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December 14, 2011

AICPA rejects audit firm rotation

The American Institute of Certified Public Accountants (AICPA) has opposed mandatory audit firm rotation in a comment letter to the Public Company Accounting Oversight Board’s (PCAOB) consultation on independence and firm rotation.

The AICPA believes rotation is a “drastic measure” that would have an adverse impact on  audit quality and ratchet up costs.The AICPA has an influential voice in the US profession and its robust opposition to firm rotation could prove a roadblock to any plans to introduce firm rotation.

The professional body, which represents more than 370,000 CPAs, also disagreed with the PCAOB’s focus on a lack of auditors’ objectivity and professional scepticism.

The AICPA said that mandatory firm rotation could end up adding significant costs and unintended consequences. For example, audit firm rotation could result in a greater risk of fraud, the AICPA said.

The AICPA quoted academic research that demonstrates audit quality increases over time as the auditor familiarises itself with the business of a client.

Frequent rotation would limit the auditor’s institutional knowledge and experience. The AICPA letter suggested that if firms are required to rotate, their audit teams may decide to no longer maintain industry specialisations, which would have “a severe impact” on multinational audits.   

The AICPA also referred to a Government Accountability Office’s (GAO) study that reports the possible additional first year audit-related costs could range from 43% to 128% higher than the likely recurring audit costs had there been no change in auditor.

The association suggests the resources to hiring a new audit firm and the additional audit hours that a new firm will need to identify risk areas and understand transactions will significantly increase the cost of audit.  

The AICPA considered the selection of an audit firm and decisions about its reappointment should be taken by the audit committee.

The AICPA said existing partner rotation requirements are effective and provide the necessary “fresh look” to ensure auditors are exercising objectivity and professional scepticism during the audit.

It encouraged the PCAOB to consider the impact of Sarbanes-Oxley Act

and new standards, such as prohibitions on the provision of certain non-audit services, prohibitions on hiring former auditor and a requirement for lead and concurring partner rotation every five year.

The concept release further points out that the PCAOB was expected to monitor the impact partner rotation rules would have on audit quality and independence but AICPA is not aware of any such evaluation. 

The association has celled on the watchdog to consider the Center for Audit Quality’s letter where a number of potential enhancements to audit quality have been offered.

The AICPA has also called on the PCAOB to conducts a cost-benefit analysis to justify the costs of a mandatory rotation would not outweigh its potential benefits.

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