PCAOB Board Member Sees Hurdles for Mandatory Firm Rotation

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By Anne Rosivach

Speaking to reporters at a question and answer session at the AICPA Conference on Current SEC and PCAOB Developments, PCAOB board member Jay Hanson said implementation of mandatory audit firm rotation was unlikely. Given a number of "hurdles", he said, “I’m skeptical as to whether we’d ever get there.”

In a written statement presented at a PCAOB (Public Company Accounting Oversight Board) roundtable in Houston on October 18, Hanson said that one obstacle to implementing mandatory firm rotation was the absence of research proving a clear correlation between audit quality and auditor tenure. A second was a cost/benefit analysis. 

"To the extent companies, auditors, or audit committees have tried any approaches to enhance auditor independence", he wrote",I encourage you to share your experiences with us, both in terms of benefits and costs."

The PCAOB issued a concept release in 2011 on ways to enhance auditor independence, objectivity, and skepticism that raised the possibility of mandatory audit firm rotation. "Since then", Hanson said",we have received almost 700 comment letters and have heard from dozens of panelists. . . . Most commenters oppose mandatory rotation and express concern that auditor rotation will actually decrease audit quality." Hanson said that the views he expressed were his own and did not represent the views of other board members. 

Finding ways to enhance audit skepticism is likely to remain a concern for the PCAOB. In his keynote address to the AICPA conference, PCAOB Chairman James Doty affirmed his commitment to continuing the discussion of mandatory firm rotation. "Above all", Doty said",emphasis should be placed on identifying and reacting appropriately to risk, and on establishing counterweights to circumstances that could detract from the ultimate goal of obtaining a high level of assurance that the financial statements are free of material misstatement. 

"This is why I believe it is so important to reexamine how we protect the auditor's independence, including by considering term limits." 

Martin Baumann, chief auditor of the PCAOB, referred to Staff Audit Practice Alert No. 10, Maintaining and Applying Professional Skepticism in Audits, issued on December 4 in his prepared remarks delivered at the AICPA conference. "I consider it essential reading for all auditors. I believe it will also be useful for audit committee members and others in understanding the responsibilities of auditors to maintain an attitude of professional skepticism throughout the audit.

"Due to the fundamental importance of the appropriate application of professional skepticism in performing an audit, the PCAOB is also continuing to explore whether additional actions might meaningfully enhance auditors' professional skepticism."

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