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.
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By GlobalDataProctor & 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 rotation
Despite 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.
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