‘Rotating’ Audit Companies, Increasing Independence Pushed

Jack Humphrey, Regulatory journalist
August 17, 2011 /

The Public Company Accounting Oversight Board (PCAOB) will issue a concept release seeking public comment on ways that auditor independence, objectivity and professional skepticism can be enhanced, including through mandatory rotation of audit companies.

PCAOB previously attended the Sino-U.S. Symposium on Audit Oversight in Beijing along with officials of the China Securities Regulatory Commission, the Chinese Ministry of Finance, and the U.S. Securities and Exchange Commission, representing regulators’ attempt at defining the future of audit regulations.

Mandatory audit firm rotation means that the number of consecutive years for which a registered public accounting firm could serve as the auditor of a public company would be limited.

PCAOB Chairman James Doty said: “One cannot talk about audit quality without discussing independence, skepticism and objectivity. Any serious discussion of these qualities must take into account the fundamental conflict of the audit client paying the auditor.

“The reason to consider auditor term limits is that they may reduce the pressure auditors face to develop and protect long-term client relationships to the detriment of investors and our capital markets.”

According to PCAOB, rotation of audit companies has been discussed at various times since the 1970s. The concept release noted that proponents of rotation believe that “setting a term limit on the audit relationship could free the auditor, to a significant degree, from the effects of client pressure and offer an opportunity for a fresh look at the company‚Äôs financial reporting.”

The concept release added that opponents to the proposition have otherwise expressed concerns about the costs of changing auditors and believed that audit quality may suffer in the early years of an engagement and that rotation could exacerbate this phenomenon.

The concept release invites commenters to respond to specific questions, including, for example, whether PCAOB should consider a rotation requirement only for audit tenures of more than 10 years or only for the largest issuer audits.

The concept release also seeks comment on whether there are other measures that could enhance auditor independence, objectivity and professional skepticism, until December 14 this year.

The Board will also convene a public roundtable on auditor independence and mandatory audit firm rotation in March 2012. Additional details about the roundtable will be announced at a later date.

 

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