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UPDATE 1-U.S. watchdog revives proposal to name audit partners

Wednesday, 4 Dec 2013 | 11:58 AM ET

* PCAOB's reproposal: partner's name belongs in audit report

Reproposal is less burdensome than previous 2011 version

* Outside work performed on an audit would also be disclosed

* Some PCAOB members express reservations about the plan

By Sarah N. Lynch

WASHINGTON, Dec 4 (Reuters) - The U.S. audit watchdog revived a controversial proposal on Wednesday that would require accounting firms to disclose the names of individual partners who work on company audits.

Under the Public Company Accounting Oversight Board's plan, engagement partners' names would have to be listed on audit reports, a document that can be easily accessed by investors.

The idea is to help investors understand the quality of auditing at companies they might want to buy stock in and hold auditors more accountable for the quality of their work.

The plan also would require accounting companies to disclose the names of outside firms that helped work on an audit - a provision inspired by a rash of accounting problems at China-based companies listed on U.S. markets.

Many of the audits of these companies were conducted by the Chinese arms of major U.S audit firms, but U.S. regulators have had limited success in gaining oversight over the work of the China-based auditors.

The PCAOB's plan was initially proposed in October 2011, but until now has remained largely dormant.

The Big Four audit firms, KPMG, PricewaterhouseCoopers , Deloitte & Touche and Ernst & Young , have opposed naming audit partners, saying it would be of little use to investors, could increase legal liability and deter auditors from tackling high-risk audit jobs.

Jim Doty, the chairman of the PCAOB, compared Wednesday's plan to other regulations that seek to hold chief executives accountable by requiring them to certify their financial statements and internal controls are sound.

"It holds the promise of improving audit quality by sharpening the mind and reminding auditors of their responsibility to the public," Doty said.

The proposal got fresh attention earlier this year after veteran KPMG auditor Scott London pleaded guilty to allegations he passed confidential details about companies he audited to a friend who used them to make profitable trades.

The accountant admitted he gave jeweler Bryan Shaw inside information regarding at least 14 earnings announcements or acquisitions by KPMG clients, including Herbalife Ltd and United Rentals Inc. Shaw also pleaded guilty in the case.

When the company initially disclosed it had parted ways with the employee responsible and with two corporate audit clients, London's identity at first remained a mystery.

Critics said at the time that, had the PCAOB proposal been in place, his name would have been disclosed much sooner.

Such information, they said, would have been helpful for shareholders of other companies whose books London audited.

RELAXED PROPOSAL

The plan unveiled on Wednesday by the PCAOB represents a scaled-back version of the one released in 2011.

The 2011 plan would have required audit firms to name the engagement partner in audit reports, as well as in annual report forms that are formally filed with the PCAOB.

The new draft still calls for the audit engagement partner to be named in the audit report. However, it removes the requirement to also name the individual in the annual report form.

The reproposal also eased a transparency measure designed to address cases in which an accounting firm does not perform 100 percent of the work on an audit.

Audit firms under the plan will be required to disclose the names of outside firms, such as units based in other countries, if they contribute more than 5 percent of the total hours dedicated to the audit.

Originally, the PCAOB had set a lower disclosure threshold of 3 percent. It had also sought to require firms to identify people by name who worked on the audit outside of the accounting firm.

Although the latest version of the plan dropped a few controversial requirements, some PCAOB board members expressed reservations, including Jay Hanson and Jeanette Franzel.

"I cannot say today that I would support the ultimate adoption of the reproposal as currently drafted," Hanson said, adding that he was concerned that the requirement to include the disclosures in the audit report could create "substantial uncertainties and potentially unnecessary risks."

Franzel said she was unconvinced the plan is necessary and suggested more analysis is warranted.

"I'm starting to think that naming the audit engagement partner in the auditor's report is a solution in search of a problem," she said.