PCAOB chair says board won’t push on audit rotation

By:
CHRIS GAETANO
Published Date:
Mar 10, 2014
During a Feb. 5 budget meeting with the Securities and Exchange Commission (SEC), the Public Company Accounting Oversight Board (PCAOB) said that it was abandoning its efforts to mandate that public companies rotate audit firms every few years.

“We don’t have an active project or work going on within the board to move forward on a term limit for auditors,” PCAOB Chair James R. Doty said.

The move represents a significant shift from previous PCAOB goals. For years, the board had been exploring the concept of mandatory auditor rotation—essentially, term limits for audit firms—in the interests of increasing auditor independence. The PCAOB first posed the idea in an August 2011 concept release, writing that there was a “fundamental conflict” in the current auditor compensation model and that many audit failures it had observed sprang from a lack of professional skepticism and independence.

At the Foundation for Accounting Education’s Auditing Conference that same year, Doty further explained the reasoning behind the proposal by saying that long-term relationships that certain firms have with clients, regardless of which partner performs the audit, can have a damaging effect on the independence of that audit.

Beyond Doty’s statement at the February SEC meeting, the board has been tight-lipped on the issue, with a PCAOB spokesperson saying that there are no plans to speak any further on the subject. Doty did, however, say that the board will continue to think about other methods for enhancing auditor independence, adding that it might change its focus in order to do so.

The topic of auditor rotation gained mainly negative attention within the CPA community.

The NYSSCPA itself panned the idea in a December 2011 comment letter, in which it argued that auditor rotation was highly impractical and could wind up doing more harm than good. While the NYSSCPA agreed that independence and objectivity are important, it argued that the PCAOB had failed to effectively link audit failures with any lack of independence. Even in cases where a lack of independence did impact the audit, the Society argued in its comment letter that the issue does not lay with the firm itself but with the engagement personnel.

The Society also cautioned that such a practice could have a negative effect on audits, as it takes time to develop and maintain the necessary skill set to properly audit an SEC-registered firm, especially in the case of specialized industries where there aren’t a lot of people who are familiar with how the companies operate. In cases like this, companies may find it difficult to find a suitable replacement when the audit firm’s tenure with that client is up.

Last April, this negative response prompted Congress to propose the Audit Integrity and Job Protection Act, which would bar the PCAOB from mandating audit firm rotation among public companies. The House approved the bill in July, and it is currently being considered by the Senate. In a Jan. 2 letter, the NYSSCPA urged Sen. Charles E. Schumer (D-N.Y.) to lend his support to the bill by co-sponsoring it.
NYSSCPA members reacted positively to the news that the PCAOB was abandoning its attempts to institute mandatory firm rotation. Julian E. Jacoby, the chair of the Auditing Standards Committee, said that he felt there are enough safeguards in place already to deal with independence issues within the firms themselves, and noted that there is already rotation of some sort in place among engagement teams.

“There is something to be gained by firm rotation, but you lose more than you gain,” Jacoby said, referring to the experience that auditors get from becoming familiar with how a company operates. He added that “if [the PCAOB] believes in its regulatory scheme and it works, then the firm rotation is a moot point, really.”

Steven Wolpow, the Auditing Standards Committee’s vice chair, expressed similar thoughts. “I just never understood why they were going there to begin with, and I think that they wasted a lot of time and energy on something that was unnecessary,” he said. “The profession does a good job at regulating itself, and I thought that the argument that the [NYSSCPA advanced in its comment letter] was very persuasive.”
“At least [the PCAOB] came to their senses,” he added.

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