OUR THOUGHTS ON:

PCAOB Considers Mandatory Audit Firm Rotation

Public Companies

By Steven Thompson

The PCAOB recently issued a Concept Release on Auditor Independence and Audit Firm Rotation to solicit public comments on enhancements to auditor independence, objectivity and professional skepticism. One of the most controversial aspects of the release relates to the concept of mandatory audit firm rotation after a designated period, such as ten years, for all public companies or the largest public companies. The idea of mandatory auditor rotation is not new. Mandatory auditor rotation was considered in the late 1970s and again in 2003. A GAO study performed in 2003 recommended against mandatory rotation in 2003 to allow the SEC and PCAOB time to monitor the impact of the Sarbanes-Oxley Act reforms. The PCAOB believes that the size, complexity and risk in today’s issuer population warrants the need for reconsideration of audit firm rotation. Proponents of audit firm rotation believe that setting a term limit could free the auditor from the effects of client pressure and provide new auditors a “fresh look” at the company’s financial reporting. Opponents of audit firm rotation believe costs will outweigh the benefits, and audit quality in the early years might suffer as auditors experience a learning curve. The PCAOB is seeking comments on the concept of audit firm rotation along with other approaches to improve audit quality and enhance investor protection. The PCAOB will hold a roundtable meeting in March 2012 where comments will be summarized and presented.

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