PCAOB Issues Concept Release on Auditor Independence and Audit Firm Rotation

The Public Company Accounting Oversight Board today voted to issue a concept release to solicit public comment on ways that auditor independence, objectivity and professional skepticism can be enhanced, including through mandatory rotation of audit firms. Comments are due Dec. 14, 2011.

Mandatory audit firm rotation would limit the number of consecutive years for which a registered public accounting firm could serve as the auditor of a public company.

"One cannot talk about audit quality without discussing independence, skepticism and objectivity. Any serious discussion of these qualities must take into account the fundamental conflict of the audit client paying the auditor," said PCAOB Chairman James R. Doty.

"The reason to consider auditor term limits is that they may reduce the pressure auditors face to develop and protect long-term client relationships to the detriment of investors and our capital markets," Chairman Doty added.

Audit firm rotation has been discussed at various times since the 1970s. The concept release notes that proponents of rotation believe that setting a term limit on the audit relationship could free the auditor, to a significant degree, from the effects of client pressure and offer an opportunity for a fresh look at the company’s financial reporting.

The concept release also notes that opponents have expressed concerns about the costs of changing auditors and believe that audit quality may suffer in the early years of an engagement and that rotation could exacerbate this phenomenon.

The concept release invites commenters to respond to specific questions, including, for example, whether the Board should consider a rotation requirement only for audit tenures of more than 10 years or only for the largest issuer audits.

The concept release also seeks comment on whether there are other measures that could meaningfully enhance auditor independence, objectivity and professional skepticism.

The Board will also convene a public roundtable on auditor independence and mandatory audit firm rotation in March 2012. Additional details about the roundtable will be announced at a later date.