Survey takes pulse of board members, shows opposition to audit firm rotation

Corporate board members charged with oversight of U.S. public companies are opposed to mandatory rotation of external auditors by more than 2 to 1, a new survey shows.

Mandatory audit firm rotation is a continuing subject of debate in Europe and the United States, where regulators are exploring such a requirement.

Sixty-eight percent of the U.S. public company board members participating in a BDO survey released this week said they do not favor a requirement for mandatory rotation of external auditors for U.S. public companies.

Among those who opposed audit firm rotation, 78% said they opposed the concept of mandatory tendering, or putting up for bid, of the external audit relationship.

Lee Graul, a BDO partner who specializes in corporate governance, said the survey results confirm his personal experiences in talking with corporate board members.

“They’re not sure that they see the benefit to a constant rechurning of the audit relationship,” Graul said.
“In fact, some of them have expressed concerns—not in our survey, but in the boardroom—that perhaps too much churning could lead to errors because people don’t understand their systems.”

The wide-ranging survey also showed that corporate directors:

• Support voluntary adoption of IFRS for financial reporting by U.S. public companies.
• Identify corruption and bribery as the greatest fraud risk for their companies.
• Say the CEO is the person at their company who is most helpful to the board in assessing and managing risk.

The PCAOB is continuing to explore the issue of mandatory audit firm rotation for U.S. public companies and has a public forum scheduled on the topic Oct. 18 in Houston. The European Parliament is debating a European Commission proposal that would limit to six years the period that an outside auditing firm would be allowed to perform audits for a public company.

In a comment letter to the PCAOB, the AICPA said mandatory firm rotation carries significant costs and possible unintended consequences that have the potential to hinder audit quality rather than the intended goal of enhancing audit quality. 

Sixty-three percent of respondents said U.S. public companies should be allowed to use IFRS in their public reporting. The SEC staff in July issued a report that examined the issue of IFRS adoption for U.S. public companies, but made no recommendation. The matter now is in the hands of the SEC commissioners, with no timetable set.

Graul said directors and executives who handle financial reporting working for large corporations view it as a “major chore” to take financial statements prepared using IFRS for their international operations and convert them to U.S. GAAP to be filed with the SEC.

“They would strongly support a voluntary filing on IFRS because it just makes their life less complicated,” Graul said. “It also would shorten their reporting time, because that one extra step they have to go through to make it U.S. GAAP, they don’t believe is actually going to cause that much of a difference in the reported results when you compare it with the IFRS results.”

Corruption/bribery is top risk

One-third of board members participating in the survey identified corruption and bribery as the most significant fraud risk facing their company. Revenue recognition (20%) and earnings management (18%) followed corruption/bribery on the list of top risks. Graul described revenue recognition risk as the danger that sales or revenue would be manipulated or reported inaccurately. He said earnings management risk can include manipulation of statements through fraudulent reporting of deferral of costs.

Respondents identified the CEO (51%), followed by the CFO (30%), as the person most helpful to the board in assessing and managing risk at their company.

Survey responses on the “whistleblower” rewards created by the SEC beginning in 2011 were mixed. Although 51% of directors said the SEC rewards have undermined businesses’ internal antifraud and compliance programs, 83% said there has been no increase or decrease in internal whistleblowers at their companies since the SEC program started.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor