PCAOB Plans Meetings Across U.S. on Audit Firm Rotation

The Public Company Accounting Oversight Board plans to hold a series of meetings to discuss a proposal to require mandatory audit firm rotation, according to PCAOB chairman James Doty.

The PCAOB issued a concept release last August proposing that companies be required to change their audit firms after a certain number of years. The initial set of meetings has been scheduled to take place on March 21 and 22. So far, the PCAOB has received over 600 comment letters on the proposal, many of them taking issue with the requirement (see Audit Firm Rotation Panned in PCAOB Comments).

“These are historic meetings that we’ll be having,” Doty said in an interview Thursday with Accounting Today. “The comments will go into the public record. They will be written and they will be oral. That record after two days is going to provide a snapshot of where the issue of auditor independence and its relationship to audit firm rotation stands at the 10-year mark.”

Doty noted that when the Sarbanes-Oxley Act passed 10 years ago, Congress considered the issue at the time, and requested a report from the Government Accountability Office. A year later the GAO delivered a report recommending that the PCAOB and the Securities and Exchange Commission seek more information on the idea. The PCAOB’s concept release and deliberations are part of that investigative and information-gathering task with the goal of improving auditor independence.

“Independence is at the heart of Sarbanes-Oxley. We have two days of meetings here," Doty said by phone from Washington. "I frankly believe we will hold meetings of similar importance in at least three or four other cities around the country. I want to make sure we get communities across and up and down the axis of the United States because we want to be sure we have the opinions and the views of a lot of people who can’t be fit into a two-day schedule and who might not travel. So we want to be sure we’ve given the maximum scope to the investigative and the information-gathering phase of it.”

The work may take a long time, he acknowledged. “We’ll be working on this at this time next year,” said Doty. “We may be completing and digesting what we have heard. We had to have debate, we had to have opinion, we had to have insight into what people saw was going on out there, and we had to be able to compare that thoughtfully with what we had seen going on in our inspection process. This is a protracted process, and should be for an issue that is this fundamental.”

Doty has been taking note of the draft law “green paper” that was proposed by the European Commission last November calling for audit firm rotation and other reforms, as well as the negative reactions of many firms (see Europe Proposes Splitting Audit Firms).

“Everyone is looking at this,” he said. “I understand that the firms are concerned about some of the provisions that are in the paper. If you read the consultation papers and the other papers that are coming out across the Atlantic, there’s a very strong view that competition is a part of this effort in their mind. It’s necessary to develop more competition.”

However, he acknowledged that questions have been raised about whether mandatory firm rotation would help or hurt the quality of the audit process.

“The competitive implications of these proposals are very much on their minds, and I think the relationship if any to audit quality and the way it affects either good or bad audit quality is something that U.S. commenters tell us about, and we will be asking about that,” he said. “I know that, for example, there are audit-only firm issues, there are dual-firm audits. There are procedures that are not typical in audits here, but have been used in Europe, and those as much as firm rotation issues are things that I think people will want to tell us about, and we’ll hear about.”

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