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August 15, 2011

PCAOB consults on independence and audit firm rotation

Photo of PCAOB chairman James DotyThe US Public Company Accounting Oversight Board (PCAOB) has issued a consultation on independence and mandatory audit firm rotation.

The consultation seeks public comment on ways that auditor independence, objectivity and professional scepticism can be enhanced, including through mandatory rotation of audit firms.

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

The PCAOB said the concept release notes that proponents of rotation believe 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’s financial reporting.

The oversight body does acknowledge that there have been concerns about the costs of changing auditors and believe that audit quality may suffer in the early years of an engagement and that rotation could exacerbate this issue.

PCAOB chairman James Doty said to discuss independence, scepticism and objectivity relating to audit quality the profession 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 auditor’s face to develop and protect long-term client relationships to the detriment of investors and our capital markets,” Doty added.

The concept release is seeking comments on questions such as whether the PCAOB should consider a rotation requirement only for audit tenures of more than 10 years or only for the largest issuer audits as well as if there are other measures that could meaningfully enhance auditor independence, objectivity and professional scepticism.   

Deadline for comment is 14 December. The PCAOB will also convene a public roundtable on auditor independence and mandatory audit firm rotation in March 2012.

 

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