The PCAOB is receiving comments on its proposal to require auditor rotation. Most of the comments are against auditor rotation. Written by corporate executives, CFOs, audit committees and auditors, the claim is made that a change in auditor will result in lower quality audits for at least three years.
Three years is selected because it is alleged that it will take at least that long for a new audit firm to get up to speed (that’s an insult to the successor audit firm). And, if the company had previously employed the best auditor, then being forced to change auditor will result in a permanent decrease in audit quality.
As a small investor, I am insulted. The issue is not about audit quality. It is about the quality of the audit opinion. It is almost a certainty that in most cases, a change in auditor will result in a higher quality opinion. At least, it it won’t produce a lower quality opinion.
How is that? Currently, the large audit firms that audit the largest public companies have little credibility to produce believable, trustworthy and valuable audit opinions. A sizable number of investors don’t even read the opinion, passing over it because so many audit scandals have destroyed faith in the auditor. And many more investors find the audit opinion to have hardly any information content, and hence, hardly any value.
I would expect a large audit firm to produce a high quality audit. Let’s say that the fee for a large audit totals $40 million USD. If 80% is spent on labor and related expenses, then I would hope that $32 million USD would be sufficient to test everything that needs to be tested.
However, in today’s world of big audit, there is frequently a disconnect between data from the audit and the opinion that is eventually rendered.
And audit opinion quality has too often sucked. Big time. How could it get any worse?
That’s what auditor rotation is all about. And if big audit and big business are successful in beating down this reform movement in all its symbolic glory, then big audit and big business will have won a battle but lost the war. It is a significant possibility that defeating investors on this issue will drive them permanently from the market. Then we all will be losers.
Debit and credit – - David Albrecht