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Is the concept of Auditor Rotation of concern to Accountants and Auditors?

August 16 2011, the PCAOB (www.http://pcaobus.org) issued Docket 037: Concept Release on Auditor Independence and Audit Firm Rotation.  The Comment period has been extended and multiple meetings convened.  The new deadline for Comment Letters is now November 19, 2012.

According to the Bureau of Labor statistics (http://www.bls.gov/ooh/Business-and-Financial/Accountants-and-auditors.htm)  the total number of Accountant and Auditor jobs in 2010 totaled 1,216,900.  Yet, to date only 679 comment letters have been received by the PCAOB on Docket 037 (http://pcaobus.org/Rules/Rulemaking/Pages/Docket037Comments.aspx).

I understand the arguement to let a trade group respond for its members and I understand the idea that firms respond for many.  But if I were to relate the importance of the issue to the attention received as demonstrated by Comment letters, it would be hard to come to the conclusion that practicitioners care.

It is important to note at this time that the UK just published a regulation requiring mandatory rotation every ten years for FTSE 350 companies.  Not a bad time period, in my opinion.

 

Answers

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

This proposal impacts auditors of public companies - primarily the "Big 4" - not individual practitioners who often specialize in tax services. Affected auditors and their industry counterparts are concerned about the prospect of higher costs and lower quality due to reduced expertise.

(Agent, JKS Solutions, Inc.) |

"As the PCAOB continues to explore the issue of mandatory audit firm rotation, the AICPA is urging careful study by the board and has cautioned that requiring periodic rotation of auditors would have costly and unintended consequences without increasing audit quality. “You really have to understand a client’s business to audit it effectively, and that takes, in some cases, one, two, or three years,” Caturano said. “If you need to have a different firm gaining that understanding every six, seven, or eight years, to me that doesn’t make any sense. To me, what makes sense is a long-standing relationship managed by an audit committee that understands the importance of independence.”

http://www.journalofaccountancy.com/Issues/2012/Nov/20125963

If you have worked with auditors in the past you know that the cost of switching auditors is expensive and includes the cost of the auditor getting to know the client and teaching its staff to audit the company. Training and getting up to speed costs get reduced over time.

The PCAOB is a legislated body, their rulings are law. That means that while they may seek comment, and practitioners may respond with comment letters, the best response by the accounting industry is in force, meaning with the help of the AICPA and other associations to bring to bear an effective lobby for or against any change.

Here are the documents at the PCAOB related to the ongoing discussions
http://pcaobus.org/Search/Results.aspx?k=auditor%20rotation&s=Entire%20Site

Essentially the issue is "Auditor Independence." Over time one of the threats to auditor independence is being too close to the client - becoming too familar with operations and relationships so as to remove an auditor's ability to remain skeptical. CPA firms are required to consider threats to their independence but it isn't so easy to look in the mirror and spot where you are too close to a relationship. The idea is that auditor rotation would keep a fresh set of eyes on the audit client constantly, however because it is so costly to open a new client file so to speak, there is a high cost for all the firms and inefficiencies for the client being audited. Everyone would have to constantly retrain the teams and never really get comfortable with the particular industry, and the danger is that if there is too much rotation, you will have audit firms auditing industries they do not understand and are essentially less qualified to opine on.

You cannot compare the comment letters to the total estimated auditor positions at the BLS that is not an effective way to look at the issue given that most auditors are probably internal auditors or have less than 5 years in the seat making them unqualified to submit such commentary.

Qualified comments come from the big firms and the AICPA and those who are recognized industry leaders including those from industry itself. Many times it is the comments regarding detriment to the Industry Businesses that carry the most weight, not from the CPA audit firms.

Note that the PCAOB does not consist of educated auditors, so the accounting industry must work constantly to educate the current board as to the effects of their proposed rulings. Sort of like an audit committee in a company, most of those people are not even industry experienced, they are wealthy so they are asked to sit on the Board of Directors and sometimes get allocated to the Audit Committee. Once I was setting up internal controls at a bank and one of the audit committee members was a medical doctor. He was a long time friend of the Chairman so was a long time member of the Board of Directors. He had absolutely no business on that Board, but hey what do you do?

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

Great points Valerie. Thank you.

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