The U.S. regulator for auditors is formally considering whetherto force public companies to routinely replace the firms that audittheir financial disclosures.

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The Public Company Accounting Oversight Board voted 5-0 today toopen a public comment period on the idea of establishing termlimits for auditors. Proponents said such restrictions mayeliminate inappropriate company influence on long-termauditors.

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“The long association of the largest audit firms with theirmajor audit clients is an issue that must be addressed in order tofulfill the mission of the PCAOB,” said Chairman James R. Dotybefore the vote. Mandatory rotation of auditors should beconsidered because of “the very size, complexity and systemic riskfound in today's issuer population,” Doty said.

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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 LLPdidn't comment individually, saying their response would comethrough the Center for Audit Quality, a Washington-based industrygroup.

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“As stressed by several board members, a cost-benefit analysisshould be central to the project,” Cynthia Fornelli, executivedirector of the association, said in a statement.

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Even with a unanimous vote, board members expressed reservationsthat could put an eventual adoption of mandatory rotations intoquestion.

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'Serious Doubts'
“I have serious doubtsthat mandatory rotation is a practical or cost-effective way ofstrengthening independence,” board member Daniel L. Goelzer saidtoday. “Firm rotation would not be cheap for Americanbusiness.”

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The board's “concept release” would limit the number ofconsecutive years that an auditor could work for a client. It wouldcombat “the pressure auditors face to develop and protect long-termclient relationships to the detriment of investors,” Doty said. Theboard said it's open to alternative ideas that would foster auditorindependence.

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The PCAOB, a nonprofit corporation authorized by the Securitiesand Exchange Commission as a watchdog for auditors of U.S.-listedfirms, will gather public comments for 120 days, reviewing them inpreparation for another meeting in March.

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Martin Baumann, the board's chief auditor, pointed out that thePCAOB's research and analysis staff so far found “no correlationbetween audit failures and tenure.”

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The California Public Employees' Retirement System and NewYork-based pension manager TIAA-CREF are among those that alreadyuse rotations, according to the PCAOB.

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Bloomberg News

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