PCAOB Proposes Mandatory Auditor Rotation

At its board meeting today, the PCAOB released a concept paper on auditor independence that proposes mandatory audit firm rotation.

In its concept release, the Board (1) gives the history of audit firm rotation as an approach for addressing perceived auditor independence problems, (2) acknowledges many of the criticisms of audit firm rotation, including lack of empirical support for its effectiveness, and (3) asks respondents to comment on the proposal. 

Among the questions commentors are asked to adddress are:

  • Whether audit firm tenure influences auditor effectiveness?
  • Is there some “subset” of all audit engagements that should be exempt from mandatory audit firm rotation?
  • Would audit firm rotation be effective for audits of multinational companies? (This is a particularly important consideration in a global audit firm marketplace in which only 4 firms can effectively audit the world’s largest public and private companies.  Would mandatory audit firm rotation create an enviroment in which the Big 4 audit firms are  “too big to fail”?)

These are a few of the 21 questions posed to respondents.  Interestingly, the Board poses the questions almost as though mandatory audit firm rotation is fait accompli and the respondent is asked to help structure the final requirements.

The PCAOB isn’t the first regulatory agency to propose mandatory audit firm rotation.  As documented in the concept release, audit firm rotation is a “usual suspect” recommendaton that has been proposed whenever talk among regulators focuses on auditor independence.  So far, mandatory audit firm rotation has failed to make it into the final auditor independence requirements. 

Of course, in this proposal, mandatory audit firm rotation is the only recommendation.  

Will some form of audit rotation will survive to the final requirements?  Stay tuned.

In an article for Bloomberg.com, Jesse Hamilton gives a concise summary of discussions from the PCAOB meeting in which mandatory audit firm rotation was proposed at http://www.bloomberg.com/news/2011-08-16/u-s-firms-could-face-constant-auditor-shuffle-in-proposal-1-.html

The PCAOB concept release is available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket037.aspx.

About docjonz

I am an Associate Professor of accounting at Hofstra University in Hempstead, NY. Additionally, I have more than 30 years of professional accounting experience in various capacities including auditing, accounting standard setting and corporate accounting policy.
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