures likely 

will impose additional reputation risk 

on engagement partners. For example, 

shareholders may express their 

discontent with an engagement partner 

though their voting decisions on the 

ratification of the audit firm, and to the 

extent that shareholder votes can affect 

the engagement partner’s job market 

projects, the engagement partner would 

face increased reputation risk, hence 

higher accountability. 

Many investors, as well as some other 

commenters, believe that public 

identification of the engagement partner 

may result in increased accountability, 

which could prompt voluntary changes 

in behavior. However, other 

commenters, primarily accounting 

firms, asserted that disclosure of 

engagement partners would not affect 

accountability. If engagement partner 

behavior were to change, such changes 

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7950 Federal Register / Vol. 81, No. 30 / Tuesday, February 16, 2016 / Notices 

92As discussed previously, an academic study, 

analyzing instances where engagement partner 

rotation can be inferred, documents an increased 

rate of financial statement restatements following 

the rotation of engagement partners. See Laurion, et 

al., U.S. Audit Partner Rotations. 

93See, e.g., Joseph V. Carcello and Chan Li, Costs 

and Benefits of Requiring an Engagement Partner 

Signature: Recent Experience in the United 

Kingdom, 88 The Accounting Review 1511 passim 

(2013); Allen D. Blay, Matthew Notbohm, Caren 

Schelleman, and Adrian Valencia, Audit Quality 

Effects of an Individual Audit Engagement Partner 

Signature Mandate, 18 International Journal of 

Auditing 172 (2014); and Ronald R. King, Shawn M. 

Davis, and Natalia M. Mintchik, Mandatory 

Disclosure of the Engagement Partner’s Identity: 

Potential Benefits and Unintended Consequences, 

26 Accounting Horizons 533 passim (2012). 

94Specifically, Carcello and Li found a significant 

decline in abnormal accruals, a decrease in the 

propensity to meet an earnings threshold, an 

increase in the incidence of qualified auditors’ 

reports, and an increase in a measure of earnings 

informativeness. Some commenters criticized the 

use of one of these metrics, abnormal accruals, as 

a proxy for audit quality. While abnormal accruals 

are an imperfect proxy for audit quality, the results 

were corroborated using alternate proxies. 

95Specifically, they find that the increase in audit 

fees from $475,900 to $477,000 between the preand post-signature requirement periods, was 

statistically significant, after controlling for client 

and auditor characteristics that could impact audit 

fees. Carcello and Li, Costs and Benefits of 

Requiring an Engagement Partner Signature: Recent 

Experience in the United Kingdom, at 1532. 

96See Blay et al., Audit Quality Effects of an 

Individual Audit Engagement Partner Signature 

Mandate. 

could include increased professional 

skepticism, which could, in turn, result 

in better supervision of the engagement 

team and lower reliance on 

management’s assertions. The auditor 

may have greater willingness to 

challenge management’s assertions in 

the auditor’s consideration of the 

substance and quality of management’s 

financial statements and disclosures. In 

addition, public disclosure of the name 

of the engagement partner may make 

that person less willing to accept an 

inappropriate position accepted by a 

previous engagement partner because of 

the potential effects on his or her 

reputation.92 The disclosures being 

adopted by the Board will reveal 

engagement partner rotations to 

investors, including instances where 

engagement partners left the 

engagement before rotation would have 

been required. 

Academic research also analyzed 

whether engagement partner disclosures 

has an effect on accountability.93 For 

example, a recent study examined the 

impact of the European Union’s audit 

engagement partner signature 

requirement on audits in the United 

Kingdom and found improvements in 

several proxies for audit quality,94 as 

well as a statistically significant 

increase in audit fees, after controlling 

for client and auditor characteristics.95

It is worth highlighting that this study 

evaluated a policy alternative (a 

signature requirement) that some 

commenters have asserted would have a 

more pronounced effect than the rules 

being adopted. In addition, the authors 

note that there were several other audit 

and financial reporting requirements 

implemented in the United Kingdom 

contemporaneously with the signature 

requirement and, accordingly, it is not 

possible for the authors to rule out the 

possibility that these other requirements 

may have driven their results. 

Furthermore, the study was conducted 

using data from the period of the recent 

financial crisis, which may also have 

affected the results. 

This contrasts with another study 

suggesting that disclosure requirements 

could produce limited or no observable 

improvement in audit quality.96 Blay et 

al. analyzed data from the Netherlands 

and were unable to document any 

statistically significant changes in audit 

quality as measured by estimates of 

earnings quality. The authors speculated 

that the lack of findings may be 

attributable to sufficiently high levels of 

accountability and audit quality in the 

Netherlands. 

As previously noted, the baseline 

conditions in other jurisdictions may 

differ from those in the United States, 

which could affect the extent to which 

these findings can be generalized to the 

United States. 

Disclosure Regarding Other Participants 

in the Audit 

While some commenters questioned 

the value of disclosures regarding other 

participants in the audit, others argued 

that the disclosure of the extent of the 

audit work performed by other 

participants in the audit could increase 

accountability for accounting firms that 

are named. Other commenters indicated 

that, as with disclosure of the name of 

the engagement partner, information 

sources would likely develop over time. 

This may increase scrutiny of the 

overall reputation of such firms. This 

increased reputational risk should 

incent other accounting firms 

participating in an audit to perform 

high-quality audits for all engagements. 

Further, if another accounting firm 

performs a substantial portion of the 

audit, then its reputation would be 

closely tied to the overall results of the 

audit. This may help further align the 

interests of the other accounting firms 

participating in the audit with investors 

and other financial statement users and 

thus enhance audit quality. 

The final rules may also incent global 

network firms to increase accountability 

for all of the firms in their networks. 

The audit process for many 

multinational companies currently 

depends on the affiliated firms within a 

global network to audit company 

subsidiaries in their respective 

countries. This introduces 

vulnerabilities to the audit if quality 

varies across the network. To counter 

this risk, the global network firm may be 

further incented to increase its efforts to 

maintain uniform quality control 

standards and accountability across the 

global network. The global network firm 

may also improve its monitoring of 

other audit participants to ensure audit 

quality as well. This increased 

accountability of the other accounting 

firms that participated in the audit to 

the accounting firm signing the auditor’s 

report could improve audit quality. 

For principal auditors that are not 

part of a global network, disclosures 

regarding other accounting firms 

participating in the audit could provide 

an additional incentive for the principal 

auditor to choose firms that have a good 

reputation for quality. 

The Costs and Other Possible 

Consequences of Disclosure 

Over the course of the rulemaking, the 

Board was mindful of concerns voiced 

by commenters about potential 

compliance and other costs associated 

with public disclosure. In particular, 

many commenters on the 2013 Release 

argued that naming the engagement 

partner and other audit participants in 

the auditor’s report, as contemplated by 

the 2013 Release, may create both legal 

and practical issues under the federal 

securities laws and therefore increase 

the cost of performing audits compared 

to the costs in the current environment. 

Some commenters suggested that an 

increase in costs would be passed on to 

companies through higher audit fees. 

Some commenters urged the Board to 

proceed with the new transparency 

requirements, if it determined to do so, 

by mandating disclosure in an amended 

PCAOB Form 2 or in a newly created 

PCAOB form. Some commenters 

suggested that disclosure on a form may 

not raise the same concerns about 

liability or consent requirements as 

disclosure in the auditor’s report. 

Direct Costs 

Under the Form AP approach, the 

direct costs for auditors would include 

the costs of compiling information about 

the engagement partner and other 

participants in the audit and calculating 

the percentage of audit work completed 

by other participants in the audit. In 

general, costs should be lower for audits 

not involving other participants because 

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97See DeAngelo, Auditor Size and Audit Quality, 

and Francis, What Do We Know About Audit 

Quality? 

98See Letter from Denise L. Nappier, State 

Treasurer, State of Connecticut, to the Office of the 

Secretary, PCAOB (Mar. 17, 2014), at 3. 

99Academic research documents differences in 

the market impact of restatements and going 

concern modifications based on the specific facts 

and circumstances of the events. See, e.g., Susan 

Scholz, The Changing Nature and Consequences of 

Public Company Financial Restatements 1997– 

2006, The Department of the Treasury (Apr. 2008); 

and Krishnagopal Menon and David D. Williams, 

Investor Reaction to Going Concern Audit Reports, 

85 The Accounting Review 2075 passim (2010). 

100The Board is aware of public reports that have 

analyzed historical and aggregate data on audit fees 

and which suggest that audit fees generally have 

remained stable in recent years, notwithstanding 

the fact that the Board and other auditing standard 

setters have issued new performance standards 

during that period. See, e.g., Audit Analytics, Audit 

Fees and Non-Audit Fees: A Twelve Year Trend 

(Sept. 30, 2014). In its 2013 Release, the Board 

sought data that might provide information or 

insight into such costs. As noted previously, 

commenters did not provide data regarding the 

extent of such costs. 

101See Joseph V. Carcello and Rudy Santore, 

Engagement Partner Identification: A Theoretical 

Analysis, 29 Accounting Horizons 297 (2015). 

102The term ‘‘welfare’’ can be thought of as 

overall well-being. In economic theory, welfare 

typically refers to the prosperity and living 

standards of individuals or groups. Some of the 

typical factors that are accounted for in welfare 

functions (or utility functions) include: 

compensation, leisure, effort, reputation, et cetera. 

the only required disclosure would be 

the engagement partner’s name and 

Partner ID. Compliance with the Form 

AP approach will entail initial costs of 

implementation—which could include 

creating systems to assign and track 

Partner ID numbers and to gather the 

required information from each 

engagement team—and ongoing costs 

associated with aggregating the 

information and filling out and filing 

Form AP. 

A number of commenters observed 

that administrative effort would be 

required to compile data for, prepare, 

and review the required disclosures, 

both initially and on an ongoing basis. 

Accounting firms that commented on 

this issue asserted that the 

administrative efforts and related costs 

would not be significant. 

Indirect Costs and Possible Unintended 

Consequences 

In addition to the direct costs, there 

may be indirect costs and unintended 

consequences associated with the 

disclosures under consideration, some 

of which could be more significant than 

the direct compliance costs. 

Differential Demand Based on 

Reputation 

The disclosures aim to provide 

investors and other financial statement 

users with additional information they 

can consider in relation to audit quality 

at the engagement level, as opposed to 

the accounting firm level. This may 

result in some degree of differentiation 

in stature and reputation of individual 

auditors who serve as engagement 

partners and in other accounting firms 

that participate in audits. 

Currently, investors and other 

financial statement users use proxies for 

quality, such as accounting firm size 

and industry experience, to differentiate 

accounting firms.97 Some commenters 

suggested that the new requirements 

could be detrimental to smaller and less 

well-known accounting firms, even 

when they perform audit work in 

accordance with PCAOB standards. 

Others raised concerns that public 

identification of the engagement partner 

could lead to a rating, or ‘‘star,’’ system 

resulting in particular individuals and 

entities being in high demand, to the 

unfair disadvantage of other equally 

qualified engagement partners. It is also 

possible that engagement partners may 

be unfairly disadvantaged because of 

association with an adverse audit 

outcome, which could be particularly 

damaging to their professional 

development and future opportunities if 

it occurred at the outset of their career. 

Unwarranted attribution of an adverse 

audit outcome to an engagement partner 

could also adversely affect other public 

companies whose audits were led by the 

same engagement partner. While 

commenters did not raise similar 

concerns related to other accounting 

firms participating in audits, the 

implications of identification could be 

similar. 

Differential demand based on 

reputation could be a cost of the 

disclosures under consideration to the 

extent the reputation (whether good or 

bad) was undeserved. It may be 

reasonable, however, to expect that 

financial markets would be discerning 

in considering information about the 

engagement partner and other 

accounting firms in the audit. As one 

commenter stated, ‘‘investors are 

accustomed to weighing a variety of 

factors when assessing 

performance. . . . This approach can be 

seen in the careful analysis investors 

and proxy advisors do when they are 

asked to withhold support from 

directors standing for election. There is 

no reason to believe they will do 

otherwise with respect to auditors.’’ 98

Academic research also suggests that 

financial markets do not treat all 

restatements and going concern 

modifications equally. Instead, financial 

markets respond to the facts and 

circumstances related to an individual 

restatement or going concern 

modification.99 The results from this 

research suggest that financial markets 

may be similarly discerning when 

forming their opinion about an 

engagement partner or other participant 

in the audit. 

Overauditing and Audit Fees 

Some commenters have suggested that 

the increased reputational risk 

associated with public disclosure may 

lead to instances of overauditing, in 

which the engagement team undertakes 

more procedures than they otherwise 

might have performed, which do not 

contribute to forming an opinion on the 

financial statements. It should be noted 

that the final rules are not performance 

standards and do not mandate the 

performance of additional audit 

procedures. However, it is possible that 

some auditors may perform additional 

procedures as a result of the 

requirements (for example, because they 

want to obtain a higher level of 

confidence in some areas). This could 

result in unnecessary costs and an 

inefficient utilization of resources, and 

might cause undue delays in financial 

reporting. If and to the extent there are 

increased costs for auditors as a result 

of the new rules, however, such costs 

may be passed on—in whole, in part, or 

not at all—to companies and their 

investors in the form of higher audit 

fees.100 Further, increased procedures 

may also require additional time from 

the company’s management to deal with 

such procedures. 

While the possibility of overauditing 

cannot be eliminated, competitive 

pressures to reduce the costs of 

conducting the audit should provide 

counterincentives that mitigate that risk. 

Other Changes in Behavior of 

Engagement Partners 

A recent study documents certain 

ways in which the disclosures could 

change the incentives of engagement 

partners resulting in changed 

behavior.101 Under a purely theoretical 

model developed by Carcello and 

Santore that has not yet been 

empirically tested, potential reputation 

costs stemming from disclosure leads 

engagement partners to become more 

conservative and gather more evidence 

than the accounting firm finds to be 

optimal. Although the results of the 

study suggested that the disclosures 

lead to increased audit quality, the 

authors’ analysis indicated that 

engagement partner identification likely 

leads to decreases in the welfare 102 of 

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103Rule 2–01(c)(6) of Regulation S–X, 17 CFR 

210.2–01(c)(6); see also Section 203 of the SarbanesOxley Act. 

104While the requirement to file Form AP is 

triggered by the issuance of an auditor’s report, the 

form would not automatically be incorporated by 

reference into or otherwise made part of the 

auditor’s report. 

engagement partners and accounting 

firms. The authors argued that changes 

in the welfare of engagement partners 

and accounting firms may not be 

optimal within their theoretical 

analysis. 

The Carcello and Santore analysis is 

limited since they do not explicitly 

analyze the effects of increased auditor 

conservatism and increased audit 

quality on investor utility. Therefore, 

their description of the ‘‘society’’ is 

missing a key participant, the investors. 

This limitation notwithstanding, they 

do note that increased conservatism at 

large accounting firms may actually be 

socially optimal as it could limit 

damages to market participants 

stemming from aggressive financial 

reporting at large issuers. 

Disincentive To Perform Risky Audits 

Some commenters have suggested that 

engagement partners and other 

accounting firms participating in audits 

may avoid complex and/or risky audits 

because of the potential negative 

consequences of an adverse audit 

outcome. It is also possible that 

accounting firms could increase audit 

fees or adjust their client acceptance 

and retention policies because of 

heightened concerns about liability, 

including the cost of insurance, or 

reputational risks. This could enhance 

auditors’ performance of their 

gatekeeper function to the extent that it 

increases auditors’ reluctance to take on 

clients at a high risk of fraudulent or 

otherwise materially misstated financial 

statements. But it would impose a cost 

if firms or partners become so risk 

averse that companies that do not pose 

such risk cannot obtain well-performed 

audits. This could effectively compel 

certain particularly risky companies to 

use engagement partners or accounting 

firms with substandard reputations or, 

in extreme circumstances, lead them to 

cease SEC reporting. If investors are 

better able to evaluate the quality of 

audit work performed by engagement 

partners and other accounting firms 

participating in the audit, companies 

that engage accounting firms with a 

reputation for substandard quality may 

experience an increased cost of capital. 

Mismatch of Skills 

Some commenters suggested that 

reputational concerns may lead audit 

committees not to select qualified 

engagement partners associated with 

prior restatements and to select a 

perceived ‘‘star’’ partner. It is, therefore, 

possible that, in some instances, highdemand auditors might be engaged 

when other auditors whose skills may 

be more relevant for a particular 

engagement are not selected. This could 

result in decreased audit quality. 

However, accounting firms have 

incentives to staff engagements 

appropriately, and high-demand 

engagement partners would also be 

incented to avoid performing audits for 

which they are not qualified in order to 

maintain that status or to mitigate any 

skill mismatch and maintain or enhance 

their reputation by consulting with 

others within their firm as necessary to 

ensure audit quality. 

The ability to identify partners and 

other accounting firms involved in 

specific engagements could also 

facilitate the intentional selection of 

auditors with a reputation for 

substandard quality. Companies may do 

this for a variety of reasons, including 

the potential for lower audit fees or to 

identify auditors who are less likely to 

challenge management’s assertions. 

Possible Changes in Competitive 

Dynamics 

Differentiation in stature and 

reputation of individual auditors who 

serve as engagement partners, and in 

other accounting firms that participate 

in audits, could have a number of 

competitive effects. One commenter 

suggested that transparency could create 

a permanent structural bias against 

smaller, less-known firms and partners 

as audit committees may be reluctant to 

engage firms or select partners that are 

not well-established or well-known. It 

appears that the disclosures under 

consideration could promote increased 

competition based on factors other than 

general firm reputation. In particular, if 

investors are better able to assess 

variations in audit quality, any resultant 

financial market effects should incent 

accounting firms to increase the extent 

to which they compete based on audit 

quality. 

Moreover, the disclosures could result 

in changes to the market dynamics for 

the services of engagement partners and 

other accounting firms participating in 

audits. The ability to differentiate 

among engagement partners and among 

other accounting firms participating in 

audits could change external 

perceptions of particular partners and 

accounting firms, which may affect the 

demand for their services. 

It should be noted, however, that a 

marked increase in the mobility of 

engagement partners and other 

accounting firms participating in audits 

seems unlikely due to high switching 

costs and contractual limitations. For 

example, partnership agreements, 

noncompete agreements, and 

compensation and retirement 

arrangements may affect partners’ 

incentives and contractual ability to 

change firms. In addition, the costs to an 

issuer of replacing the global audit team 

and explaining the decision to change 

accounting firms to the market may 

affect companies’ incentives to follow 

an engagement partner to a new firm. As 

a result, engagement partners may be 

reluctant to or contractually precluded 

from changing accounting firms, and 

those who elect to change firms may be 

unable to bring their clients with them. 

Additionally, the five-year partner 

rotation requirement would preclude an 

engagement partner from serving a 

company for more than five years, even 

if the engagement partner switched 

accounting firms.103

Potential Liability Consequences 

The Board believes that disclosure on 

Form AP appropriately addresses 

concerns raised by commenters about 

liability. As commenters suggested, 

disclosure on Form AP should not raise 

potential liability concerns under 

Section 11 of the Securities Act or 

trigger the consent requirement of 

Section 7 of that Act because the 

engagement partner and other 

accounting firms would not be named in 

a registration statement or in any 

document incorporated by reference 

into one.104 While the Board recognizes 

that commenters expressed mixed views 

on the potential for liability under 

Exchange Act Section 10(b) and Rule 

10b-5 and the ultimate resolution of 

Section 10(b) liability is outside of its 

control, the Board nevertheless does not 

believe any such risks warrant not 

proceeding with the Form AP approach. 

Alternatives Considered 

After considering these factors and 

public comments, the Board adopted 

new rules and amendments to its 

standards that require the names of the 

engagement partner and certain other 

audit participants to be disclosed in a 

newly created PCAOB form, Form AP. 

Commenters have indicated that 

disclosure in Form AP could produce 

the intended benefits of transparency 

while addressing concerns related to 

auditor liability. 

As described below, the Board has 

considered a number of alternative 

approaches to achieve the potential 

benefits of enhanced disclosure. 

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105Form 2 must be filed no later than June 30 of 

each year—according to PCAOB Rule 2201, Time 

for Filing of Annual Report—and covers the 

preceding 12-month period from April 1 to March 

31; see Form 2, General Instruction 4. 

106 In 2014, the IAASB adopted ISA 700 

(Revised), Forming an Opinion and Reporting on 

Financial Statements, which generally requires 

disclosure of the name of the engagement partner 

in the auditor’s report. Following this adoption, 

disclosure of the engagement partner’s name in the 

auditor’s report of a listed entity will become the 

norm in those jurisdictions that have adopted the 

ISAs as adopted by the IAASB. See also 2013 

Release for further discussion of the requirements 

regarding engagement partner disclosure in other 

jurisdictions. 

107Out of the 20 countries with the largest market 

capitalization (based on data obtained from the 

World Bank, World Development Indicators), the 

four that currently do not require the disclosure of 

the name of the engagement partner are the United 

States, Canada, Republic of Korea, and Hong Kong. 

The 16 countries that currently require disclosure 

of the name of the engagement partner are Japan, 

United Kingdom, France, Germany, Australia, 

India, Brazil, China, Switzerland, Spain, Russian 

Federation, the Netherlands, South Africa, Sweden, 

Mexico, and Italy. 

Alternatives Considered Previously 

Over the past several years, the Board 

has considered a number of alternative 

approaches to the issue of transparency. 

Initially, the Board considered whether 

an approach short of rulemaking would 

be a less costly means of achieving the 

desired end. The Board’s usual vehicles 

for informal guidance—such as staff 

audit practice alerts, answers to 

frequently asked questions, or reports 

under PCAOB Rule 4010, Board Public 

Reports—did not seem suitable. U.S. 

accounting firms have not voluntarily 

disclosed information about engagement 

partners. Also, even if some auditors 

disclosed more information under a 

voluntary regime, practices among 

auditors likely would vary widely. That 

would defeat one of the Board’s goals of 

achieving widespread and consistent 

disclosures about the auditors that carry 

out PCAOB audits. Thus, the Board did 

not pursue an informal or voluntary 

approach. 

In the 2009 Release, the Board 

considered a requirement for the 

engagement partner to sign the auditor’s 

report in his or her own name in 

addition to the name of the accounting 

firm. A number of commenters 

supported and continue to support the 

signature requirement. However, many 

other commenters opposed it, mainly 

because including the signature in the 

auditor’s report, in their view, would 

appear to minimize the role of the 

accounting firm in the audit and could 

increase the engagement partner’s 

liability. Some commenters believed 

that this alternative would increase both 

transparency and the engagement 

partner’s sense of accountability. Other 

commenters believed that engagement 

partners already have sufficient 

incentives to have a strong sense of 

accountability and that signing their 

own name on the audit opinion would 

not affect that. 

In the 2011 Release, in addition to the 

requirement to disclose the name of the 

engagement partner in the auditor’s 

report, the Board proposed to add to 

Form 2, the annual report, a 

requirement to disclose the name of the 

engagement partner for each audit 

required to be reported on the form. As 

originally proposed, disclosure on Form 

2 would supplement more timely 

disclosures in the auditor’s report by 

providing a convenient mechanism to 

retrieve information about all of a firm’s 

engagement partners for all of its audits. 

The 2011 Release also proposed to 

require disclosure about other 

participants in the most recent period’s 

audit in the auditor’s report. 

The Board also considered only 

requiring disclosure in Form 2. There 

are, however, a number of disadvantages 

to a Form 2-only approach, as discussed 

in the 2013 Release. It would delay the 

disclosure of information useful to 

investors and other financial statement 

users from 3 to 15 months.105 It also 

would make the information more 

difficult to find by investors interested 

only in the name of the engagement 

partner for a particular audit, rather 

than an aggregation of all of the firm’s 

engagement partners for a given year, 

because they would have to search for 

it in the midst of unrelated information 

in Form 2. 

Some commenters on both the 2011 

Release and 2013 Release suggested that 

the names of the engagement partner 

and the other participants in the audit 

should be included, if they were to be 

disclosed at all, not in the auditor’s 

report but on an existing or newly 

created PCAOB form only. This would 

make the information publicly available, 

while responding to concerns expressed 

by commenters related to liability and 

related practical issues. Some 

commenters on the 2013 Release also 

suggested that these disclosures would 

be more appropriately made in the 

company’s audit committee report. 

In considering commenters’ views, 

the Board also considered providing 

auditors the option of making disclosure 

either in the auditor’s report or on a 

newly created PCAOB form. This 

alternative would have had the 

advantage of allowing auditors to decide 

how to comply with the disclosure 

requirements based on their particular 

circumstances, may have imposed lower 

compliance costs in some instances 

compared to mandatory form filing or 

mandatory auditor’s report disclosure, 

and may have resulted in more 

disclosures in the auditor’s report than 

a mandatory form because some 

auditors may have preferred to avoid the 

cost of filing the form by disclosing the 

information in the auditor’s report. 

However, such an approach would have 

permitted disclosures in multiple 

locations, which could have caused 

confusion and increased search costs 

compared to either auditor’s report 

disclosure or a mandatory form. 

Disclosure in the Auditor’s Report 

Under the alternative proposed in the 

2013 Release, auditors would have been 

required to disclose the name of the 

engagement partner and certain other 

participants in the audit in the auditor’s 

report. This approach has certain 

benefits to market participants related to 

timing and visibility of the disclosures. 

For example, mandated disclosure in 

the auditor’s report would reduce search 

costs for market participants in some 

instances. The required information 

would be disclosed in the primary 

vehicle by which the auditor 

communicates with investors and where 

other information about the audit is 

already found, and would be available 

immediately upon filing with the SEC of 

a document containing the auditor’s 

report. However, market participants 

may incur costs to aggregate the 

information disclosed in separate 

auditors’ reports. 

Some commenters indicated that, 

compared to disclosure on Form AP, 

disclosing the information in the 

auditor’s report may have an 

incrementally larger effect on the sense 

of accountability of identified 

participants in the audit because, for 

example, the engagement partner would 

be involved in the preparation of the 

auditor’s report, but may not be 

involved in the preparation of the form. 

As discussed above, increased auditor 

accountability could have both positive 

and potentially some negative effects on 

the audit. 

Mandating disclosure of the name of 

the engagement partner in the auditor’s 

report would also create consistency 

between PCAOB auditing standards and 

requirements of other global standard 

setters regarding engagement partner 

disclosure.106 For example, 16 out of the 

20 countries with the largest market 

capitalization, including 7 E.U. member 

states, already require disclosure of the 

name of the engagement partner in the 

auditor’s report.107 However, it should 

be noted that baseline conditions, 

including those regarding auditor 

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108Changes to the format of the auditor’s report 

in the United Kingdom may have provided auditors 

with a mechanism to distinguish themselves from 

their peers. Some filings suggest that some auditors 

may be using the new format to showcase the rigor 

and quality of their audit work. See Citi Research, 

New UK Auditor’s Reports Update (Sept. 3, 2014). 

109There is an extensive body of academic 

literature demonstrating that financial markets are 

able to incorporate information into securities 

prices. Because securities prices can be viewed as 

public goods, investors are able to learn important 

information about a company by looking at the 

prices of its securities. See, e.g., Eugene F. Fama, 

Efficient Capital Markets: A Review of Theory and 

Empirical Work, 25 The Journal of Finance 383 

(1970); Sanford Grossman, Further Results on the 

Informational Efficiency of Competitive Stock 

Markets, 18 Journal of Economic Theory 81 (1978); 

John C. Coffee, Jr., Market Failure and the Economic 

Case for a Mandatory Disclosure System, 70 

Virginia Law Review 717 (1984); and Verrecchia, 

Essays on Disclosure. 

110See Jumpstart Our Business Startups (‘‘JOBS’’) 

Act, Pub. L. 112–106 (Apr. 5, 2012). See also 

Section 103(a)(3)(C) of the Sarbanes-Oxley Act, (15 

U.S.C. 7213(a)(3)), as added by Section 104 of the 

JOBS Act. 

liability, may differ among these 

jurisdictions. 

As previously discussed, disclosure in 

the auditor’s report could trigger the 

consent requirement of Section 7 and 

subject the identified parties to potential 

liability under Section 11 of the 

Securities Act. As a result, there could 

be additional indirect costs to 

engagement partners and other 

accounting firms participating in audits 

associated with defense of the litigation. 

Disclosure on a New PCAOB Form 

Under the final rules adopted by the 

Board, firms are be required to disclose 

the name of the engagement partner and 

certain other accounting firms that 

participated in the audit in a separate 

PCAOB form to be filed by the 35th day 

after the date the auditor’s report is first 

included in a document filed with the 

SEC, with a shorter deadline of 10 days 

for initial public offerings. 

The approach described in the 2015 

Supplemental Request would allow 

auditors to decide whether to also 

provide disclosure in the auditor’s 

report taking into account, for example, 

any costs associated with obtaining 

consents pursuant to the Securities Act 

and the potential for liability stemming 

from disclosure in the auditor’s report. 

Although many auditors may prefer to 

avoid the potential legal and practical 

issues associated with disclosure in the 

auditor’s report, some auditors may 

choose to also make the required 

disclosures in the auditor’s report. 

Financial statement users could 

interpret an auditor’s willingness to be 

personally associated with the audit in 

the auditor’s report as a signal of audit 

quality or, more generally, as a means of 

differentiating among auditors.108

Requiring disclosure in a separate 

PCAOB form may decrease the chances 

that investors and other financial 

statement users would seek out the 

information. While disclosure in the 

auditor’s report would make 

information available on the date of SEC 

filing of the document containing the 

auditor’s report, disclosure on Form AP 

could occur up to 35 days later and 

information would only be included in 

the auditor’s report when the auditor 

also chose to disclose in the auditor’s 

report. Regardless of where it is 

disclosed, investors should be able to 

consider the information in developing 

their investment strategies.109

Applicability to Brokers and Dealers 

Under Exchange Act Rule 17a–5 

For a discussion of the economic 

considerations relevant to the 

application of the final rules to audits of 

brokers and dealers, see above. 

Considerations for Audits of Emerging 

Growth Companies 

Pursuant to Section 104 of the 

Jumpstart Our Business Startups 

(‘‘JOBS’’) Act, any rules adopted by the 

Board subsequent to April 5, 2012, do 

not apply to the audits of EGCs (as 

defined in Section 3(a)(80) of the 

Exchange Act) unless the SEC 

‘‘determines that the application of such 

additional requirements is necessary or 

appropriate in the public interest, after 

considering the protection of investors 

and whether the action will promote 

efficiency, competition, and capital 

formation.’’ 110 As a result of the JOBS 

Act, the rules and related amendments 

to PCAOB standards the Board is 

adopting are subject to a separate 

determination by the SEC regarding 

their applicability to audits of EGCs. 

The 2015 Supplemental Request as 

well as the 2013 Release sought 

comment on the applicability of the 

proposed disclosure requirements to the 

audits of EGCs. Commenters generally 

supported requiring the same 

disclosures for audits of EGCs on the 

basis that EGCs have the same 

characteristics as other issuers and that 

the same benefits would be applicable 

to EGCs. 

The data on EGCs outlined below in 

‘‘Characteristics of Self-Identified 

EGCs,’’ remains consistent with the data 

discussed in the 2013 Release, although 

the number of EGCs has nearly doubled 

since the issuance of that release. A 

majority of EGCs continue to be smaller 

public companies that are generally new 

to the SEC reporting process. Overall, 

there is less information available in the 

market about smaller and newer 

companies than there is about larger and 

more established companies. The 

communication of the name of the 

engagement partner and information 

about other accounting firms in the 

audit could assist the market in 

assessing some risks associated with the 

audit and in valuing securities, which 

could make capital allocation more 

efficient. Disclosures about audits of 

EGCs could produce these effects no 

less than disclosures about audits of 

other companies. Because there is 

generally less information available to 

investors about EGCs, additional 

disclosures about audits of EGCs may be 

of greater benefit to investors in EGCs 

than to investors in established issuers 

with a longer reporting history. 

As noted below, some EGCs operate 

in geographic segments that are outside 

the country or region of the accounting 

firm issuing the auditor’s report, which 

may suggest involvement of participants 

in the audit other than the accounting 

firm issuing the auditor’s report. While 

a smaller percentage of EGCs report 

such sales and assets than the 

companies in the Russell 3000 Index, 

for those EGCs that do, the amounts 

represent a larger portion of total sales 

and assets. The percentage of EGCs 

reporting segment sales (15%) and 

assets (17%) in geographic areas outside 

the country or region of the accounting 

firm issuing the auditor’s report is 

smaller as compared to companies in 

the Russell 3000 Index (51% and 42%, 

respectively). However, for these EGCs, 

the average percentage of reported 

segment sales (58%) and assets (73%) in 

geographic areas outside the country or 

region of the accounting firm issuing the 

auditor’s report is significantly higher 

than the analogous average segment 

sales (40%) and assets (35%) reported 

by companies in the Russell 3000 Index. 

Therefore, providing the disclosures 

regarding other accounting firms in the 

audit may be as relevant, or more 

relevant, to investors in EGCs and other 

financial statement users as it would be 

to investors in larger and more 

established companies. 

One commenter asserted that costs to 

collect data about other participants in 

the audit will likely be more significant 

and probably more burdensome for 

auditors of EGCs than those of other 

issuers. Based on the characteristics of 

EGCs it is unlikely that the cost of 

collecting data will be 

disproportionately high for EGCs as a 

group because the percentage of EGCs 

that operate outside the country or 

region of the accounting firm issuing the 

auditor’s report appears to be relatively 

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111Pursuant to the JOBS Act, an EGC is defined 

in Section 3(a)(80) of the Exchange Act. In general 

terms, an issuer qualifies as an EGC if it has total 

annual gross revenue of less than $1 billion during 

its most recently completed fiscal year (and its first 

sale of common equity securities pursuant to an 

effective Securities Act registration statement did 

not occur on or before Dec. 8, 2011). See JOBS Act 

Section 101(a), (b), and (d). Once an issuer is an 

EGC, the entity retains its EGC status until the 

earliest of: (i) the first year after it has total annual 

gross revenue of $1 billion or more (as indexed for 

inflation every five years by the SEC); (ii) the end 

of the fiscal year after the fifth anniversary of its 

first sale of common equity securities under an 

effective Securities Act registration statement; (iii) 

the date on which the company issues more than 

$1 billion in nonconvertible debt during the prior 

three year period; or (iv) the date on which it is 

deemed to be a ‘‘large accelerated filer’’ under the 

Exchange Act (generally, an entity that has been 

public for at least one year and has an equity float 

of at least $700 million). 

112To obtain data regarding EGCs, the PCAOB’s 

Office of Research and Analysis compiled data from 

Audit Analytics on self-identified EGCs and 

excluded companies that (i) have terminated their 

registration, (ii) had their registration revoked, or 

(iii) have withdrawn their registration statement 

prior to effectiveness and, in each case, have not 

subsequently filed audited financial statements. 

The PCAOB has not validated these entities’ selfidentification as EGCs. The information presented 

also does not include data for entities that have 

filed confidential registration statements and have 

not subsequently made a public filing. 

113Approximately 28% of these 171 companies 

are blank check companies according to the 

Standard Industrial Classification (‘‘SIC’’) code. 

This is the most common SIC code among the 171 

companies; the next most common SIC code (5%) 

is that for metal mining (the remaining SIC codes 

each represent less than 5%). Approximately 84% 

of these 171 companies had an explanatory 

paragraph included in the last auditor’s report filed 

with the SEC stating that there is substantial doubt 

about the company’s ability to continue as a going 

concern. Approximately 7% of these 171 companies 

were audited by firms that are annually inspected 

by the PCAOB, 2% were audited by firms that are 

affiliates of annually inspected firms, 2% were 

audited by other foreign firms, and the remaining 

89% were audited by domestic firms that are 

triennially inspected by the PCAOB. 

low compared to companies in the 

Russell 3000 Index. Although for those 

EGCs that do, the percentage of sales 

and assets that may be subject to audit 

by other participants could be greater. 

The costs associated with the final 

rules, which are discussed above, are 

equally applicable to all companies, 

including EGCs. To the extent 

compliance costs do not vary with the 

size of the company, they may have a 

disproportionately greater impact on 

audits of smaller companies, including 

audits of smaller EGCs. As previously 

noted, however, the Board does not 

believe that direct costs for auditors to 

comply with the final rule will be 

significant. Such costs would not, in 

any case, be borne by companies, 

including EGCs, except to the extent 

they are passed on in the form of higher 

audit fees. 

As noted above, the Board was 

mindful of concerns voiced by 

commenters about compliance and 

other costs. The final rule responds to 

those concerns by requiring disclosure 

on Form AP, which should not raise the 

same concerns about potential liability 

or consent requirements as disclosure in 

the auditor’s report. 

Approximately 3% of EGCs were 

audited by firms having only one 

certified public accountant whose full 

name is included in the firm’s name (for 

example, sole proprietor). For those 

EGCs, the name of the audit engagement 

partner is already disclosed through the 

required signature of the firm on the 

auditor’s report. No companies in the 

Russell 3000 Index are audited by such 

firms. 

The Board is providing this analysis 

and the information set forth below to 

assist the SEC in its consideration of 

whether it is ‘‘necessary or appropriate 

in the public interest, after considering 

the protection of investors and whether 

the action will promote efficiency, 

competition, and capital formation,’’ to 

apply the standard and amendments to 

audits of EGCs. This information 

includes data and analysis of EGCs 

identified by the Board’s staff from 

public sources. 

The final rules will provide investors 

and other financial statement users with 

improved transparency about those who 

conduct audits, adding more specific 

data points to the mix of information 

that can be used to make decisions 

about audit quality and evaluate the 

credibility of financial reporting. The 

information will also allow investors 

and other financial statement users to 

evaluate the reputations of engagement 

partners and other accounting firms, 

which should have an effect on their 

sense of accountability. 

For the reasons explained above, the 

Board believes that the final rules are in 

the public interest and, after considering 

the protection of investors and the 

promotion of efficiency, competition, 

and capital formation, recommends that 

the final rules should apply to audits of 

EGCs. Accordingly, the Board 

recommends that the Commission 

determine that it is necessary or 

appropriate in the public interest, after 

considering the protection of investors 

and whether the action will promote 

efficiency, competition, and capital 

formation, to apply the final rules to 

audits of EGCs. The Board stands ready 

to assist the Commission in considering 

any comments the Commission receives 

on these matters during the 

Commission’s public comment process. 

Characteristics of Self-Identified EGCs 

The PCAOB has been monitoring 

implementation of the JOBS Act in 

order to understand the characteristics 

of EGCs 111 and inform the Board’s 

consideration of whether it should 

recommend that the SEC approve the 

application of the final rules to audits of 

EGCs. To assist the SEC, the Board is 

providing the following information 

regarding EGCs that it has compiled 

from public sources.112

As of May 15, 2015, based on the 

PCAOB’s research, there were 1,972 SEC 

registrants that filed audited financial 

statements and identified themselves as 

EGCs in at least one public filing. 

Among the 1,972 EGCs, there were 171 

that did not file audited financial 

statements within the 18 months 

preceding May 15, 2015.113

Characteristics of the remaining 1,801 

companies that filed audited financial 

statements in the 18 months preceding 

May 15, 2015 are discussed below. 

These companies operate in diverse 

industries. The five most common SIC 

codes applicable to these companies are: 

(i) pharmaceutical preparations; (ii) 

blank check companies; (iii) real estate 

investment trusts; (iv) prepackaged 

software services; and (v) business 

services. 

The five SIC codes with the highest 

total assets as a percentage of the total 

assets of the population of EGCs are 

codes for: (i) Real estate investment 

trusts; (ii) state commercial banks; (iii) 

crude petroleum or natural gas; (iv) 

national commercial banks; and (v) 

electric services. Total assets of EGCs in 

these five SIC codes represent 

approximately 46% of the total assets of 

the population of EGCs. EGCs in two of 

these five SIC codes (state commercial 

banks and national commercial banks) 

represent financial institutions, and the 

total assets for these two SIC codes 

represent approximately 17% of the 

total assets of the population of EGCs. 

Approximately 13% of the EGCs 

identified themselves in registration 

statements and had not reported under 

the Exchange Act as of May 15, 2015. 

Approximately 74% of EGCs began 

reporting under the Exchange Act in 

2012 or later. The remaining 13% of 

these companies have been reporting 

under the Exchange Act since 2011 or 

earlier. Accordingly, a majority of the 

companies that have identified 

themselves as EGCs have been reporting 

information under the securities laws 

since 2012. 

Approximately 62% of the companies 

that have identified themselves as EGCs 

and filed an Exchange Act filing with 

information on smaller reporting 

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114The SEC adopted its current smaller reporting 

company rules in Smaller Reporting Company 

Regulatory Relief and Simplification, Securities Act 

Release No. 8876 (Dec. 19, 2007). Generally, 

companies qualify to be smaller reporting 

companies and, therefore, have scaled disclosure 

requirements if they have less than $75 million in 

public equity float. Companies without a calculable 

public equity float will qualify if their revenues 

were below $50 million in the previous year. Scaled 

disclosure requirements generally reduce the 

compliance burden of smaller reporting companies 

compared to other issuers. 

115The management report on internal control 

over financial reporting is required only in annual 

reports, starting with the second annual report filed 

by the company. See Instruction 1 to Item 308(a) of 

Regulation S–K. EGCs that have not yet filed at least 

one annual report are therefore not required to 

provide it. 

116For purposes of comparison, the PCAOB 

compared the data compiled with respect to the 

population of companies that identified themselves 

as EGCs with companies listed in the Russell 3000 

Index in order to compare the EGC population with 

the broader issuer population. The Russell 3000 

Index was chosen for comparative purposes because 

it is intended to measure the performance of the 

largest 3,000 U.S. companies representing 

approximately 98% of the investable U.S. equity 

market (as indicated on the Russell Web site). To 

contrast, approximately 98% of the companies in 

the Russell 3000 Index provided a management 

report on internal control over financial reporting. 

Of those companies that provided a management 

report, approximately 5% stated in the report that 

the company’s internal control over financial 

reporting was not effective. 

117For purposes of comparison, the PCAOB 

compared the data compiled with respect to the 

population of companies that identified themselves 

as EGCs with companies listed in the Russell 3000 

Index in order to compare the EGC population with 

the broader issuer population. The average and 

median reported assets of issuers in the Russell 

3000 Index were approximately $13.2 billion and 

approximately $1.9 billion, respectively. The 

average and median reported revenue from the most 

recent audited financial statements filed as of May 

15, 2015, of issuers in the Russell 3000 were 

approximately $4.9 billion and $812.9 million, 

respectively. 

118Less than 1% of companies in the Russell 

3000 Index have an explanatory paragraph 

describing that there is substantial doubt about the 

company’s ability to continue as a going concern. 

119This data is based on firms’ annual disclosures 

on PCAOB Form 2. No companies in the Russell 

3000 Index were audited by such firms. 

120See Financial Accounting Standards Board 

Accounting Standards Codification, Topic 280, 

Segment Reporting. 

121Approximately 51% and 41% of the 

population of companies in the Russell 3000 Index 

reported segment sales and assets, respectively, in 

geographic areas outside the country or region of 

the accounting firm issuing the auditor’s report. 

122For the population of companies in the Russell 

3000 Index that reported segment sales or assets in 

geographic areas outside the country or region of 

the accounting firm issuing the auditor’s report, 

approximately 40% and 35% of those segment sales 

and assets, respectively, were in geographic areas 

outside the country or region of the accounting firm 

issuing the auditor’s report. 

company status indicated that they were 

smaller reporting companies.114

Approximately 54% of the companies 

that have identified themselves as EGCs 

provided a management report on 

internal control over financial 

reporting.115 Of those companies that 

provided a management report, 

approximately 50% stated in the report 

that the company’s internal control over 

financial reporting was not effective.116

The most recent audited financial 

statements filed as of May 15, 2015, for 

those companies that identified as EGCs 

indicated the following: 

• The reported assets ranged from 

zero to approximately $12.9 billion. The 

average and median reported assets 

were approximately $227.4 million and 

$3.1 million, respectively.117

• The reported revenue ranged from 

zero to approximately $926.4 million. 

The average and median reported 

revenue were approximately $53.7 

million and $48 thousand, respectively. 

• Approximately 43% reported zero 

revenue in their financial statements. 

• The average and median reported 

assets among companies that reported 

revenue greater than zero were 

approximately $382.3 million and $71.1 

million, respectively. The average and 

median reported revenue among these 

companies that reported revenue greater 

than zero were approximately $94.0 

million and $13.5 million, respectively. 

• Approximately 50% had an 

explanatory paragraph included in the 

auditor’s report on their most recent 

audited financial statements describing 

that there is substantial doubt about the 

company’s ability to continue as a going 

concern.118

• Approximately 44% were audited 

by firms that are annually inspected by 

the PCAOB (that is, firms that have 

issued auditor’s reports for more than 

100 public company audit clients in a 

given year) or are affiliates of annually 

inspected firms. Approximately 56% 

were audited by triennially inspected 

firms (that is, firms that have issued 

auditor’s reports for 100 or fewer public 

company audit clients in a given year) 

that are not affiliates of annually 

inspected firms. 

• Approximately 3% were audited by 

firms: (1) whose names contain the full 

name of an individual that is in a 

leadership role at the firm and (2) have 

disclosed only one certified public 

accountant.119

• Approximately 15% and 17% of the 

EGCs reported segment sales and 

assets,120 respectively, in geographic 

areas outside the country or region of 

the accounting firm issuing the auditor’s 

report.121 For these EGCs, on average, 

58% and 73% of the reported segment 

sales and assets, respectively, were in 

geographic areas outside the country or 

region of the accounting firm issuing the 

auditor’s report.122

III. Date of Effectiveness of the 

Proposed Rules and Timing for 

Commission Action 

Pursuant to Section 19(b)(2)(A)(ii) of 

the Exchange Act, and based on its 

determination that an extension of the 

period set forth in Section 19(b)(2)(A)(i) 

of the Exchange Act is appropriate in 

light of the PCAOB’s request that the 

Commission, pursuant to Section 

103(a)(3)(C) of the Sarbanes-Oxley Act, 

determine that the proposed rules apply 

to audits of emerging growth companies, 

as defined in Section 3(a)(80) of the 

Exchange Act, the Commission has 

determined to extend to May 16, 2016 

the date by which the Commission 

should take action on the proposed 

rules. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rules 

are consistent with the requirements of 

Title I of the Act. Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/pcaob.shtml); or 

• Send an email to rulecomments@sec.gov. Please include File 

Number PCAOB–2016–01 on the subject 

line. 

Paper Comments 

• Send paper comments in triplicate 

to Brent J. Fields, Secretary, Securities 

and Exchange Commission, 100 F Street 

NE., Washington, DC 20549–1090. 

All submissions should refer to File 

Number PCAOB–2016–01. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/pcaob.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rules that 

are filed with the Commission, and all 

written communications relating to the 

proposed rules between the Commission 

and any person, other than those that 

may be withheld from the public in 

accordance with the provisions of 5 

U.S.C. 552, will be available for Web 

site viewing and printing in the 

Commission’s Public Reference Room, 

on official business days between the 

hours of 10:00 a.m. and 3:00 p.m. 

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Federal Register / Vol. 81, No. 30 / Tuesday, February 16, 2016 / Notices 7957 

123 17 CFR 200.30–11(b)(2). 

Copies of such filing will also be 

available for inspection and copying at 

the principal office of the PCAOB. All 

comments received will be posted 

without charge; we do not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number PCAOB– 

2016–01 and should be submitted on or 

before March 8, 2016. 

For the Commission, by the Office of the 

Chief Accountant, by delegated authority.123

Brent J. Fields, 

Secretary. 

[FR Doc. 2016–02875 Filed 2–12–16; 8:45 am] 

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