AICPA Letter to PCAOB Raises Concerns About Mandatory Audit Firm Rotation

December 14, 2011

The AICPA recommended that the PCAOB refrain from imposing mandatory audit firm rotation.

AICPA Chairman Greg Anton, and President and CEO Barry Melancon signed a comment letter sent by email Wednesday to the PCAOB stating that mandatory audit firm rotation is costly and has the potential to hinder audit quality rather than enhancing it.

In August, the PCAOB issued a concept release on auditor independence and audit firm rotation seeking comment. The release noted that proponents of rotation contend term limits could decrease client pressure on auditors and create opportunity for a fresh look at a company’s financial reporting.

The AICPA letter supported the PCAOB’s goals for enhancing auditor independence and objectivity, and professional skepticism. But the Institute said the PCAOB should not impose mandatory audit firm rotation without evidence linking audit firm tenure to audit failures detailed in PCAOB inspection findings.

Even if such a link is indicated through further study, the AICPA would like the PCAOB to carefully weigh the costs associated with mandatory firm rotation and consider other potential enhancements that would be less costly and disruptive.

The AICPA cited research indicating that mandatory firm rotation may hurt audit quality and that audit quality increases with audit firm tenure. The letter also said:

Audit firm rotation may limit institutional knowledge and industry specialization, which the AICPA said increases during audit firms’ relationship with a company and is crucial to a high-quality audit.

Mandatory firm rotation may unintentionally undermine the role of the audit committee by preventing the committee from selecting and retaining the most qualified audit firm to perform a company’s audit.

Existing partner rotation requirements provide the necessary “fresh look” to ensure auditors’ objectivity.

The PCAOB’s release is part of the reason audit firm rotation has become a big issue in recent months. Last month, the European Commission proposed limiting to six years the period in which an outside audit firm can perform audits for public companies. Companies that opt for voluntary joint audits would be allowed a nine-year window; a four-year cooling-off period was proposed.

At last week’s AICPA National Conference on Current SEC and PCAOB Developments, Anton said research indicates that mandatory audit firm rotation has the unintended consequence of increasing the propensity for fraud.

“We caution the EU member states and the European Parliament—as well as the PCAOB—to carefully consider the consequences of such proposals and focus on proven solutions to enhanced transparency, increased objectivity and improved audit quality,” Anton said on Dec. 5.

Wednesday was the final day of the comment period. In March, the PCAOB will hold a public round table on auditor independence and mandatory audit firm rotation.

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