Mandatory Auditor Rotation

This comes from Blackswan87:
It seems that PCAOB wants to limit audit firm tenure for public companies.  It will gather feedback and hold a public forum in March 2012. Certain questions PCAOB is trying to determine:

  • whether the rule should only apply to the largest public companies,
  • if a 10 years rotation is a proper measure, and 
  • what would be some of the advantages and disadvantages of the mandatory rotation.
PCAOB must determine

  • if the benefits will outweigh the cost,
  • the effect the mandatory rotation will have on investors and
  • the public and some of the potential consequences.
The question remains if a mandatory rotation will solve a broken system or if more tinkering would actually make matters worse. In other words, are audit deficiencies due to lack of objectivity?
 What do you guys think? Should audit firms rotate their public companies? Wouldn’t this mean that public accounting firms will lose some of their biggest client? KPMG having to give up Citi or PwC having to give up Goldman Sachs would definitely have a negative impact on their revenue, and the profession as a whole?
If you agree that rotations should happen, is 10 years mark fair?

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About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

4 comments

  1. I do not think rotating public companies clients will do anything except have costs outweigh benefits. This is will be because the new auditors will have to reach out to the incumbent auditor for all needed information. Also, the new auditors will have to learn the ins and outs of the new client, which could take more than a year for some of the bigger companies. On the other side of the coin, companies will have to get used to the new auditors' style and information needs. This will also come at a cost. I think rotating public companies is a good idea and gives the public a greater perception of auditor independence and objectivity. I think more research needs to be done on the costs of such a requirement and make sure that the benefits will outweigh the costs.

  2. Rotating public companies would be a complete draw back to all accounting firms. As auditors, we work hard to create a relationship with the client to continue having a business relationship with them. Rotating would put less of an emphasis on client-service. It is our duty to be objective in our audits and exercise professional skepticism. We should be treated as professionals who would practice such policies and not looked at as untrustworthy companies in need of rotation brought on by a higher accounting power.

  3. I agree, I don't think that rotating clients between firms is the right solution. Partners and their staff in accounting firms, work extremely hard to gain and keep a client. Forcing them to give up the relationship that they've earned isn't fair for the industry.

  4. I think that there would be nothing but negative effects if PCAOB enforced mandatory auditor rotation. Although the argument for auditor rotation suggests that it would lead to an increase in objectivity, at what cost? If we implemented mandatory rotation there would be a long transition period for auditors trying to understand their client’s practices while building good relationships. This would place a huge burden on accounting firms which consists of professionals who know (or should know) to use professional skepticism. Therefore, there should be no need for mandatory rotation. To address some of the questions the PCAOB is trying to determine, they cannot only address large public companies when enforcing this mandate because where would they draw the line? Also, anything less than 10 years would be detrimental to auditors because just as they were getting through the transition period and learning the ins and outs of their client’s company, their client would be rotated to another accounting firm who will encounter the same problem.

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