By AccountingWEB Staff
The Public Company Accounting Oversight Board (PCAOB) issued a concept release on August 16, 2011, that included a number of questions related to mandatory audit firm term limits.
On March 21 and 22, 2012, the PCAOB hosted a public meeting to obtain further input on ways to enhance auditor independence, objectivity, and professional skepticism, including through mandatory rotation, or term limits, for audit firms. Panelists included investors and investor advocates, senior executives and audit committee chairs of major corporations, CEOs of audit firms, academicians, and other interested parties.
The PCAOB hosted a public meeting to obtain further input on ways to enhance auditor independence, objectivity, and professional skepticism, including through mandatory rotation, or term limits, for audit firms.
AccountingWEB's Anne Rosivach tuned in to the meetings and summarized the opinions and concerns of many of the panelists:
- They believe audit quality has improved in the ten years since Sarbanes Oxley, but there is room for improvement.
- They oppose mandatory firm rotation for audit quality reasons and believe that audit quality depends on the audit team's expertise and talent.
- They have concerns that auditor rotation could make it more difficult to attract talent and could potentially lead to voluntary attrition, which would lessen audit quality.
- They suggest that all audit committees could evaluate their auditors each year.
- They question the tone set by audit firm CEOs, particularly when a client determines a partner is "difficult."
- They see that their responsibility is to provide appropriate support to the audit teams.
- They acknowledge that changes that have occurred since Enron and Arthur Andersen have been profound.
Following are comments and proposed strategies made by several of the panelists:
Former SEC Chairman Richard Breeden: The PCAOB could inspect the audits of large companies in the seventh or eighth year. If there were issues relating to objectivity or independence, firm rotation would be mandated; if there were no concerns, the audit committee could vote to continue with the same firm.
Former US Comptroller General Charles Bowsher: A mandatory rotation could be implemented that would be limited to extremely large companies, including all major financial institutions, any firm the FDIC designates as "too big to fail," industry leaders such as GM and GE, and companies that have significant audit and accounting problems.
Ernst & Young, Americas Managing Partner Stephen Howe, Jr.: Mandatory firm rotation would pose risks to audit quality and to its capital markets.
Former SEC Chairman Harvey Pitt: Mandatory audit rotation would require auditors to be switched, even if they had been serving ably. He advocated strengthening audit committees' review of audit firms rather than implementing audit firm rotation.
Center for Audit Quality, Executive Director Cindy Fornelli: Mandatory firm rotation would hinder the ability of audit committees to oversee external auditors. The current system of investor protection that SOX put in place is fundamentally sound.
Former Federal Reserve Chairman Paul Volcker: Senior auditing partners should sign auditing reports in order to add to the sense of personal responsibility in the audit.
PCAOB Chairman James Doty: Perhaps, change the payment system to one where a third-party payer or insurance fund would pay for the audit; firms would not be paid directly by the companies they are auditing.
M&G Investment Management, Head of Equity Research James Alexander: While auditor rotation is good in principle, there are concerns with size; conflicts of interest; the value of audits; and financial company audits, especially banks.
Entergy Corporation, Chief Accounting Officer Theodore H. Bunting, Jr: Audit firms and engagement teams must have a thorough understanding of a specific company and its industry.
Harvard Business School, Professor of Business Administration Max H. Bazerman: Auditors are not independent in the United States, and they are affected by conflicts of interest.
University of California, Associate Professor of Management of Organizations Don Moore: Without independence, outside auditors become redundant with inside auditors. This raises questions about whether outside auditors perform a useful service at all, and whether it makes sense to require firms to pay for audits that are, in effect, redundant with their own internal accounting reports.
Grant Thornton LLP, CEO Stephen Chipman: Mandatory audit firm rotation could remove the perception that tenure is a factor; but without a change in auditor appointment patterns, its implementation could cause unintended consequences.
The Honorable Roderick M. Hills: It is timely for new steps to be taken to increase both the independence and the efficacy of audit committees. Removing management from the selection of candidates for board membership is a particularly important objective. It would be tragic to abandon the audit committee to the bureaucracy of mandatory rotation.
Harvard Business School, Senior Lecturer; Brookings Institution, Senior Fellow Bob Pozen: The PCAOB should adopt a middle ground - requiring the audit committees of public companies periodically to issue an RFP for auditing services, but allowing the existing auditor to bid on the RFP. This would reinforce the accountability of the external auditor to the audit committee, rather than management, without imposing some costs associated with mandatory auditor turnover.
Institute of Internal Auditors, Chairman North American Board Lawrence J. Harrington: Work toward strengthened coordination between internal and external auditors to leverage the knowledge, skills, experience, and expertise of internal audit. This could lead to a deeper understanding of company risks and controls and to a more appropriate reliance on internal audit results, thereby enabling external auditors to concentrate more of their resources on higher-risk areas.
Independent Financial Consultant Jack Parsons: Rather than mandatory auditor rotation, the PCAOB should work with the SEC to implement a mandatory bid process after some defined period, with enhanced shareholder communication.
University of Vermont School of Business Administration, Assistant Professor Barbara Arel: Long periods of auditor tenure potentially may lead to a troublesome degree of closeness between auditors and management and auditor financial dependence on the client, which threatens their ability to act independently during the audit.
Northeastern University, Research Chair Arnie Wright: Ensure audit committee members do not have social or professional ties with management that could impede audit committee independence in fact or in appearance.
Crowe Horwath LLP, CEO Charles M. Allen: Changing auditors can be demanding in both time and money, and as with most types of regulatory cost, the burden falls disproportionately on middle market and smaller companies.
Center for Audit Quality, Executive Director Cynthia M. Fornelli: Mandatory firm rotation could actually decrease audit quality and has become a distraction from the real issue raised by the PCAOB – how each of us can and should use our respective roles to continue to enhance audit quality, particularly independence, objectivity, and professional skepticism.
BDO International Limited, Global Head of Audit and Accounting Wayne Kolins: When small companies are required to rotate to other audit firms, we believe the predecessor firm generally would be less able to replace them with issuers of similar size because of the inherent bias that still exists in many parts of the marketplace in favor of larger firms. This may drive some of these smaller firms out of the public company arena.
EisnerAmper LLP, CEO Charles Weinstein: Research and history have indicated that audit failures occur more often in the first couple of years of an auditor's tenure.
In a February press release wherein the March public meeting was announced, PCAOB Chairman James R. Doty said, "Independence, objectivity, and professional skepticism form the foundation for investor confidence in the integrity of the audit, and our inspections have made clear that improvement is needed in these areas. We received many thoughtful, reasoned comments, and this public meeting is intended to further explore these issues."
It would appear that the meeting met the PCAOB's objectives.