Skip Ribbon Commands
Skip to main content
Stay Connected: Twitter Facebook Flickr RSS E-Mail

 Statement on Public Meeting On Auditor Independence and Audit Firm Rotation

DATE: Oct. 18, 2012
SPEAKER: Jay D. Hanson, Board Member
EVENT: PCAOB Public Meeting
LOCATION: Houston, TX

Good morning,

I would like to join Chairman Doty and my fellow Board members in welcoming today's panelists and to thank the Rice University community for their warm welcome. I would also like to thank the PCAOB staff for their hard work in getting all of us into this room together to discuss auditor independence, objectivity and skepticism, which, without a doubt, is one of the most fundamental elements in the performance of robust audits and key to serving the needs of investors.

Fourteen months ago, we issued a concept release with the goal of gathering information and framing a discussion about whether the Board should take any steps to enhance auditor independence, objectivity and skepticism. Since then, we have received almost 700 comment letters and have heard from dozens of panelists. Commenters overwhelmingly support the Board's efforts to enhance auditor independence, objectivity and skepticism, but there are widely varying views on how to accomplish that goal. Most commenters oppose mandatory rotation and express concern that auditor rotation will actually decrease audit quality. From this group, we have heard some suggestions for ways to enhance auditor rotation, including an enhanced focus by audit committees, joint audits, mandatory re-tendering, tenure protection for auditors, non-audit service restrictions, increased PCAOB inspections and/or transparency about our inspections, and several others. Some commenters, on the other hand, believe that auditor rotation is the only way to overcome what some describe as an inherent conflict between independence and the fact that auditors are paid by the companies they audit.

Thus, we have received a lot of input, and we have much to think about. There are a few areas, however, where I believe we would benefit from more information, and I would like to encourage today's panelists, and any other potential commenters, to consider whether they can help us fill in these gaps. For example, it has proven difficult to establish a clear correlation between audit quality and auditor tenure. I know some of you may address that issue today, and I look forward to hearing your views on this subject. I look forward to hearing views on how panelists define audit quality.

To date, we also have not delved deeply into the details and implications of all the potential ways to enhance auditor independence that have been suggested. In order to fully understand all possible approaches, and to determine how to evaluate various alternatives, I believe it is important that we do so. I look forward to hearing from those of you who plan to share with us views on approaches other than rotation that could enhance both auditor independence and audit quality. To the extent companies, auditors or audit committees have tried any approaches to enhance auditor independence, I encourage you to share your experiences with us, both in terms of benefits and costs.

Finally, I have spoken a number of times on the key role played by audit committees. In my experience as an auditor, I saw a transformation in audit committee behavior and focus after implementation of the requirements of the Sarbanes-Oxley Act. We have heard from many audit committee members who described in great detail their extensive efforts to evaluate and ensure their auditor's independence. Yet, some believe that even the most diligent audit committees cannot sufficiently monitor auditor independence. One question I frequently ask myself is what we can do to help audit committees do a better job in this regard. In August, the Board issued a new auditing standard on communications with audit committees. It is my hope that by arming audit committees with more information about the audit, including audit risks, significant or difficult accounting issues, significant unusual transactions, and other important matters, those committees can provide better oversight over the entirety of the audit process, including evaluating whether the auditor is approaching difficult issues with an appropriate degree of skepticism. Likewise, we recently issued a release to provide audit committees with more information about PCAOB inspections and related topics that audit committees may wish to discuss with their auditor. This too, I trust, will assist audit committees in better evaluating their auditors in a variety of important areas, including competence, diligence and independence. Although the Board does not have the authority to regulate audit committees, we are willing to help them however we can. I am particularly interested in your views — and those of other commenters who may not yet have participated in this dialog — as to what else this Board can do to enhance the ability of audit committees to ensure that their auditors are appropriately meeting all of their obligations.

Thank you again for taking time out of your busy schedules to be with us today, and I look forward to your comments.

 

Related Information