This is a guest post from FEI member Norman Strauss, Professor in Residence at Baruch College.
One big issue facing both auditors and publicly held companies is whether there should be a requirement that companies rotate their auditors say every five years. The Public Company Accounting Oversight Board has issued a concept release raising the issue of mandatory auditor rotation and it has generated a lot of controversy. If they decide to move forward there would be a formal proposal prior to it becoming final but in the meantime followers of this issue have fallen into one of two camps.
The PCAOB in raising the issue wanted to bring to light a concern that if the auditors do the audit year in and year out perhaps in some cases for many decades could they still be independent of management and be counted on to challenge the company when they may be "crossing the line." Some users of financial statements believe requiring rotation would in fact strengthen auditor independence, which is an essential ingredient in maintaining the credibility of the financial statements issued to shareholders and relied on by many users. Getting that fresh look from a new auditing firm periodically in their view would reduce the likelihood of financial statements being issued incorrectly.
On the other hand, auditors and many companies disagree. They point out the many safeguards for auditor independence that already exist including mandating that the lead partner on the audit rotate every five years and that audit committees actively oversee the work of the company's auditors. Further, changing auditors is expensive and disruptive and, in the view of the groups opposing this change, would not necessarily lead to a "better audit" as there is a big learning curve when a new auditing firm comes in for the first time. Further, finding another auditing firm with the expertise and without conflicts may not always be that easy for certain companies.
The PCAOB has been receiving lots of comment letters and we will see what they will do regarding this important and controversial issue. What are your thoughts - should the PCAOB do this or shouldn't they?? Please comment!