Debate Over Mandatory Auditor Rotation

Close up on the Big Ben

Close up on the Big Ben (Photo credit: Wikipedia)

The deadline to submit comments to the Public Company Accounting Oversight Board (PCAOB) regarding their concept release on mandatory auditor rotation is April 22nd, this Sunday. The PCAOB re-opened the comment period after its March 20th & 21st public meetings.  At these meetings, the PCAOB heard from a variety of panelists including those in the public policy arena, institutional investors, academics and the audit firms themselves.  Many views were presented on both sides of the issue. Significantly, the audit firms, while fully supporting quality audits, offered other possible alternatives to mandatory rotation such as increased oversight by the independent audit committee with possible enhanced proxy disclosures documenting those efforts.

Hundreds of letters were submitted to the PCAOB in response to its concept release, with a significant percentage opposed to mandatory rotation.  Even some members of Congress have weighed in to express their views. The most cited concerns were the loss of institutional knowledge, the burden of increased costs that would be incurred by companies and the potentially huge drain on resources for all involved in terms of getting the companies new auditor up to speed.

Auditor rotation is not really a new concept, but it came up again recently as a suggestion to improve audit quality, post the 2008 financial crisis.  Back when the Sarbanes-Oxley Act of 2002 (SOX) was adopted, a number of new regulations were put in place around auditors/internal controls and compliance.  Among other things, SOX introduced a requirement that lead audit partners must rotate every 5 years.  Additionally, NYSE rules adopted in 2003 (shortly after SOX became law) require every NYSE listed company to have a fully independent Audit Committee and also require the Audit Committee to have a number of other specified responsibilities, including: 

* Sole responsibility for hiring the company’s auditor and determining auditor compensation.

* Responsibility for establishing company policies with respect to the hiring of current or former employees of the company’s audit firm. Click here for additional information about NYSE rules for Audit Committees.

NYSE Euronext submitted a comment letter to the PCAOB that argues against a “one size fits all” approach and expresses a concern about the possible loss of audit quality and inefficiencies for both companies and auditors, click here.

For another perspective, note that Cynthia Fornelli, Executive Director - Center for Audit Quality, was a recent guest on This Week in the Boardroom (TWIB) where she discussed the PCAOB’s proposal and its current status.  The Center for Audit Quality (CAQ) states in its own comment letter that it is “not aware of any indication that MFR (mandatory firm rotation) would improve audit quality.”  In its comment letter, CAQ also offers some alternatives to mandatory auditor rotation including improving audit firm communication with the Audit Committee, enhancing transparency around the audit, etc. Here’s a link to the CAQ comment letter and to the TWIB webcast.

 

 

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