
[Federal Register Volume 81, Number 30 (Tuesday, February 16, 2016)]
[Notices]
[Pages 7927-7957]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-02875]



[[Page 7927]]

Vol. 81

Tuesday,

No. 30

February 16, 2016

Part III





Securities and Exchange Commission





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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; Notice

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

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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 dual-dated 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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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 five-digit 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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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.
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    \1\ See, 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 long-term 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.'').
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    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

[[Page 7932]]

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.
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    \2\ The 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.
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    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.
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    \3\ Most non-US jurisdictions with highly developed capital 
markets require transparency regarding the engagement partner 
responsible for the audit.
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    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.
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    \4\ At 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.
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    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.
---------------------------------------------------------------------------

    \5\ See 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.
    \6\ See AS 1201 (currently Auditing Standard No. 10), 
Supervision of the Audit Engagement.
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    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.
---------------------------------------------------------------------------

    \7\ Louis Brandeis, Other People's Money and How the Bankers Use 
It 92 (1914).
---------------------------------------------------------------------------

    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

[[Page 7933]]

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.
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    \8\ See, 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).
---------------------------------------------------------------------------

    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:
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    \9\ For 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.
---------------------------------------------------------------------------

    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

[[Page 7934]]

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.
---------------------------------------------------------------------------

    \10\ Existing 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.
    \11\ Rules on Periodic Reporting by Registered Public Accounting 
Firms, PCAOB Release No. 2008-004 (June 10, 2008), at 28.
    \12\ The 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 Sarbanes-Oxley 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 Sarbanes-Oxley 
Act, confidential treatment of the information filed on Form AP will 
not be available.
---------------------------------------------------------------------------

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, 
third-party vendors will supply information in addition to what is 
provided by Form AP.
---------------------------------------------------------------------------

    \13\ As 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.
---------------------------------------------------------------------------

    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

[[Page 7935]]

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.
---------------------------------------------------------------------------

    \14\ See Appendix A of AS 2101 (currently Auditing Standard No. 
9), Audit Planning, and Appendix A of AS 1201 (currently Auditing 
Standard No. 10).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \15\ Directive 2006/43/EC of the European Parliament and of the 
Council, Article 28, Audit Reporting (May 17, 2006).
---------------------------------------------------------------------------

    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

[[Page 7936]]

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.
---------------------------------------------------------------------------

    \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.
    \17\ See 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.
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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.
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    \18\ See 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.
---------------------------------------------------------------------------

    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

[[Page 7937]]

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.
---------------------------------------------------------------------------

    \19\ For 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.
    \20\ See 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).
    \21\ AS 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).
    \22\ See AS 1205 (currently AU sec. 543) for a list of matters 
the auditor is required to review.
    \23\ See 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).
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    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.
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    \24\ PCAOB Rule 1001(p)(iii), Definition of Terms Employed in 
Rules.
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    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 five-digit 
identifier (``Firm ID'') for firms that have a publicly available 
PCAOB-assigned 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.
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    \25\ This 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.
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    Form AP includes a new requirement to provide the Firm ID for all 
currently-registered 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

[[Page 7938]]

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 PCAOB \28\ and would not generally be conducting 
the audit of an issuer, but rather a subsidiary or business unit of an 
issuer.
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    \26\ See AS 1205.03, .06-.09 (currently AU sec. 543.03, 
.06-.09).
    \27\ Additionally, 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 referred-to auditor be filed with the SEC.
    \28\ Under 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.''
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    Unlike the disclosures for other accounting firm participants, 
which are based on the percentage of total audit hours, Form AP 
disclosures for referred-to 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.
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    \29\ See 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.
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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.
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    \30\ PCAOB Release No. 2011-007, at 18.
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    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.
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    \31\ The 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.
    \32\ The 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.
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    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.
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    \33\ Unless 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.
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    Nonaccounting firm participants participate in audits at the 
request of and in support of the audit work of

[[Page 7939]]

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.
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    \34\ See AS 1220 (currently Auditing Standard No. 7), Engagement 
Quality Review.
    \35\ AS 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.
    \36\ See 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.
    \37\ See 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).
    \38\ Nonetheless, 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).
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    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.
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    \39\ See Financial Accounting Standards Board (``FASB'') 
Accounting Standards Codification (``ASC'') Topic 323, Investments--
Equity Method and Joint Ventures.
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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\
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    \40\ Under 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.
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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%,

[[Page 7940]]

10%,\41\ or the PCAOB's substantial role threshold of 20%.\42\
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    \41\ On 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.
    \42\ According 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.''
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    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.
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    \43\ PCAOB 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.
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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.
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    \44\ Section 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.
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    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 
liability-related 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

[[Page 7941]]

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.
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    \45\ While 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.
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    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\
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    \46\ See AU sec. 1205.03, .06-.09 (currently AU sec. 543.03, 
.06-.09).
    \47\ See Rule 2-05 of Regulation S-X, 17 CFR 210.2-05.
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    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.

[[Page 7942]]

    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.
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    \48\ AS 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.
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    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.
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    \49\ While 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.
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    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.
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    \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.
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    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.
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    \51\ For 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.
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    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,

[[Page 7943]]

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.
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    \52\ Form 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.
---------------------------------------------------------------------------

    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.
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    \53\ See, e.g., Rules on Periodic Reporting by Registered Public 
Accounting Firms, PCAOB Release No. 2008-004 (June 10, 2008), at 36-
38.
    \54\ See id. at 37-38 n.38.
---------------------------------------------------------------------------

    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\
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    \55\ See Exchange Act Rule 17a-5, 17 CFR 240.17a-5.
    \56\ See Exchange Act Rule 17a-5(e)(3), 17 CFR 240.17a-5(e)(3).
    \57\ See also Exchange Act Rule 17a-5(c)(2), 17 CFR 240.17a-
5(c)(2), regarding audited statements required to be provided to 
customers.
---------------------------------------------------------------------------

    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.

[[Page 7944]]

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.
---------------------------------------------------------------------------

    \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.
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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.
---------------------------------------------------------------------------

    \59\ Economists often describe information asymmetry as an 
imbalance, where one party has more or better information than 
another party.
---------------------------------------------------------------------------

    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

[[Page 7945]]

(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.
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    \60\ See, 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).
---------------------------------------------------------------------------

    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.
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    \61\ See PCAOB Release No. 2015-005.
    \62\ See PCAOB Release No. 2013-005.
---------------------------------------------------------------------------

    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.
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    \63\ See, 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 Myllym[auml]ki, Audit Partner Public-
Client 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).
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    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.
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    \65\ There 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).
    \66\ See, e.g., George J. Stigler, Perfect Competition, 
Historically Contemplated, 65 The Journal of Political Economy 1 
passim (1957).
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    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.
---------------------------------------------------------------------------

    \67\ Academic 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).
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    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

[[Page 7946]]

and to avoid being associated with adverse audit outcomes that could be 
attributed to deficiencies in their audit work.\68\
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    \68\ Adverse audit outcomes may include financial statement 
restatements for errors, nontimely reporting of internal control 
weaknesses, and nontimely reporting of going concern issues, among 
others.
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \69\ For 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.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \70\ See 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.
---------------------------------------------------------------------------

     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 high-quality 
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\
---------------------------------------------------------------------------

    \71\ There 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \72\ The 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \73\ For 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.
---------------------------------------------------------------------------

    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

[[Page 7947]]

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.
---------------------------------------------------------------------------

    \74\ See Henry Laurion, Alastair Lawrence, and James Ryans, U.S. 
Audit Partner Rotations (Sept. 14, 2015) (working paper, available 
in Social Science Research Network (``SSRN'')).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \75\ The 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.
    \76\ PCAOB 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \77\ Item 9(e)(6) of Schedule 14A (17 CFR 240.14a-101) 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \78\ See, 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.
---------------------------------------------------------------------------

    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

[[Page 7948]]

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\
---------------------------------------------------------------------------

    \79\ See above for a discussion of commenter reactions to the 
disclosure requirements.
    \80\ See 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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \81\ See Knechel et al., Does the Identity of Engagement 
Partners Matter? An Analysis of Audit Partner Reporting Decisions.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \82\ See 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \84\ See Aobdia et al., Capital Market Consequences of Audit 
Partner Quality.
    \85\ See Kinney, Discussion of ``Does the Identity of Engagement 
Partners Matter? An Analysis of Audit Partner Reporting Decisions.''
    \86\ See 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \87\ See 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).
---------------------------------------------------------------------------

    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

[[Page 7949]]

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.
---------------------------------------------------------------------------

    \88\ See 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \89\ See Dee et al., Who Did the Audit? Audit Quality and 
Disclosures of Other Audit Participants in PCAOB Filings.
    \90\ Academic 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \91\ On 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).
---------------------------------------------------------------------------

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

[[Page 7950]]

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.
---------------------------------------------------------------------------

    \92\ As 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \93\ See, 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).
    \94\ Specifically, 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.
    \95\ Specifically, they find that the increase in audit fees 
from $475,900 to $477,000 between the pre- and 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \96\ See Blay et al., Audit Quality Effects of an Individual 
Audit Engagement Partner Signature Mandate.
---------------------------------------------------------------------------

    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

[[Page 7951]]

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.
---------------------------------------------------------------------------

    \97\ See DeAngelo, Auditor Size and Audit Quality, and Francis, 
What Do We Know About Audit Quality?
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \98\ See Letter from Denise L. Nappier, State Treasurer, State 
of Connecticut, to the Office of the Secretary, PCAOB (Mar. 17, 
2014), at 3.
    \99\ Academic 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).
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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.
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    \100\ The 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.
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    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

[[Page 7952]]

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.
---------------------------------------------------------------------------

    \101\ See Joseph V. Carcello and Rudy Santore, Engagement 
Partner Identification: A Theoretical Analysis, 29 Accounting 
Horizons 297 (2015).
    \102\ The 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 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, high-demand 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\
---------------------------------------------------------------------------

    \103\ Rule 2-01(c)(6) of Regulation S-X, 17 CFR 210.2-01(c)(6); 
see also Section 203 of the Sarbanes-Oxley Act.
---------------------------------------------------------------------------

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[hyphen]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.
---------------------------------------------------------------------------

    \104\ While 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.
---------------------------------------------------------------------------

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.

[[Page 7953]]

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.
---------------------------------------------------------------------------

    \105\ Form 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.
---------------------------------------------------------------------------

    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

[[Page 7954]]

liability, may differ among these jurisdictions.
---------------------------------------------------------------------------

    \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.
    \107\ Out 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \108\ Changes 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \109\ There 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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \110\ See 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.
---------------------------------------------------------------------------

    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

[[Page 7955]]

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\
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    \111\ Pursuant 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).
    \112\ To 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' self-
identification 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.
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    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.
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    \113\ Approximately 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.
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    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

[[Page 7956]]

company status indicated that they were smaller reporting 
companies.\114\
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    \114\ The 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.
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    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\
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    \115\ The 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.
    \116\ For 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.
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    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\
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    \117\ For 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.
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     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\
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    \118\ Less 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.
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     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\
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    \119\ This data is based on firms' annual disclosures on PCAOB 
Form 2. No companies in the Russell 3000 Index were audited by such 
firms.
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     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\
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    \120\ See Financial Accounting Standards Board Accounting 
Standards Codification, Topic 280, Segment Reporting.
    \121\ 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.
    \122\ 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.
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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 rule-comments@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.

[[Page 7957]]

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.
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    \123\ 17 CFR 200.30-11(b)(2).

    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]
 BILLING CODE 8011-01-P


