Legislation May Preclude Statutory Requirements for Mandatory Auditor Rotation

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By Amanda Meko, CPA | Partner, Director of the Audit & Other Assurance Services and Team Leader of the Not-for-Profit Services Group

On Monday, the U.S. House of Representatives passed H.R. 1564, the Audit Integrity and Job Protection Act, by a significant majority vote of 321 to 62. The bill, which prohibits mandatory audit firm rotation, was a response to the Public Company Accounting Oversight Board’s (PCAOB) Concept Release on Auditor Independence and Audit Firm Rotation in August 2011 PCAOB Concept Release.

The Concept Release sought public comment on ways that auditor independence, objectivity and professional skepticism could be enhanced with an emphasis on mandatory audit firm rotation as one of the ways to achieve the objective. The question of whether or not auditor tenure should be regulated is not a new one.

Beginning with the Metcalf Report in 1977, several studies have been conducted over the years with arguments both for and against mandatory rotation. Congress had previously decided audit partner rotation was preferable to mandatory firm rotation when it passed the Sarbanes Oxley Act of 2002. The PCAOB raised the question again in 2011 both due to requests from its Investor Advisory Group and the hundreds of audit failures discovered over the past eight years during inspections of more than 2,800 engagements. The PCAOB admits that its inspections and remediation process have improved audits and that its analysis of the inspection data does not link audit tenure to the number of audit failures. However, the PCAOB remains concerned about the frequency and type of audit deficiencies discovered. The PCAOB has since conducted public hearings to solicit opinions on mandatory rotation. The AICPA opposes mandatory audit firm rotation, citing several reasons in a letter to the PCAOB in December 2011 AICPA Response to PCAOB. The AICPA has argued that mandatory firm rotation carries costly and unintended consequences, including an adverse impact on audit quality that has been supported by research studies. In addition, mandatory rotation may limit institutional knowledge, experience and industry specialization, which research has shown to have a strong correlation to high audit quality. Lastly, mandatory rotation could limit the audit committee’s ability to hire the most qualified firm to perform the company’s audit. Both those for and against mandatory audit firm rotation agree on one thing, that continually evaluating and improving the quality of audits is a good thing. The question of audit firm rotation is not only a public company issue, but also arises frequently in the private sector.

I’m interested in hearing your opinion. Please email me your comments and questions to ameko@greenwaltcpas.com.

Contact: Amanda Meko, CPA | Partner, Director of the Audit & Other Assurance Services and Team Leader of the Not-for-Profit Services Group | 317.260.4436 | ameko@greenwaltcpas.com