The PCAOB will soon issue a concept release on auditor rotation; better outcomes, more work or both?
The Public Company Accounting Oversight Board Tuesday voted to issue a concept release looking for comments on how to improve auditor performance, which would include requiring mandatory rotation for audit firms.
“One cannot talk about audit quality without discussing independence, skepticism and objectivity,” PCAOB Chairman James Doty said in a statement. “Any serious discussion of these qualities must take into account the fundamental conflict of the audit client paying the auditor.”
But in calling for more transient auditors, the PCAOB will surely raise costs and create more work and likely more headaches. In theory, requiring term limits for auditors sounds good on paper – fresh eyes, fresh perspective, etc – but in reality, and in conjunction with other plans to require more transparency, companies, and more specifically, treasuries, will find themselves in a pinch.
The problem is that if auditor term limits are imposed, the result is chaos of who knows what, and in educating a new auditor that has rotated in. This could even create opportunities for fraud, one treasurer observed. And while treasurers may like the idea of getting rid of a particular auditor, making it mandatory is problematic in terms of the extra work involved in getting that auditor up to speed. Not to mention cost. As one internal auditor has said previously, “The cost of ramp-up and ramp-down for changing out a firm would be horrible, and the buck is sure to stop with the corporations not the auditors.”
Indeed, they could already be on the hook for an increased workload in preparing management and audit committees with the information they might need if the PCAOB has its way in calling for more and better information.
In June PCAOB Board member Steven Harris told an Open Board Meeting that “management and the audit committee should provide better disclosures to investors about the financial reporting risks facing the company.” Both the AC (as a “surrogate” for the external auditor) and management could “help to fill the void in investor communications through improved reporting to the shareholders.” Mr. Harris therefore suggested the Security and Exchange Commission to give it careful consideration. But there is no doubt who will be doing the legwork for management and audit committee – treasurers and internal audit departments.
“I don’t have a predetermined idea as to whether the PCAOB ultimately should adopt term limits,” Chairman Doty said in a speech in early June. “My only predilection is that the PCAOB deepen the analysis of how we can better insulate auditors from client pressure and shift their mindset to protecting the investing public.”
But while protecting the investing public the PCAOB puts the squeeze on companies — in increased work, increased cost, and in trying to fulfill a mandate that the agency has made more difficult to do.
Comments for the PCAOB’s concept release are due Dec. 14, 2011. The Board will also hold a public roundtable on auditor independence and mandatory rotation in March 2012. The PCAOB said additional details about the roundtable will be announced later.