Groups Object to Mandatory Audit Firm Rotation

Monday, December 19, 2011 Print Email

The Institute of Internal Auditors has sent a comment letter to the Public Company Accounting Oversight Board taking issue with the PCAOB’s proposal to require mandatory rotation of audit firms for listed companies, echoing concerns from the American Institute of CPAs and the New York State Society of CPAs. The IIA objected to the proposal, contending that it could have a significant impact on the relationship between external and internal auditors; how their audits are planned, coordinated and performed; and how external auditors leverage the knowledge, experience and expertise of internal auditors to enhance overall effectiveness.

“It’s not clear whether mandatory audit firm rotation will enhance auditor independence, objectivity, and professional skepticism when considering the cost/benefit trade-offs,” said IIA president and CEO Richard F. Chambers in a December 14 letter to the PCAOB in response to its recent concept release.

Chambers pointed to research from the IIA indicating that a majority of members disagree with the concept of mandatory audit firm rotation.

Members also feel that the independence, objectivity and professional skepticism of “new” external audit firms is not markedly different than that of a prior existing firm. The IIA’s member research also cited other disadvantages of mandatory audit firm rotation, including increased costs to the company and/or audit firm, a steep learning curve and loss of knowledge, potential erosion in the quality of audits, potential opportunities for opinion shopping, and the potential that mandatory rotation would diminish the role and influence of the audit committee.

In lieu of time-based mandatory rotation, The IIA suggested the PCAOB require a change in the external auditor when circumstances arise, such as restatements (which result in the Company’s filing an 8K removing reliance on the prior filing); significant frauds in the companies audited financial statements; or other indicators of audit failure which impact investors.

The IIA also recommended increased disclosure about the audit committee’s role in overseeing the quality of the audit, including its periodic evaluation of auditor independence; providing audit committees the ability to request the PCAOB perform a directed inspection of the company’s audit with reporting directly to the audit committee; a requirement that the audit committee solicit bids from other auditors after specified intervals; and greater reliance on internal auditing.

“The internal audit profession is experiencing more inquiry from and providing greater assistance to audit committees in providing perspectives on the financial auditor’s independence and overall audit quality,” said Chambers. “We encourage the board to consider ways effective internal audit activities can contribute to the financial auditor’s independence, objectivity, professional skepticism, and audit quality. The costs and risks could be reduced by having the new auditor leverage the knowledge, skills, experience, and expertise of internal auditing and place appropriate reliance on internal audit results.”

The American Institute of CPAs also recently sent a comment letter to the PCAOB outlining its objections to the proposal. Like the IIA, it cited costly and unintended consequences from mandatory rotations, and research indicating an adverse impact on audit quality.

The New York State Society of CPAs has also sent a comment letter objecting to the proposal, contending that audit failures have not been convincingly linked to a lack of independence of auditing firms.

The PCAOB issued the proposals as a concept release in August to gauge reactions from U.S.-based accounting organizations and firms (see PCAOB Proposes Mandatory Auditor Rotation). To date, it has received at least 375 comments for and against the proposals. Last month, the European Commission released a draft law that included mandatory auditor rotation along with more far-reaching proposals (see Europe Proposes Splitting Audit Firms).

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