Mike Fitzpat-rick’s proposed amendment to the Sarbanes-Oxley Act of 2002, “would prohibit the PCAOB from requiring public companies to use specific auditors or require the use of differ
Trang 1By GUNDI JEFFREY
comments on the U.S
P u b l i c C o m p a n y
Accounting Oversight Board’s
con-cept release on auditor rotation —
with most interested parties totally
opposed — a member of the House
of Representatives has stepped into
the fray to propose a legislative
amendment that would put an end
to the idea once and for all
Republican Rep Mike
Fitzpat-rick’s proposed amendment to the
Sarbanes-Oxley Act of 2002,
“would prohibit the PCAOB from
requiring public companies to use
specific auditors or require the use
of different auditors on a rotating
basis.” The March 21 amendment
came during the PCAOB’s
two-day roundtable on auditor rotation
The House f inancial services
committee then scheduled a
hearing on the proposal for March
28, calling on standard setters and
other interested parties to debate
the issue — again
The PCAOB aired its concept
release issued last August to invite
discussion on how to enhance
auditor independence, objectivity
and professional skepticism The
release primarily focused on
man-datory audit f irm rotation and
audit term limits of no more than
10 years as a way to achieve those
objectives
“Independence, objectivity, and professional skepticism form the foundation for investor conf i-dence in the integrity of the audit, and our inspections have made clear that improvement is needed
in these areas,” said PCAOB chairman James Doty in February, when he announced the March 21-22 roundtable on mandatory audit firm rotation
The concept release drew more than 600 comments — with 94 per cent strongly opposed to the notion — and Doty wanted to
“further explore these issues.”
Forty-seven regulators, investors, corporate officials, heads of audit committees, academics and leaders of the audit profession came to offer their views
Regulators were divided on the need for mandatory audit f irm rotation One of the first speakers, former Federal Reserve chairman Paul Volcker, supported the idea,
s ay i n g i t wo u l d “ p r ov i d e a powerful incentive to maintain professional discipline.”
It seemed to him that “regular audits should not become a long-term annuity for the accounting
f irm paid for by the company being audited, rather than being responsive … to the investing public.”
Fo r m e r U S c o m p t r o l l e r Charles Bowsher agreed “There’s
an inherent conflict of interest when big corporate clients pay the fees of their auditors.” But Bow-sher wants the measure introduced for only the biggest 25 to 40 com-panies in the country, such as GE
or GM and all the major financial institutions, as well as companies with significant accounting and auditing problems
Former SEC chairman Richard Breeden was more worried about auditor concentration, which he said “limits practical choices.”
Large companies may be reluc-tant to have the same audit firm as their principal competitors, Breeden suggested
“There may be many reasons, including lack of industry depth or geographic presence, that make one or more of the non-incumbent firms unattractive as a business matter Therefore, for many large companies, there may at worst be
no viable alternative to the incum-bent auditor and, at most, only one
or two viable alternatives The benefits of rotation in enhancing objectivity may well be offset by increased conflicts, loss of a non-audit service provider or other adverse impacts.”
Another former SEC chair, Arthur Levitt, was also in favour
of rotation “Investors deserve the perspectives of different profes-sionals every so often, especially when an auditor’s independence can reasonably be called into question.”
But Harvey Pitt, yet another former SEC chairman, was decid-edly anti-rotation “I believe this board should be reluctant simply
to command that, after the passage
of a specified number of years — irrespective of the particular number of years chosen — all companies must replace their cur-rent outside audit firm, no matter how well, capably and independ-ently those auditors have per-formed.”
P i t t r e c o m m e n d e d t h a t independent audit committees be required to consider (and docu-ment their consideration) whether the performance of their auditors over a prescribed period of time
— say five years — warrants their reappointment or another f irm should get the job
Most corporate panelists were also anti-rotation
Steven Buller, managing dir-ector of BlackRock Inc., voiced concern about restrictions in a company’s ability to select the most qualified audit firm, the loss
of institutional knowledge and the reduced incentive for audit firms
to invest in the audit relationship when their time horizon is short
Because BlackRock sponsors a variety of investment funds, “man-datory rotation would be a logis-tical challenge given our monthly fund year-end cycles and the need
to co-ordinate auditor selection with over a dozen corporate and fund boards of directors that must select auditors.”
Theodore Bunting, senior vice-president and chief accounting officer of Entergy Corp., believes that “a mandatory audit firm rota-tion diminishes audit quality and becomes an unnecessary distrac-tion to the company, which, in turn, creates more financial state-ment risk.”
Academics had decidedly split opinions
Max Bazerman, a professor at the Harvard School of Business, wants auditors to be hired under fixed contracts stipulating rotation
of both individual auditors and the auditing firm “During that con-tracted period, the client should not be able to fire the audit firm.”
On the other hand, Greg Jen-kins, an accounting professor at the Virginia Polytechnic Institute, cited research showing that KPMG audits the greatest number
of companies in the f inancial industry, while PwC audits the lar-gest proportion of the industry based on market capitalization
Ernst & Young audits 40 per cent
of the companies in the pharma-ceutical industry, yet
PwC audits almost 50 per cent
of the industry based on market capitalization Other industries, such as retail and utilities, are mostly audited by Ernst & Young and Deloitte, both in terms of the
number of clients and the relative market capitalization
“Mandatory firm rotation may have significant unintended nega-tive consequences for companies that require specialist auditors if they are required to retain an audit firm that possesses less industry specialization than their former firm.”
Not surprisingly, audit firms are not enthusiastic about rotation Stephen Howe, Jr., managing partner of Ernst & Young believes
“audit quality has improved in recent years, and the board and profession should seek to build on this foundation rather than strike out in a new and, we believe, dam-aging direction that poses risk not only to audit quality but to our capital markets as well.”
J o e E c h eva r r i a , C E O o f Deloitte, would prefer to see work
on reinforcing the audit commit-tee’s responsibility for overseeing the audit firm, expanding com-munications between audit firms and audit committees, enhancing the expertise of audit committees and creating audit quality councils
to advise audit firms
“One of the ironies of this pro-fession is that the public rarely hears or sees anything when an audit is done well,” said PwC chairman and senior partner Robert Moritz “A lot of good work is done behind the scenes Our auditors make the tough calls, and 92 per cent of our audit firm staff reported that in the last two years they had a difficult conver-sation with a client about an audit firm judgment or suggested an improvement.”
And KPMG LLP’s chair and CEO John Veihmeyer said “we don’t find a nexus between audit tenure and insufficient scepticism, and we see significant disadvan-tages to term limits, including dif-ficulty in attracting and retaining talented people My view is that a
‘sales culture’ that some contend
is increasing in accounting firms,
is far more likely to exist in a system of mandatory firm rotation
— where every year a significant percentage of a f irm’s audit engagements will be lost and will have to be replaced.”
Robert Pozen, also from the Harvard Business School, wants the PCAOB to adopt a middle ground — requiring the audit committees of public companies
to periodically issue a request for proposal for auditing services, but allowing the existing auditor to bid on this RFP “In my view, this approach would reinforce the accountability of the external aud-itor to the audit committee, rather
t h a n m a n a g e m e n t , w i t h o u t imposing some of the costs asso-ciated with mandatory auditor rotation.”
Larry Harrington, chairman of the Institute of Internal Auditors, cited a survey showing that the majority of internal auditors
Auditor rotation idea on thin ice
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THE BOTTOM LINE
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Regional Correspondents
Geoff Kirbyson (Western Canada); Jeff Buckstein (Ottawa); Luis Millan (Quebec);
donalee Moulton (Halifax); Special Correspondent: Gundi Jeffrey
“The benefits of rotation in enhancing objectivity may well
be offset by increased conflicts, loss of a non-audit service
provider or other adverse impacts.”
Richard Breeden, former SEC chairman
BReeden
See Chamber on page 26
Trang 226 N E W S The Bottom Line May 2012
whose companies experienced a
change in auditors did not
per-ceive the independence,
objec-tivity and professional skepticism
of the new auditing firm as
mark-edly different from that of the
prior firm “The potential benefit
in this area may already have been
realized through existing
require-ments for rotation of lead and
reviewing audit partners.”
But the strongest objection
came from David Hirschman,
s e n i o r v i c e p r e s i d e n t , U S
Chamber of Commerce Noting that more than 90 per cent of
c o m m e n t e r s t o t h e c o n c e p t release opposed mandatory firm rotation and that the majority of investors were also against it, he said “the failure to demonstrate a need for mandatory firm rotation and a universal rejection of the concept by investors, business and governmental actors leads us
t o q u e s t i o n w h y v a l u a b l e resources, time and monies are being spent on this project.”
A week after the panelists at the PCAOB roundtable stopped
slugging it out, many of the same views were aired at the hearing
by the House financial services committee on the proposed legis-lative amendment blocking the PCAOB from mandating auditor rotation
At that hearing, Doty pointed out that the board had not yet mandated mandatory audit firm rotation — or even proposed it — but was simply looking for a wide-ranging discussion of the idea “If this process results in
the PCAOB proposing any rules
— whether they involve term limits or not — they will be sub-ject to further public comment and SEC approval.”
Should the PCAOB proposal
be adopted, said Barry Melancon, CEO of the American Institute of Certified Public Accountants, it would be “a very clear example
of unbalanced regulation It would impose significant strains
on the audit profession and the public company business com-munity with no evidence that the
Sarbanes-Oxley formula, which
assigned authority to hire and fire the auditor to the independent audit committee, is not working
in a way that protects the public interest.”
Joseph Carcello, director of research of the Corporate Gov-ernance Center, University of Tennessee, focused on the Fitzpa-trick amendment, saying it is
“potentially flawed” because it would prohibit the PCAOB from requiring public companies to use specific auditors “PCAOB Aud-iting Standard No 5 already requires an issuer to use the same auditor to audit the f inancial statements and internal control over f inancial reporting This requirement in AS5 could be interpreted as the board requiring
an issuer to use a specific auditor Eliminating this AS5 requirement would likely make audits more expensive and less effective.” Speaking on behalf of the Financial Executives Institute, Gary Kabureck, a vice-president with Xerox Corp., pointed out that the process for selecting and transitioning in a new auditor
“will be extremely costly for both the company and the new auditor Company time and money are finite — every hour and dollar spent on changing auditors is not available for other uses in the business or return to investors.”
To m Q u a a d m a n , v i c e -president, Center for Capital
Mar-ke t s C o m p e t i t ive n e s s , U S Chamber of Commerce, added that “the concept releases on mandatory audit firm rotation and auditor discussion and analysis have the chamber concerned that the PCAOB is engaged in mission creep It is leaving the realm of audit regulation and crossing the threshold of regulating corporate governance, a subject area that has been left to state corporate law and the Securities Exchange Commission.”
So, where does this issue go from here? Bruce Pounder, dir-ector of Professional Programs,
L o s c a l z o A s s o c i a t e s , L t d , believes the legislative amend-ment will never see the light of day “This is only the first stage of the federal legislative process In
my opinion, what lies ahead for this draft bill is a long and circu-itous political process, with little likelihood that the process will ever actually result in a change in federal law.”
Chamber frets over ‘mission creep’
“One of the ironies of this profession
is that the public rarely hears or sees anything when an audit is done well.”
Robert Moritz, PwC LLP chairman
Continued from page 4
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