Proposed Solution to Mandatory Auditor Rotation

One financial expert has a plan to solve the heated issue of mandatory auditor

As the debate over auditor rotation continues, one expert has come up with a plan to combine ideas from both sides of the issue.

A recent report found many Fortune 500 companies have used the same auditor for more than 20 years - some for more than half a century. The Public Company Accounting Oversight Board, along with the European Union, have proposed mandatory auditor rotations, which they say would improve auditor skepticism and impartiality. Companies argue institutional knowledge would be lost and the cost of rotating auditors would vastly outweigh the benefits.

Under one proposed scenario, the system would be opened up to a competitive bidding process. Robert Pozen, of Harvard Business School and the Brookings Institute, suggested in a recent Huffington Post column that a company's independent audit committee issue a request for proposal for audit engagement every 15 years. Existing auditors could bid on the RFP, but even if they are routinely selected, the process would keep them from becoming too complacent because a future auditor could identify accounting deficiencies, according to Pozen.

"Most importantly, an RFP process would reinforce the critical role of the independent audit committee in the eyes of the external auditor, especially one with a longstanding relationship to the same company," Pozen said. "The RFP process would make it clear that the independent directors on the audit committee, not company management, were in charge of choosing the auditor and supervising its work."

Comments

Topic Expert
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This issue is very complex for large multinational companies. Not all very large audit firms offer the same level of expertise in core industies or geographical areas. Further, most large companies use two to all four big four audit firms for different work. A change in the audit requires many other changed to conform to conflict of interest rules, again with expertise issues. Some companies may have to choose lower quality somewhere and some of those may their audit for lower quality risks.

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