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April 9, 2012

Editor’s letter: Up in arms

Nicola Maher

The contentious proposal of mandatory audit firm rotation has been a big talking point for the US profession as the Public Company Accounting Oversight Board (PCAOB) held a hearing on rotation and the role of the auditor.

Accounting firms, audit committee chairs, large corporates, preparers, academics and other stakeholders were invited to share their thoughts on whether mandatory rotation could enhance auditor independence, objectivity and professional scepticism.

In the first day opinions were split with investors, regulators and academics backing rotation while audit firms and large corporates vehemently opposing it.

By the second day in Washington it was clear the majority were against mandatory rotation, arguing it would not cure the ‘perceived’ lack of independence caused by long-term audit engagements ‘cosy relationships’ with clients. Mandatory rotation is likely to increase costs, reduce audit quality and may even cause accounting firms to lose valuable talent, it was argued.

I cannot see PCAOB chairman James Doty going against the grain and pushing for mandatory rotation to become a regulatory requirement in the US. It is unpopular and there is little evidence it would improve indpendence or audit quality. In reality, it is more likely that mandatory firm rotation for small periods, such as 6 years, could cause more damage to audit quality than good.

That is not to say the concept of rotation is flawed. Rotation does have merits and I can understand why investors and some academics view it as a positive step, but the devil is in the detail and how it would be implemented.

Government steps in

Regardless of what Doty and other stakeholders think, it appears US Congress will not allow mandatory firm rotation anyway. Congressmen have threatened to block the PCAOB from proposing regulation to introduce mandatory audit firm rotation, arguing the oversight body is ‘not a policy-making entity and such decisions should stay in the hands of politicians’. (See article: US Congress threatens to block audit firm rotation for the full story).

Really? How many politicians have ever done an audit in their lives and even understand what the role of an auditor is?

I suspect these congressmen are more concerned about lobbyists than improving audit quality. If they want to engage in the debate then I would applaud them, but to try and stifle it is complete and utter nonsense and helps nobody.

I would encourage these politicans to take a legitimate interest in the profession and educate themselves about auditors and the role they play in capital markets.

Doty hasn’t ‘pushed’ mandatory rotation onto anyone, he has simply opened a debate to discuss its merits in an effort to improve audit quality and auditor independence.

Perhaps if politicians had similar ambitions as Doty, debates on mandatory rotation wouldn’t need to occur because the role of the auditor would already be fit for purpose.

An area of consensus at the PCAOB hearing is support for increased guidance and communication between the auditors and the audit committee. A number of recommendations were made to increase the power of the US Securities and Exchange Commission to improve the work of the audit committee and for the PCAOB to consider issuing guidance for audit committees. This is sensible and audit committees should be strengthened and made fiercly independent. Decisions on audit selection should not stem from management. Period.


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