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March 21, 2012

PCAOB HEARING: Stakeholders divided over audit firm rotation

DAY 1: A divide has broken out in the US debate over mandatory audit firm rotation during the first day of US Public Company Accounting Oversight Board (PCAOB) hearing. In one corner, investors, regulators and academics are calling for change and backing rotation while audit firms and large corporates are vehemently against being forced to swap audit firms after a set period of time.

The aim of rotation is to tackle a perceived lack of independence caused by long-term audit engagements where it is perceived auditors form a too cosy relationship with clients. Much is at stake.

Audit firms and corporates fear that regular rotation will not only increase costs but could decrease audit quality, especially for the larger and more complex companies.

KPMG US chairman and chief executive John Veihmeyer said mandatory rotation would create a sales culture at the firm, decrease audit quality and make it harder to attract and retain talent.

Grant Thornton US chief executive Stephen Chipman said there is no reason to believe rotation will enhance audit quality “but will have a negative effect on cost especially for small public companies”.

Auditors received strong backing from large companies as the PCAOB heard from representatives of BlackRock, Proctor & Gamble, Goodyear and Edison Electric, whom argued mandatory firm rotation would prove damaging to their businesses.

Proctor & Gamble senior vice president and controller Valarie Sheppard said audit complexity “is extensive in an organisation of our size and rotation would disturb our audit quality”.

Sheppard explained the Proctor & Gamble already uses three of the Big Four firms for different audit and non-audit services and having to re-tender would pose serious concerns about independence and the limitation of choice.

Backing rotationDespite strong opposition by a majority of the respondents to the consultation, several witnesses backed firm rotation. Investment groups were adamant rotation should be adopted.

“Unless, the PCAOB takes the regulatory action to require auditor rotation, the status quo, which encourages ‘Audit firm for life or forever, whichever comes first’, will continue and investor concerns about audit firm independence will persist,” said Peter Clapman US chairman of investor group Governance for Owners.

Academics are also in favour of rotation. University of Illinois professor Richard Kaplan said although mandatory audit firm rotation would not alone solve the problem of auditor independence in a world in which auditors are hired, fired and paid by the company they are auditing, “it would fundamentally improve the situation and counter to some degree the natural tendency of accounting firms to identify with their clients”.

Former US Controller General Charles Bowsher agreed rotation was an essential need at least for some of the largest corporates in order to address independence issues and the “inherent conflict of interest” resulting from big corporate clients paying the audit fees.

The main arguments pro rotation from several stakeholders were: building on SOX, increasing independence, providing a fresh set of eyes on an audit in order to improved prudence and scepticism.

Supporters of rotation also dismissed concerns over increased cost. Founder of investment group Vanguard Group John Bogle said: “Cost is very much in the eye of the calculator.”

The PCAOB panel, consisting of the board’s chairman James Doty and board members Jeanette Franzel, Steven Harris, Jay Hanson and Lewis Furguson, are to hear from another 26 stakeholders on Thursday before further considering changes to the audit market. Related articlesCAQ against mandatory firm rotation

US considers mandatory rotation

PCAOB consults on independence and audit firm rotation

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