The Board has reopened its comment period for whether external auditors should be required to rotate.
The PCAOB last week held more discussions on whether audit firms should be made to rotate to new clients after a certain period of time. According to the Journal of Accountancy, the comment period for its concept release was reopened June 25 and will be extended through July 28.
The PCAOB’s concept release, issued August 2011, which, in addition to the rotation idea also sought comment on enhancing auditor independence, objectivity, and professional skepticism, has been met with lots of pushback from the audit industry. And the question of whether the Board’s proposals will have any impact i.e., prevent fraud, has been brought up even by its own supporters.
As we’ve written before, treasurers sometimes would probably like to see their auditors take a long walk off a short pier. But many also realize it probably wouldn’t work in practice or just be too disruptive. Said one treasurer: “While I kind of relish the idea, mandatory rotation bothers me. On the other hand, auditors do become overwhelmingly entrenched…that’s why it’s such a pain to change them.”
New people — and usually eager and fresh-faced — arriving for every year or two and having to learn the ropes will no doubt be disruptive. Will it bring the promised fresh approaches and challenges outdated assumptions? Depends on which way the judgment goes. If it is hedge accounting and your audit firm is more conservative than you are, that could be problematic and ultimately could impact the balance sheet.
But corporates so far seem receptive to the idea, at least according to one survey. That survey, from consultant Protiviti surprisingly showed lots of corporate support for audit rotation. According to the survey results, “nearly half of all survey respondents — 48 percent — agree that this rotation would have a positive impact, and 47 percent of large accelerated filers share this view. Moreover, nearly 60 percent of nonaccelerated filers agree with requiring auditor rotation.”
Back in January, however, an E&Y report showed much larger opposition. E&Y perused all the comment letters and determined that 94 percent of them were opposed to rotations. Most of the respondents were audit committee members — the folks who pick the independent auditors — followed by issuers and preparers. Their biggest concern is the increased cost — in time and money — of managing the new regime and bringing auditors up to speed.
According to Reuters, using data from research firm Audit Analytics, about 35 percent of companies in the S&P 500 index have had the same auditor for 25 years or more. Some have been with the same auditor for over a century!
Whether it’ll be useful is still up in the air of course. And even rotation supporters aren’t convinced the measure will help. Recently Harold Williams, former chairman of the U.S. Securities and Exchange Commission, said at a forum in San Francisco that he supports mandatory rotation “but I am not sanguine that it will produce the desired result.”
Perhaps only implementation will tell if rotations make it easier to detect fraud or easier to commit fraud. Comments can be mailed to the PCAOB or emailed to [email protected].