After eighteen months of inactivity, other than frequent promises of further action, Chairman James Doty of the Public Company Accounting Oversight Board, in a Brussels speech on June 22, 2015, announced that a release was coming, on a date still not specified, to consider a separate new form by which accounting firms would provide the name of their lead engagement partner on the audits of US public companies.
The final outcome of a yet-further comment period remains pending. But the triviality of the approach is visible in the vacuity of Doty’s announcement: rather than solve the substance of the American profession’s concern with enhanced individual partner exposure, the form would, in his words, “reduce auditors’ perception of litigation risk” (emphasis added).
Doty has trod this rocky path at tedious length for years, and the ground is familiar – see here on October 17, 2011, April 11, 2013 and December 4, 2013 – and with those references, re-plowing is not necessary. Instead, in a few words, it’s still all about the optics – and the topic is still one that diminishes the stature of the agency and distracts its energy from serious issues:
- The user community is indifferent to partner naming, as shown by the absence of distinction between practices that vary among countries.
- At the same time, audit quality differentiation based on partner naming is, to be generous, elusive. Careful reading of the “research” cited by Doty shows the “confirmation bias” built into his invocations, while there is no study at the large-company level of share price effects or financial statement quality differentiation between US-based companies that do not provide partner names and European ones, including those listed in America, that do.
- Exposure of engagement partners to real litigation will not be reduced, because their identity is readily knowable through the discovery process and complaints could, if strategic for plaintiffs, be readily amended to add them as defendants.
- But at the same time, that exposure is largely illusory. Plaintiffs’ attorneys have never made a practice of naming individual partners, because their evidence for use against their firms is always available, and their personal assets are insignificant in context of multi-million dollar damage claims.
- While cutting the other way, lead partner careers are impaired by litigation in any event, whether they are named in the suits or not, by the combination of reputational effect and protracted distraction while dealing with the time and emotional demands of participating in a large pending lawsuit.
All of which means that partner naming is not a real issue for most investors – in the US or elsewhere -- who could get the information if truly desired -- but only for the voyeuristic critics of the profession who want named individual villains for their finger-pointing.
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