Alternatives for Auditor Rotation

If you are a CFO, Controller, Audit Committee Chair or Senior Finance Executive at a public company you should be aware that the Public Company Accounting Oversight Board (PCAOB) issued a concept release last August making the case for mandatory auditor rotation, requiring corporations to switch their accounting firms every few years.

The PCAOB felt that mandatory auditor rotation would strengthen the buffer between auditors and their corporate clients and lead to better audits. PCAOB chairman James Doty noted that the PCAOB had found “hundreds of audit failures” during recent inspections and suggested that management influence over auditors may have led to “eroded public confidence in audits.”

Key Point: The idea of mandatory auditor rotation has been raised several times. The debate centers around what would make for a more effective audit: a new accounting firm with a fresh perspective or a familiarity about the ins and outs of a company and how they do business, which at times might be complex?

CFOs are naturally concerned by the cost and time it takes for a new auditor to get acquainted with their business. A switch to a new auditor could add up to a 20% premium to the costs of an audit for the first year of an engagement.

A compromise included in the Sarbanes-Oxley Act, rather than requiring full auditor rotation, requires lead audit partners to move off an account after five consecutive fiscal years. Critics of the PCAOB proposal say that between lead-auditor rotation and a new requirement that audit committees be responsible for hiring and firing accounting firms, Sarbanes-Oxley created enough of a barrier between company management and auditors.

On average, the largest public companies have had the same auditor for more than two decades. Investor advocates are divided on the auditor-rotation concept. The PCAOB has not shown a clear link between auditor rotation and improved audit quality. According to recent research by Audit Analytics, only 4 of 53 restatements made by companies in the past five years occurred shortly after a company had switched auditors.

Last week the U.S. Chamber of Commerce accused the PCAOB of mission creep in an unsigned letter. Perhaps improving communications between audit committees and auditors, and expanding the audit reports included in companies’ annual reports could lead to improved audit quality more effectively than mandatory audit rotation. The issue looks set to run for a while longer since the PCAOB reopened its comment period, which expired in mid-December. Feedback now can be submitted until the 22nd of April.

Contact us: The PCAOB document is not a proposed rule but could form the foundation for one. For questions on this or any other audit and assurance issues please contact Craig Podradchik, CPA, Audit Principal, by phone at 561-367-1040, or by email at [email protected].


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