On August 16, 2011, the PCAOB opened a 120 day comment period on the concept release in which it proposes mandatory auditor rotation. Relevant information about the matter are included in Docket 37, “Concept Release on Auditor Independence and Audit Firm Rotation.”
With two weeks left in the comment period, the only audit firm to submit a comment letter is Ernst & Young. Expect KPMG, PWC, Deloitte, McGladrey, Grant Thornton and BDO to submit their comments soon. I’m certain that each letter will be similar in message to that of Ernst & Young.,
Ernst & Young submitted its letter on November 18, about four weeks before the December 14, 2011, deadline. In general E&Y’s message is that auditors are sufficiently skeptical of management’s assertions that in general, financial reporting is a benefit to investors. Because the system works at the current time, no changes are needed. In any case, E&Y does not like the idea of mandatory rotation.
Mandatory audit firm rotation, in our view, is not a necessary or constructive means to promote
auditor skepticism. There is no evidence that we are aware of suggesting that mandatory firm rotation will improve audit quality. Moreover, there are many identifiable and known downsides to such a policy with little to no certain benefit. A mandatory audit firm rotation model would not only give rise to substantial costs and disruptions, but also would, we believe, impair audit quality, undermine sound corporate governance, and detract from the ability to maintain a robust accounting profession —all to the ultimate disadvantage of the interests of investors. We believe the mandatory retendering approach suffers from the same or even greater disadvantages.
There are five reasons why E&Y “… believe[s] mandatory firm rotation would harm corporate governance and investor interests and the ability to maintain a robust, highly skilled independent accounting profession performing high-quality audits.”
- “Negative effect on shareholders, corporate governance and audit committees.“ E&Y says this would result from meddling with the duties of the audit committee.
- “Negative effect on auditor’s knowledge of the company being audited and the effectiveness of audits.“ E&Y argues that long auditor tenures are beneficial, not detrimental.
- “Negative effect on public companies and the interests of their shareholders.“ E&Y argues that a new auditor’s efforts would be inefficient (and therefore more costly) and less effective (thereby increasing audit failure risk).
- “Negative effect on the audit profession.” E&Y says that there would be increased costs to auditor and audit team relocation once a five-year engagement ends. In addition, the firm’s focus would shift away from delivering quality audits to a focus on marketing.
- “Effect on audit fees.” E&Y thinks audit fees are bound to increase. Since it foresees no advantages to auditor rotation, it is a negative NPV proposition.
There you have it. E&Y didn’t say anything controversial.
I can’t wait to read what the other firms have to say.
Debit and credit – - David Albrecht