John Biggs, CEO of TIAA-CREF from 1993 to 2002, recently submitted to the PCAOB a comment letter about its auditor rotation proposal. In it, Biggs voiced his support for mandatory auditor rotation.
In his capacity as CEO of TIAA-CREF, Biggs was more of an investor than a reporting corporate CEO. TIAA-CREF accepts contributions from teachers and their schools, invests them, and upon a teacher’s eventual retirement provides a pension based on the accumulation.
TIAA-CREF changed its auditor twice during Biggs’s tenure as CEO. From his experiences, he concludes that auditor quality increased as a result of the switches. Moreover, TIAA-CREF’s audit fees did not change. Biggs challenges the accepted wisdom that costs to audit firms increase 20% upon a change in auditors. He suggests that the 20% is a blue sky number proposed by people desiring to defeat the auditor rotation idea.
Biggs reasons that auditor quality increases because the departing auditor desires to leave the engagement with everything fully disclosed and in good shape. The new audit firm is able to review the working papers and decide for itself what additional investigations need to be performed.
In his 2002 Senate testimony, Biggs had this to say:
[H]ad Enron been required to rotate its auditors every five to seven years, it is unlikely that misleading financial reporting would have continued or that the Board’s Audit Committee would have been kept in the dark, as they claim they were. It is also conceivable that, if they had been confronted by a group of different non-compliant auditors, senior management might have hesitated to engage in some of the financial manipulation they appear to have carried out. Honest financial reporting from the beginning also would likely have resulted in more reasonable stock valuations.
Biggs disagrees that an audit firm should be a corporation’s partner, and says partnership is a threat to auditor independence and trustworthy financial statements.
You can read Biggs’s comments here:
- 2011 comment letter to PCAOB in favor of auditor rotation
- 2002 Comments to the Senate Committee on Banking, Housing and Urban Affairs: Oversight Hearing on “Accounting and Investor Protection IssuesRaised by Enron and Other Public Companies.”
Thanks to Jim Hamilton for the tip.
Debit and credit – - David Albrecht