Academics vs. executives on mandatory auditor rotation

The idea of mandatory rotation of auditors has never gone over that well in the corporate world.

The general discomfort with the idea, which the Public Company Accounting Oversight Board (PCAOB) has proposed, was voiced again in Houston at the PCAOB's third meeting to discuss the concept. The PCAOB has held two other meetings, in March in Washington, DC, and in June in San Francisco. The corporate response was generally negative. 

In Houston, one CFO said that, "We believe the current five-year rotation requirement of lead audit partners captures substantially all the benefits of mandatory audit firm rotation in a cost-effective manner, including the important attribute of a fresh set of skeptical eyes."

The Comptroller at another major company was quoted saying, "Mandatory auditor rotation has been met with..universal rejection by board audit committees, including ExxonMobil's, as the proposal diminishes the audit committee's role in hiring, assessing and firing audit firms."

One issue is the effect the rule will have on audit committees.

"Independent audit committees are in the best position to reinforce auditor independence through their critical oversight role. Mandatory rotation could, in fact, actually weaken the effectiveness of this core responsibility," said one executive, who noted that "audit committees would then have a less of a choice in decisions about when to switch auditors."

The academics who participated were more open to the idea. In fact, many of them were quite supportive. One Rice University professor note that "if the PCAOB cannot require mandatory rotation of auditing firms, the next best things would be mandatory retendering, in which audit committees look for alternative auditing firms periodically, or mandatory rotation when PCAOB inspections identify significant audit failures."

But she noted that this would amount to "nibbling around the edges rather than tackling the problem head on."

In the end, the opposition to the idea has already prompted a political response and a lobbying response such that we are doubtful that it will become a requirement anytime soon. That said, the PCAOB just might decide to push the envelope, and take on the challenge. The clash would be epic. -Jim