Audit Firm Rotation Panned in PCAOB Comments

The majority of comments on the Public Company Accounting Oversight Board’s proposal for mandatory rotation of audit firms by publicly traded companies have been negative.

While some groups have come out in favor of mandatory firm rotation in the concept release, such as the Consumer Federation of America, the majority of comments have been opposed to the concept. Surprisingly, even some investor groups have opposed the concept of mandatory firm rotation.

Cindy Fornelli, the executive director of the Center for Audit Quality, has conducted an informal review of the comment letters submitted to the PCAOB on the mandatory audit firm rotation proposal, and she estimates that approximately 90 percent of the comments opposed the proposal.

“Given the overwhelming response by all different stakeholder groups opposing mandatory firm rotation, we should all now shift our attention to ways that we can partner together to help achieve our common goal of achieving audit quality across the board and focus on areas such as objectivity and skepticism,” she said. “We can all work together to find ways to increase that, given those are areas of continuous improvement that you can never fully perfect  but can always strive to improve.”

The deadline for comments was last December, but comments were still coming in as recently as January 25. The PCAOB proposed mandatory auditor rotation last August (see PCAOB Proposes Mandatory Auditor Rotation). The idea seemed to be one that would be favored by investors, but so far only about 4 percent of the comment letters have come from investors or investor groups. Of the 27 received as of January 18, 23 opposed mandatory firm rotation.

Even the influential pension fund, the California Public Employees Retirement System issued a lukewarm comment on the proposal. While it recommended that audit committees should “assess the independence of their external auditor on an annual basis” and “promote the rotation of the auditor to maintain a fresh perspective.” CalPERS added, “We believe that is essential and beneficial for the PCAOB to collaborate with non-U.S. regulators and standard-setters on this matter.”

In fact, Europe may be ahead of the U.S. on this matter. A draft law was proposed last November by the European Commission that would provide not only mandatory audit firm rotation, but also the splitting up of the Big Four firms’ auditing and consulting functions. So far, though, it has made little progress in the European Parliament.

As for the PCAOB proposal, accounting organizations have mostly opposed mandatory audit firm rotation, including the Institute of Internal Auditors, the American Institute of CPAs and the New York State Society of CPAs (see Groups Object to Mandatory Audit Firm Rotation). On the other hand, some smaller accounting firms might be able to benefit from audit work when companies are forced to rotate away from the major firms.