On August 16, 2011, the Public Company Accounting Oversight Board (“PCAOB”) issued a concept release (“Release”) requesting public comment on its proposal to require mandatory audit firm rotation and other ways to enhance auditor independence, objectivity and professional skepticism. Although the PCAOB has requested comments on auditor independence in general, the Release primarily focuses on “whether mandatory auditor rotation would significantly enhance auditors’ objectivity and ability and willingness to resist management pressure.”
Similar to the current requirement under the Sarbanes-Oxley Act of 2002 that imposes mandatory rotation for individual audit partners for listed companies, the PCAOB’s proposal for mandatory audit firm rotation would limit the number of consecutive years that an audit firm could provide audit services to public companies, including registered funds. The Release indicates that requiring mandatory auditor rotation could allow a new incoming auditor to bring a “fresh viewpoint” to the audit process and generally increase an auditor’s incentive to resist pressure from management. In addition to a general call for comments on auditor independence, the Release poses 21 questions intended to elicit comments on specific aspects of mandatory audit firm rotation such as the appropriate length of the auditor’s term, the types of issuers to which rotation should apply, competition issues, and restrictions on an issuer’s ability to remove the auditor without good cause prior to the end of the allowable term.
The PCAOB’s proposal for mandatory audit firm rotation has been widely criticized for a variety of reasons, including: (i) loss of the knowledge base and efficiencies that are created over time by an audit firm each time a rotation is required, thereby increasing the costs of maintaining the same level of audit services, decreasing the quality of audit services and heightening the risk of fraud in the early years of an audit firm’s engagement; (ii) management would be disrupted and would be required to expend resources to familiarize new auditors with their business; and (iii) companies in specialized industries or remote locations may have trouble finding audit firms that have the necessary expertise, staffing levels, and independence.
The Release is available here and comments on the Release are due by December 14, 2011. The PCAOB has also announced that it will hold a public roundtable on the Release in March 2012.