Auditor Rotation Takes a Front Seat

In the article, Hot Topic, Cool Talk (Mostly), the author, Michael Cohn, discusses a recent public inquiry by the Public Company Accounting Oversight Board (PCAOB) into audit firm rotation.  The obvious cause for the discussion is the memorable audit failures in recent history, WorldCom and Enron.

Has the auditing industry lost focus in the name of acquiring long-term contracts?  Can they keep perspective with clients they have had for a century?  Or do these long-term clients create an industry blind-spot?

The PCAOB asked the auditing community its impressions of a regular schedule for audit firm rotation, drilling to what many consider the heart of the matter, long-term clients.  In response the auditing industry felt that audit firm rotation would be a costly, unnecessary and possibly an impossible task given the concentration of audit firms.

The corporate community felt similarly, quoting as much as 20% increases to costs if they were forced to move from auditing firm to auditing firm.  Highly specialized industries, such as utilities, also lamented the possible loss of “auditor knowledge”.

The U.S. Chamber of Commerce also weighed in on the issue, accusing the PCAOB of “mission creep” and requested the board withdraw its concept release for auditor rotation.  The Chamber feels the board is moving beyond its mission of audit regulation and into regulating corporations.

Not everyone were nay-sayers, however. John Biggs, former CEO of TIAA-CREF, said the insurance provider rotates its audit firms every few years and that industry projections of 20% cost increases are more likely closer to 2%.

As one of the marginally informed, but fully aware of the costly implications of auditor complacency, I’m all for auditor rotation.  I personally feel it would help to keep everyone honest and focused.  However, I haven’t forgotten the lesson I learned while researching international financial standards.  This article barely scratches the surface of auditor rotation, and it would be negligent of me to base my opinion of the topic solely on the ideas expressed therein and the bad press of Enron and WorldCom.

I do intend to keep myself abreast of this topic as the weeks and months progress towards legislation, and along with myself, you, my dedicated reader.

Reference:

"Hot topic, cool talk (mostly); Strong opinions rise to surface at PCAOB discussion on auditor rotation." Accounting Today 26.5 (2012): 1. Academic OneFile. Web. 7 May 2012.