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PCAOB Re-Opens Comments on Mandatory Rotation

Tammy Whitehouse | March 9, 2012

The Public Company Accounting Oversight Board has re-opened the comment process for its concept release on whether mandatory term limits or some other solution will make auditors more independent, objective and skeptical.

The board is hosting a two-day public meeting March 21-22 with four dozen panelists representing all aspects of capital market activity, and it wants to allow more time for comments leading up to and following those sessions. The concept release was issued in August with the comment period originally closing in December. So far, the board has collected more than 600 comment letters.

PCAOB Chairman James Doty resurrected debate about mandatory rotation soon after he assumed his post in early 2011. The idea was considered but dismissed during the development of the Sarbanes-Oxley Act as a way to break up long-standing relationships between audit firms and public companies that raise questions about independence. The concept releases looks for thoughts and ideas on whether a mandatory system of audit firm rotation would enhance independence, along with myriad questions on how such a system might work, or whether other ideas would be more effective.

In light of the current debate, research firm Audit Analytics decided to investigate whether there is a link between an audit firm departure and restatements. The firm looked at the filings of more than 1,300 companies making up the Russell 1000 list from 2005 to 2010 to see if a change in auditor had any apparent link to the discovery of outstanding accounting problems.

Don Whalen, director of research at Audit Analytics, says the research suggests a significant majority of restatements disclosed – about 82 percent – took place when companies were engaging the same auditor continuously. The study revealed about 7.5 percent of restatements within that population of companies resulted from a new auditor taking over the engagement and studying financial statements with a fresh set of eyes. However, it also found that 64 percent of the restatements within the same group of companies were unearthed by the departing audit firm, and 15 percent of restatements were detected by the companies themselves or some other regulatory body. 

The PCAOB's panelists for the March 21-22 sessions include institutional investors, audit firm executives, governance experts, corporate executives, audit committee members, former regulators, and academics. The comment period for the concept release has been extended to April 22.