PCAOB May Scrap Auditor Sign-off Proposal

The Public Company Accounting Oversight Board has received mostly negative comments on a recent proposal to require engagement partners with final responsibility for an audit to sign the audit report, and it may end up abandoning the idea.

PCAOB Deputy Chief Auditor Greg Scates told the attendees at an auditing conference held by the New York State Society of CPAs’ Foundation for Accounting Education on Monday that the board had received 23 comments on the “concept release” it circulated in July, and only two were positive (see Audit Firm Regulation: No Autographs).

PCAOB standards already require the audit to be signed by the audit firm. Some sole proprietors pointed out in their comments that they were already doing the sign-off themselves. However, the PCAOB was disappointed that only two comments came from investor representatives and those were the only comments in favor of the new requirement.

“The other 21 were pretty much, ‘Not a good idea,’” said Scates. “The board is going to discuss this and make some decisions in this fourth quarter on what to do and whether to move forward in this area. This is not uncommon in Europe. Partners do sign the report in other countries. In our country, of course, this is not the way we’ve been doing business, so it is a new concept. We’ll see what the board wants to do as they look through the comment letters and make a decision on what to do.”

The PCAOB is also in something of a state of limbo with the SEC’s recent requirement that it begin inspecting auditors of broker-dealers. The PCAOB has recently begun registering such firms, after the SEC gave the go-ahead in response to the outcry over the Madoff Ponzi scheme (see PCAOB Starts Registering Broker-Dealer Auditors). The board saw a surge in firm registrants after the new SEC requirement went into effect.

“The Madoff scandal exploded and the SEC decided to hand the PCAOB a little post-holiday gift which we were not expecting,” said Scates.

But the requirement mostly applies to broker-dealers who clear their own trades. The requirements would not have applied to Bernard Madoff’s auditor, Friehling & Horowitz, as Madoff used an outside firm to clear his trades. The board is waiting for Congress to take action on a bill that would allow inspections of auditors of non-issuing broker-dealers and better cover firms like Madoff’s.

“What the SEC did was they required you to register with us, but that’s all they could do at the time,” said Scates. “Right now there is a bill pending in the House that is going to take up this matter as to inspecting the auditors of the non-issuing broker-dealers.”

Scates added that he can’t predict the outcome of the House legislation. “We don’t know what’s going to come out of this,” he said. “Are we, the PCAOB, going to be required to inspect all firms that audit non-issuing broker-dealers, or are we going to better define that, perhaps look only at clearing broker-dealers or some other definition. I don’t believe they’re going to require us to inspect the auditors of all non-issuing broker-dealers, but that’s just a personal opinion. We’ll have to wait and see where it comes out. More important are the risks of where the funds are, who’s holding the funds and who’s responsible. Are they a clearing broker-dealer, or are they clearing through some other broker-dealer? There are a lot of issues to deal with. We’re working with the SEC and Congress to try to come up with the right answer.”