In August 2011, the Public Company Accounting Oversight Board (“PCAOB”) issued a concept release requesting comments on possible approaches to enhance auditor independence, objectivity and professional skepticism. As background to the concept release, the PCAOB noted that, although the reform provisions of the Sarbanes-Oxley Act of 2002 have improved auditor independence, the PCAOB had found instances in which it appeared that auditors have failed to approach audits with the required level of independence, objectivity and professional skepticism. The concept release, while seeking comments on enhancing auditor independence generally and on the various approaches the PCAOB could take to make such enhancements, focused primarily on a proposal to require mandatory audit firm rotation.
Proponents of mandatory audit firm rotation claim that limiting the number of consecutive years an audit firm can provide audit services to a client, and thereby also limiting the long-term income streams the auditor receives from such client, may strengthen the auditor's ability to resist management pressure, allow for a fresh viewpoint that a new independent auditor may bring to the audit process and provide incentive to ensure that the audit is done correctly. Opponents have expressed concerns over the potential costs that changing auditors could impose on issuers, that rotation could negatively affect audit quality in the early years of an engagement because of the steep learning curve new auditors face to gain the requisite knowledge of issuers that is necessary for effective audits and that there may be an issue with issuers being able to find audit firms with the necessary capacities, areas of expertise and independence.
The concept release, acknowledging the various viewpoints, solicits comments generally on auditor independence and more specifically on the mandatory audit firm rotation proposal. In particular, the PCAOB poses 21 questions on the rotation proposal covering topics such as: (1) the appropriate length for an audit firm’s term, (2) whether the rotation requirement should apply only to certain types of issuers, (3) implementation concerns, including possible challenges or unintended consequences of the rotation proposal, and (4) whether the PCAOB should consider changing other requirements to mitigate any risks posed by rotation, such as requiring firms to provide additional audit supervision and oversight at the beginning of an engagement or restricting an issuer’s ability to remove an auditor before the end of a fixed term.
Comments on the concept release are due by December 14, 2011. The PCAOB announced that it will convene a roundtable meeting in March 2012 to discuss auditor independence and mandatory audit firm rotation.