The primary role of an audit is to provide reasonable assurance that financial statements present a true and fair view of the actual states of affairs of a company. The provision for adequate disclosure requirements boosts the confidence of the users of financial statements in relying on an audit report. Currently, in the United States, the quality of an audit engagement is assessed through the standing of the audit company that provides the audit report. Such a criterion does not provide adequate assurance especially when PCAOB has acknowledged that audit engagement quality varies within a firm. Much more disclosure needs to be in place for a more informed judgment on making an investment decision. However, making known the identity of the engagement partner may not be the solution, and other forms of disclosure should be put in place to provide the users of the financial statements with the basis to gauge the quality of an audit engagement (King, Davis & Mintchik, 2012).
Exposure of the engagement partner will go a long way in improving transparency for the users of the financial statements without using the reputation of the audit firm providing the report as a cover-up. Investors take risks while investing in a firm and audit reports cushions them from the danger that the company may be withholding relevant information that is crucial for their decision to invest or not to invest. To them, this requirement will protect them from the risk of unreliable audit reports due to poor quality. Based on the reputation of the audit partner who conducted the process, the investor may decide on whether to rely on the report or not. Disclosing of only the audit firm may be seen by the investor to amounts to a lack of transparency since most of them would prefer to make their decisions after scrutinizing the historical standing of the engagement partner (King et. al, 2012).
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However, from the perspective of the audit firm, disclosing the engagement partner as part of the audit requirement will only improve the audit quality in appearance and not in reality (King et. al., 2012). Advocates of this provision argued that this move will increase the personal liability which will tend to improve the quality of the audit. However, auditors are already operating within a regulatory framework that ensures the engagement quality is high and they are accountable for their actions. No audit firm would want to put their businesses at risk by employing unprofessional partners. There are different measures put in place to ensure accountability as done through inspection of the audit processes as well as the firm, peer review, oversight by the Securities and Exchange Commission, and private litigation as a contingent measure (Johanns, 2015). These actions have the effect of ensuring that the audit firms conduct themselves in a professional way to provide high-quality audit reports and are well aware that they are accountable for their actions. Besides, naming an engagement partner provides a limited view of the process making it seem like it’s only the engagement partner who conducted the process, yet more than 50 people participate. Instead of providing transparency, this move may unnecessarily expose an audit partner to be a target for potential litigation (Braun, 2016).
Naming the engagement partner may bring about more harm than good. The move may result in the misuse and misinterpretation of his name. It will also amount to the destruction of an auditor’s career once they are listed as “bad partners” without a resultant improvement of quality and transparency. Instead of naming the audit partner as an objective to improve the quality of an audit engagement, there is an alternative that can be adopted to facilitate the same objectives. The tangible benefit to the investors lies with the disclosure of all the firms that contributed to the audit process (Johanns, 2015). More than one firm being affiliates and non-affiliates of the signing company coordinate in the completion of an audit engagement, particularly in the case of multinational corporations requiring cross-border services. In such a case, it would be useful for the identities of such firms to be disclosed together with their locations.
The essence for this disclosure lies in the fact that the country of origin determines to a greater extent the quality of an audit due to factors such as the regulatory environment and other cultural factors. It is, therefore, important for the users of the financial statement to be aware of the names and locations of the public bookkeeping company engaged in the audit process. This data is critical considering that there have been recent cases of accounting fraud as a result of questionable audit quality conducted by poorly supervised foreign audit firms. This requirement is already in the new Public Company Accounting Oversight Board (PCAOB) proposal that requires the disclosure of names and locations of other audit companies that have contributed at least 5 percent of audit hours in an audit engagement. This requirement should be enough to provide accountability and transparency in an audit report for the investors (Public Company Accounting Oversight Board, 2015).
Disclosure of the engagement partner as a mandatory requirement from an investor's point of view improves the quality of an audit as far as appearance is concerned. However, the implications on the intrinsic quality of the process may not be there. There is increased accountability, but the effectiveness of the process may not be guaranteed. The overall impact appears to be a duplication of efforts or rather over-auditing, considering that in the first place, audit services are already characterized by a feature of the credence good. To the investor, this requirement improves the quality of an audit engagement, but as far as the reality is concerned, it may only be in appearance. Australia is one of the jurisdictions that have this requirement in place since the 1970s. To the users, this provision increases accountability, transparency as well as engagement quality. To the auditors, this requirement does not do the same since these features are already in place as there are existing frameworks to provide for the same (Public Company Accounting Oversight Board, 2015).
The need to disclose the engagement partner appears to have a greater benefit in validating the public perception of the audit quality due to increased transparency as well as accountability. Revealing the identity of the engagement partner does not determine the audit quality (Braun, 2016). As such, the audit quality may remain the same as when the disclosure would not be mandatory. As long as this requirement does not necessarily improve the actual quality of the process, its application in private companies and nonprofit organizations may not be required. The reason for their non-application is because, public perception is most important for public corporations because investors risk their investments in such companies in anticipation of positive returns, and their attitude will determine their investment decision. However, for private enterprises and nonprofit organizations, stocks are not publicly traded in the stock exchange market, which makes this requirement not as useful (Braun, 2016).
PCAOB’s provision to reveal the identity of the engagement partner with the objective to improve transparency and accountability and thus the audit quality is likely to increase the public perception of the audit quality and not necessarily its actual quality. This requirement would be necessary for situations where the prevailing public opinion of the audit quality is relatively minimal, and there is a need to increase such confidence to instill integrity in the audit firms. Otherwise, such a move is bound to lead to a gap between the actual quality and the public perception of the process. However, disclosing the name and location of affiliate and non-affiliate audit firms participating in an audit engagement seems to be a better alternative (Public Company Accounting Oversight Board, 2015).
Braun, J. (2016). Fund Restructuring Practical Insight and Analysis on the Accounting, Audit and Tax Issues Impacting Investment Companies. Retrieved from http://www.bbdcpa.com/investment-company-notebook/what_drives_audit_quality
Johanns, J. (2015). Name Disclosure in Audits Is Not a Good Idea, but It’s Time for Compromise. Texas. Retrieved from https://news.utexas.edu/2015/08/19/name-disclosure-in-audits-is-not-a-good-idea-but-needed
King, R.R., Davis. S.M., & Mintchik, N. (2012). Mandatory Disclosure of the Engagement Partner’s Identity: Potential Benefits and Unintended Consequences . Washington: American Accounting Association.
Public Company Accounting Oversight Board. (2015). Improving the transparency of audits: Rules to require disclosure of Certain audit participants on a new PCAOB form and related amendments To auditing standards . Retrieved from https://pcaobus.org/Rulemaking/Docket029/Release-2015-008.pdf