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PCAOB Abandons Auditor Rotation

The audit watchdog's three-year pursuit of a rule to boost auditor independence has ended, says chairman James Doty.

After spinning its wheels on auditor rotation for three years, the Public Company Accounting Oversight Board may have finally conceded defeat. On Thursday, according to CFO Journal, PCAOB chairman James Doty told the SEC that “We don’t have an active project or work going on within the board to move forward on a term limit for auditors.” However, Doty added, the PCAOB would “continue to think about what impacts independence.”

Doty’s remarks came at a budget meeting with SEC members.

The PCAOB encountered fierce resistance to the mandatory auditor rotation idea, which never got beyond the concept release stage. It would have required U.S. public companies to change auditors every few years. Even the House of Representatives got in on the act in 2013, passing a bill that would have amended the Sarbanex-Oxley Act to prohibit the PCAOB from requiring companies to “use specific auditors or require the use of different auditors on a rotating basis.”

At the time of the concept release in 2012, Doty noted that the PCAOB had found “hundreds of audit failures” during its inspections and suggested that management influence over auditors may have led to “eroded public confidence in audits.”

Senior finance executives, however, loudly urged the PCAOB to abandon thoughts of requiring corporations to switch their accounting firms regularly. More than 684 letters poured into the PCAOB commenting on the concept release. About 24 percent of them were signed by CFOs, and many others were from chief accounting officers, controllers and audit-committee chairs.

As CFO reported in October 2012, Tenet Healthcare CFO Daniel Cancelmi, speaking at a PCAOB meeting, said requiring companies to rotate their auditors would not provide any additional audit quality that wasn’t already being provided by having lead audit partners rotate. (Sarbanes-Oxley mandates that the lead partner in an audit firm rotate off an audit project every five years.) “We believe the current five-year rotation requirement of lead audit partners captures substantially all the benefits of mandatory audit-firm rotation in a cost-effective manner, including the important attribute of a fresh set of skeptical eyes,” Cancelmi said at the time.

He also said he believed companies that adopted a new audit partner had already jumped through the necessary hoops they’d have to if they hired a whole new audit firm. When the lead audit partner on the Tenet Healthcare account rotates off, he noted at the time, his company’s management performs a review and provides all critical background information on the company’s business to the new partner, which is “tantamount to the process that occurs when a company changes auditors.”

At the same meeting, Patrick Mulva, vice president and controller of ExxonMobil, said global support for mandatory audit-firm rotation was just not there. “Mandatory auditor rotation has been met with . . . universal rejection by board audit committees, including ExxonMobil’s, as the proposal diminishes the audit committee’s role in hiring, assessing and firing audit firms.”

Even those that didn’t vehemently oppose the rotation concept and who acknowledged that working toward greater auditor independence was important, although rotation was probably not the best way to do it. 

The rotation debate has always centered on a key question: what would make for more effective audits, a fresh pair of eyes (a new accounting firm) or deep — but perhaps compromised — knowledge about the ins and outs of a complex company?

Outside the United States, meanwhile, member states of the European Union have approved new regulations that require audit firms to rotate engagements with public-interest entities every 10 years. The regs must still be approved by the European Parliament and other governmental bodies.

Source: PCAOB’s Auditor Rotation Project is Essentially Dead from CFO Journal.

4 thoughts on “PCAOB Abandons Auditor Rotation

  1. I am reminded of the “old” J. P. Morgan. Fifty plus years ago, it rotated its auditors routinely. It “footed” its balance sheet to the nearest penny. It also quietly refused to bank one of the 100 largest companies in America; it banked the other 99.

    “Know what you are doing. Do what you know.”

    Espial

  2. Rotating audit firms doesn’t address the real conflict in the auditor/audited relationship, and that is that B pays A and A is always bidding for more work from B. Sarbox addressed the latter issue in part, but the ultimate solution is clear: Let the D&O insurance underwriters pick and pay the auditors, as a package deal.

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