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June 28, 2012

PCAOB HEARING: More arguments against firm rotation

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.

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