AICPA Raises Concerns about Mandatory Audit Firm Rotation
Category: Articles
1/7/12
During August 2011, the Public Companies Accounting Oversight Board (PCAOB) voted to issue a concept release regarding possible mandatory limits on audit firm tenure with public companies. The board is focusing on the advantages and disadvantages of audit terms of 10 years or greater.
After considering the impact of such requirements on public companies, and recognizing that many privately held companies and not-for-profit organizations view PCAOB requirements as benchmarks for financial reporting practices, the American Institute of CPAs (AICPA) responded to the concept release. In December 2011, the AICPA issued a comment letter recommending that the PCAOB refrain from imposing mandatory auditor rotation.
The AICPA letter supported the PCAOB’s goals for enhancing auditor independence, objectivity and professional skepticism. But the Institute said there is no evidence linking audit firm tenure to audit failures discussed in the PCAOB inspection findings. The AICPA cited research indicating that, to the contrary, auditor rotation may hurt audit quality and that audit quality increases with audit firm tenure. The letter also said:
1. Audit firm rotation may limit institutional knowledge and industry specialization which increases during audit firms’ relationship with clients;
2. Mandatory rotation may unintentionally undermine the role of the audit committee by preventing the committee from selecting and retaining the most qualified audit firm for the company audit; and
3. Existing partner rotation requirements provide the necessary “fresh look” to ensure objectivity.
In addition, AICPA officials have said research indicates that mandatory audit firm rotation has the unintended consequence of increasing the propensity for fraud.
In a separate letter, the Institute of Internal Auditors (IIA) echoed the above points made by the AICPA.
In March 2012, the PCAOB will hold a public round table on auditor independence and mandatory firm rotation. Rubino & McGeehin will monitor developments in this area.