US stakeholders have said mandatory audit firm
rotation is not the “best solution” to improve independence and
scepticism.

The comments were made at the US Public
Company Accounting Oversight Board (PCAOB) second hearing on its
audit reform proposals issued last year. They are also in line with
the views previously heard when it was told mandatory audit firm
rotation is a ‘bad idea’.

Former US Securities and Exchange Commission
(SEC) chief accountant Conrad Hewitt said mandatory rotation would
“not prevent accounting scandals and frauds, such as Enron, World
Com, Sunbeam, AIG, Freddie Mac, Health South and Madoff”.

“Many of these accounting scandals were due to
existing accounting standards which were based on rules and not
principles, and permitted such abuses of GAAP. Fraud is always
difficult to detect and prevent. A mandatory change in auditors
would not stop such frauds,” Hewitt said.

Hewitt also called for the PCAOB to focus on
strengthening the audit committees so that they can carry out their
responsibilities and auditing under Sarbanes-Oxley Act without
making mandatory rules and regulations.

Moss Adams chief practice officer David
Follett warned that mandatory audit firm rotation would “undermine
the authority of the audit committee”.

“Mandatory firm rotation inappropriately
prohibits an entity’s ability to continue with its existing
auditor, even if the audit committee determines it is in the best
interest of the entity’s shareholders,” Follett said.

Follett also called for the PCAOB to
investigate more cost effective and less risky alternatives to
mandatory rotation such as increased transparency between auditor
and audit committees and performing root-cause analysis of audit
deficiencies identified during internal and PCAOB inspections.

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Japanese Financial Services Agency (FSA)
deputy chief accountant Koichiro Kuramochi told the PCAOB that
Japan had discarded, following extensive consultation, the idea of
mandatory firm rotation and opted for mandatory audit partner
rotation because of “costs that may occur and practical
difficulties due to limited number of large audit firms”.

Former US SEC chairman Harold Williams said he
supports mandatory rotation but is uncertain it will “produce
desired results”.

“If mandatory rotation is undertaken, I
recommend it begin on a limited basis so that the PCAOB and the
firms can learn from the experience,” Williams said.

Similarly to the March hearing, stakeholders
called for the PCAOB to issue guidelines for audit committees and
consider alternatives such mandatory retendering instead of
imposing mandatory firm rotation.

The hearing held in San Francisco was another
chapter in the PCAOB’s quest to improve auditor independence,
scepticism and objectivity but there has already been wide spread
opposition to mandatory rotation. The US Congress has also
threatened to block the oversight body from proposing any such
regulation.