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March 22, 2012

PCAOB HEARING: A unified line against rotation

DAY 2: US mid-tier accounting firms agree with their Big Four peers and Grant Thornton that mandatory audit firm rotation is a ‘bad idea’.

The last day of the US Public Company Accounting Oversight Board (PCAOB) hearing, heard more arguments against the proposal with similar comments as on day one that it would increase costs, reduce audit quality and could cause firms to loose valuable talent.

BDO International global head of audit and accounting Wayne Kolins said mandatory rotation is “not the answer and could have adverse consequences”.

Crowe Horwath chief executive Charles Allen said there are other solutions apart from rotation that could help to improve independence, objectivity and professional scepticism while EisnerAmper chief executive Charles Weinstein suggested mandating re-tender every three years with the possibility to keep the existing auditor.

Weinstein was not the only one who advocated for increasing the frequency of tendering for public companies as the PCAOB heard similar suggestions from investors, academia and audit committee chairs earlier in the day.

Some of the panellists felt that mandating retendering would keep the “existing auditor on their toes” and prevent the auditor/client relationship getting “comfortable” as well as increasing competition in the market.

The mid-tier firms also agreed that mandating audit firm rotation would actually diminish the power of the audit committees.

The academics on also agreed with the firms and City University of New York professor Al Ghosh noted only 25% of existing mandatory audit rotation studies globally found there are benefits to it.

Role of the audit committee

Throughout the PCAOB hearing it was implied that 94% of the comment letters in response the oversight body’s consultation, were against mandatory rotation and only a few isolated voices showed support.

Despite wide spread opposition, there were several recommendations made to increase the power of the US Securities and Exchange Commission to improve the work of the audit committee as another way to enhance objectivity, scepticism and independence.

PCAOB chairman James Doty listened with interest when audit committee chairs, internal auditors and the so called ‘money managers’ said the PCAOB should consider issuing guidance and best practice examples for audit committees.

Society of Corporate Secretaries and Governance Professionals chairman Robert Smith said audit committee members should know their role better and suggested the PCAOB be the ones to help with their education.

On the role of the audit committee, Norteastern University professor Arnold Wright said the problem “is still that management makes most of the decisions regarding the auditor and not the audit committee”.

However, he added that he does not believe rotation would “solve problems in the market and encourages strengthening audit committees”.

What next?

Following two long days of debate with more than 60 stakeholders the PCAOB is now expected to analyse the comment letters and panellists’ witness statements received and then issue a report that might propose some form of legislative action later this year.

As the vast numbers of stakeholders were against mandating audit firm rotation, it seems highly unlikely the board would consider it further, however as the European Union forms its opinion on audit market reforms more proposals might be issued by the PCAOB in the future.


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