Public Company Accounting Oversight Board voted unanimously on August 16 to ask for public comment on a proposal to require public companies to change their auditing firms from time to time. The PCAOB is discussing this proposal due to concerns that auditing firms may lack independence or objectivity if they have been auditing the same company for many years.
Proponents of term limits say breaking up the close relationships will lead to improved objectivity on the part of auditors, while critics say they will lead to costly inefficiencies and even more mistakes as an auditing firm gets acquainted with a new client. PCAOB Chairman James R. Doty said at the board's August 16 open meeting in Washington, “I hope to challenge critics and proponents alike to do their homework, come forward with facts, and add meaningful depth to the discussion in order that we might reach a resolution.”
The concept release calls for public comment for 120 days to be followed by a public roundtable discussion on audit independence and mandatory audit firm rotation scheduled for March 2012.
While firm rotation was the solution that received the most attention at the PCAOB meeting, board members said they are willing to consider other methods of protecting investors by ensuring auditor independence and objectivity.
During the PCAOB discussion Doty noted that Congress considered mandatory audit firm rotation when it debated the Sarbanes-Oxley Act of 2002. Congress directed the Government Accountability Office to study the matter, and the GAO essentially concluded that the reforms that were included in the act should be given time to work and that rotation could, if necessary, be revisited again by the board and the SEC. Several PCAOB Board members commented that it makes sense to now follow up on GAO's suggestion.
The public comment period ends on December 14. Any requirements adopted by the PCAOB must be approved by the Securities and Exchange Commission.