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SEC Insights - February 2017

 

New Rules Take Effect to Improve Audit Transparency

Contributors: Kim Lamplough, Partner, Assurance Services & Lewis Greenberg, Southeast Marketing Manager

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In an effort to continue improving the transparency of audits, the Public Company Accounting Oversight Board ("PCAOB") adopted two new rules (Rule 3210 and 3211) and one new form ("Form AP") on December 15, 2015. The new rules and form are intended to provide users of financial statements with information about the engagement partners and accounting firms involved in auditing the issuers.

Effective dates for these new rules, which are being introduced in a phased approach, are nearing. Form AP disclosure will be required for audit reports issued on or after January 31, 2017. Disclosure regarding other accounting firms will be required for audit reports issued on or after June 30, 2017.

The PCAOB is adopting these rules in response to several years of comments from investors that emphasized the importance and value to them of increased transparency and accountability in relation to all those participating in the audit. The PCAOB believes the additional disclosures discussed below will improve audit quality. Since audit quality is a component of financial reporting quality, improving it will increase the credibility of financial reporting.

The additional information required to be disclosed in a Form AP is intended to help all users of the financial statements, especially investors and issuers.

Investors will now have access to the names of the engagement partners on all issuer audits and will be able to use this information to determine the quality of the audit based on the reputation, experience and qualifications of the partner. Investors will also be able to assess the quality of the audit by being able to distinguish how much of the audit is actually performed by the principal auditor as well as the names of other auditors and their overall involvement in the engagements.

Investors and issuers will both benefit from the increased accountability in the audit process that is expected from the increased public disclosures required by these rules. A summary of these changes is as follows:

Rule 3210. Amendments simply requires registered public accounting firms to comply with the provisions of Rule 2205 concerning amendments to any Form AP, filed in accordance with Rule 3211.

Rule 3211. Auditor Reporting of Certain Audit Participants requires firms to file a Form AP for each audit report the firm issues for an issuer. A Form AP is only required to be filed by the principal auditor. Component auditors or other auditors referred to by the principal auditor are not required to file a Form AP.

Pursuant to Rule 3211, a Form AP only needs to be filed the first time an audit report is filed with the U.S Securities and Exchange Commission (the "SEC"). If a change to the audit report is necessary, including any change in the dating of the report, the firm issuing the report is required to file a new Form AP the first time the revised audit report is filed with the SEC.

The Form AP discloses:

  1. The name of the engagement partner.
  2. The name, location, and extent of participation of each other accounting firm whose work constituted at least 5% of total audit hours.
  3. 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 Form AP's filing requirements are as follows:

  1. Firms must file a Form AP by the 35th day after the date the audit report is first included in a document filed with the SEC.
  2. If the filing is a registration statement under the Securities Act, a Form AP must be filed by the 10th day after the date the audit report is first included in a document filed with the SEC.
  3. Firms must file a Form AP electronically through the PCAOB's web-based system.
  4. The date the firm submits a Form AP will be deemed the filing date.

The template of the Form AP, along with instructions for preparing the form, are available through the PCAOB's website.

Conclusion

The adoption of Rule 3210 and 3211 is simply intended to improve the transparency of audits. The additional required disclosures are expected to improve the information available for investors and other users of the financial statements. Finally, the overall audit process is expected to improve as a result of the increased accountability resulting from the increased required public disclosure.

Sources

https://pcaobus.org/Rules/Pages/Rule-3210-3211.aspx
https://pcaobus.org/News/Releases/Pages/transparency-adoption-fact-sheet-12-15-15.aspx
https://pcaobus.org/Rulemaking/Docket029/Release-2015-008.pdf

 
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