Audit Firms Oppose Rotation

Big Four executives say term limits would hurt audit quality.

Senior executives of Ernst & Young LLP, KPMG LLP and other large accounting firms said regulators should back away from a proposal that public companies be required to rotate their auditors.

The Public Company Accounting Oversight Board, the nonprofit that regulates auditors of U.S.-listed companies, is weighing mandatory term limits to combat auditor bias toward longtime clients. Chief executives and other leading officials at the so-called Big Four firms criticized the rotation proposal today at a meeting in Washington, arguing it would hurt the quality of audits.

“It is not a necessary or constructive means to promote auditor skepticism, and we are aware of no evidence suggesting that it will improve audit quality,” said Stephen R. Howe, managing partner of Ernst & Young in the U.S., in remarks submitted to the board. Howe, who pointed out most of the 630 comment letters to the PCAOB were against rotation, said the change would cause higher costs and disruptions.

Auditor rotation is one of several ideas under debate at the PCAOB, a watchdog overseen by the Securities and Exchange Commission after being established by the Sarbanes-Oxley Act in the wake of the collapse of Enron Corp.

PCAOB Chairman James R. Doty has repeatedly pointed to the dangers of auditing firms getting too comfortable with clients they’ve retained for decades.

“Well-intentioned auditors, as with other people, sometimes fail to recognize and guard against their own unconscious biases,” Doty said.

“It’s obvious that we’re all aware of lapses in auditor performance,” said Paul Volcker, former chairman of the Federal Reserve, who said PCAOB inspections are finding “indications of divided loyalties and inattention” at the firms. “Regular audits should not become a sort of long-term annuity for the accounting firm.”

The accounting firms -- including Deloitte LLP, KPMG and PricewaterhouseCoopers LLP -- contend the rotation proposal is burdensome and unnecessary.

“There is no evidence that among the root causes of the financial crisis was a failure of the accounting profession to audit adequately,” said Robert Moritz, chairman and senior partner at PricewaterhouseCoopers, in written remarks. “There has been no support for the proposition that mandatory firm rotation is the right way to improve audit independence.”


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