The PCAOB has revisited the idea of mandatory auditor rotation for public companies. The nonprofit community looks to the standards required by public companies to influence their own best practices and has previously embraced the rotation concept. The concept has some high level opponents, though, and the PCAOB has been flooded with opinion letters from CFOs and audit committee chairs that are pushing back against the requirement. Most of the letters argue that the PCAOB has not shown a clear link between auditor rotation and improved audit quality.
Is the argument against auditor rotation self-serving? In theory, if everyone is rotating, then clients out the door should be roughly equivalent to clients in the door, although it’s a reasonable argument to point out that not knowing where next season’s revenue is coming from doesn’t always enhance the auditor’s independence and objectivity. There have been occasions where maintaining integrity meant losing a client to someone who would do things their way and that’s one of the few times I’m happy to be on the losing side.
The goal in rotating auditors is to bring fresh eyes to the scene and reduce any possible independence issues between the auditors and management. However, arguments against rotating cite the high cost of bringing new auditors up to speed (estimated at 20% of audit costs in initial year), the chance of someone unfamiliar with the organization missing something that someone with deeper knowledge and experience would have spotted, and whether there is a sufficient number of skilled auditors with the necessary expertise in particular niches to make changing a viable option.
The comment period has been re-opened until April 22 following the March 21-22 public meeting held at 1201 15th Street NW, Washington DC that is open to the public and available via webcast on the PCAOB website. Comments should be sent to firstname.lastname@example.org or mailed to the Office of the Secretary, PCAOB, 1666 K Street NW, Washington, DC 20006-2803. For more on the meeting, click here.