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Franzel: PCAOB Looking at Audit Committee Role

Tammy Whitehouse | April 24, 2012

After Congress warned audit regulators to stand down on a possible mandatory rotation requirement, it appears the Public Company Accounting Oversight Board may be steering its attention to the audit committee.

In a podcast interview with Compliance Week, the PCAOB's newest member, Jeanette Franzel, says the board is still looking broadly at how to get auditors to think and act more independently and more skeptically. The PCAOB has been collecting feedback on a controversial concept release that looks for ideas on how to improve auditor independence and skepticism and whether term limits or mandatory rotation would do the trick. After sifting through more than 630 comment letters and two days of roundtable discussions – and after the House Financial Services Committee threatened the board with legislation to bar auditor rotation – now the board is looking more closely at the audit committee, says Franzel.

“Some of the themes that are coming through are the need to look at strengthening the role of the audit committee and audit committee performance, perhaps looking at some of the types of disclosures, perhaps about audit firm tenure,” Franzel says. The board is also considering “things like the retendering of audits periodically without a mandatory audit firm rotation requirement,” she says. “Everybody is acknowledging there's an inherent conflict of interest in the client payer model, so we're looking very broadly at how to mitigate the risks associated with that.”

The House banking committee called PCAOB Chairman James Doty to testify on the board's consideration of a rotation system and gave the board clear orders to give up the idea – at least not without more intensive study of the potential costs and benefits of such a rule. The committee reminded Doty that the Government Accountability Office studied a rotation idea in the early days following the Sarbanes-Oxley Act and determined mandatory rotation was not advisable.

Franzel, in fact, was a key member of the GAO team that studied rotation and issued that report. “It is kind of ironic that here I am on the other side as the PCAOB is evaluating that,” she says. She points out, however, that the GAO recommended against rotation after a number of reforms had already been put in place intended to strengthen the audit profession and improve audit quality. “At this point, it's a brand new evaluation in a whole different time frame and a different set of facts and circumstances,” she says.

One of the board's key priorities is to address some serious shortcomings in the current audit model as evidenced in inspection findings, says Franzel. The board has issued some harsh criticisms in the latest inspection reports to be published on major firms. “We continue to find serious audit deficiencies where auditors just simply are not doing adequate audit work in very important audit areas,” she says.