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.
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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
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.