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PCAOB considers mandatory audit firm rotation

The Public Company Accounting Oversight Board (PCAOB) is considering mandatory audit firm rotation as a way to address auditor independence concerns.

PCAOB chairman James Doty told the Securities and Exchange Commission and Financial Reporting Institute’s annual conference that PCAOB inspectors had found auditors failed to show a sufficient amount of independence from their clients.

“Considering the disturbing lack of scepticism we continue to see, and because of the fundamental importance of independence to the performance of quality audit work, the board is prepared to consider all possible methods of addressing the problem of audit quality, including whether mandatory audit firm rotation would help address the inherent conflict created because the auditor is paid by the client,” Doty said.

Doty added that he is, however, unsure whether the watchdog should ultimately adopt “term limits” but it will “take up the debate…and examine it, with rigorous analysis and the weight of evidence in support and against”.

“My only predilection is that the PCAOB deepen the analysis of how we can better insulate auditors from client pressure and shift their mindset to protecting the investing public,” Doty said.

The PCAOB will issue a paper to explore whether there are other approaches that could more systematically insulate auditors from forces that pull them away from the necessary mindset.

Doty also said the board is preparing a paper on its efforts gathering opinions on whether the current auditor’s report can better address investor needs. Recently, the PCAOB gathered opinions from a range of people experienced in using or preparing audit reports, including investors, auditors, preparers, audit committee members, researchers and others.

The paper will lay out a range of options, including more insight into procedures already included in the audit such as areas of disclosure the auditors review.

 

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