The U.S. regulator for auditors is formally considering whether to force public companies to routinely replace the firms that audit their financial disclosures.
The Public Company Accounting Oversight Board voted 5-0 today to open a public comment period on the idea of establishing term limits for auditors. Proponents said such restrictions may eliminate inappropriate company influence on long-term auditors.
“The long association of the largest audit firms with their major audit clients is an issue that must be addressed in order to fulfill the mission of the PCAOB,” said Chairman James R. Doty before the vote. Mandatory rotation of auditors should be considered because of “the very size, complexity and systemic risk found in today’s issuer population,” Doty said.
Of the so-called “Big Four” accounting firms, PricewaterhouseCoopers LLP declined to comment on the board’s vote. Deloitte & Touche LLP, Ernst & Young LLP and KPMG LLP didn’t comment individually, saying their response would come through the Center for Audit Quality, a Washington-based industry group.
“As stressed by several board members, a cost-benefit analysis should be central to the project,” Cynthia Fornelli, executive director of the association, said in a statement.
Even with a unanimous vote, board members expressed reservations that could put an eventual adoption of mandatory rotations into question.
“I have serious doubts that mandatory rotation is a practical or cost-effective way of strengthening independence,” board member Daniel L. Goelzer said today. “Firm rotation would not be cheap for American business.”
The board’s “concept release” would limit the number of consecutive years that an auditor could work for a client. It would combat “the pressure auditors face to develop and protect long-term client relationships to the detriment of investors,” Doty said. The board said it’s open to alternative ideas that would foster auditor independence.
The PCAOB, a nonprofit corporation authorized by the Securities and Exchange Commission as a watchdog for auditors of U.S.-listed firms, will gather public comments for 120 days, reviewing them in preparation for another meeting in March.
Martin Baumann, the board’s chief auditor, pointed out that the PCAOB’s research and analysis staff so far found “no correlation between audit failures and tenure.”
The California Public Employees’ Retirement System and New York-based pension manager TIAA-CREF are among those that already use rotations, according to the PCAOB.