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PCAOB Opens Debate on Term Limits for Audit Firms

Tammy Whitehouse | August 16, 2011

The Public Company Accounting Oversight Board has now asked the hugely controversial question of whether public companies should be required to switch audit firms every few years, one idea among many the board is considering to reduce the risk of audit firms failing to catch erroneous financial reports.

The PCAOB has published a concept release that asks for public input on how to get auditors to become more independent, more objective, and more skeptical – and especially whether a mandatory rotation system for audit firms would achieve that objective. While mandatory rotation has been considered and dismissed in the past, PCAOB Chairman James Doty wants to take a fresh look at the idea to see if it might reduce the pressure on auditors to put concerns about the client relationship ahead of sound audit judgment.

During an open meeting to proposed the concept release, Doty acknowledged the idea is controversial, fraught with complexities and consequences. “The debate ebbs and flows, but the contending solutions languish unresolved,” he said. “With this release, I hope to challenge critics and proponents alike to do their homework, come forward with facts, and add meaningful depth to the discussion, in order that we might reach resolution.”

The PCAOB says proponents of mandatory rotation believe it could free the auditor from client pressure and enable them to look at the financial statements more objectively. Opponents raise concerns about the cost and complexity of changing auditors, especially in the early years of new engagements as auditors learn a company's business and its risks. The concept release outlines a number of questions for discussion, such as whether the concept of rotation should be confined to only the largest firms, or only those that have been entrenched for a decade or more on a specific engagement. It also invites other ideas on how to develop greater independence, objectivity and skepticism if not through rotation.

The concept release is open for comment through Dec. 14, with a public roundtable to be held in March. The board isn't set on whether the process will lead to any rulemaking. And some board members openly expressed their skepticism about whether mandatory rotation is the right answer.

“I have serious doubts that mandatory rotation is a practical or cost-effective way of strengthening independence,” said PCAOB member Daniel Goelzer. “However, with nearly nine years of inspections experience under our belts, the time is right to step back and thoughtfully examine whether we need to deploy new tools to promote independence.”