In this season of regulatory anti-reform, some people may be looking to the audit industry as a shining example of how to sail through controversy unscathed. The industry has been through the reform wringer before. Recall the death sentence meted out to Arthur Andersen in the wake of the Enron collapse.  But in the post-financial crisis era, we've seen very little reform imposed on the industry, despite some big-time accusations of malfeasance, such as the state of New York's charges against Ernst & Young for its Lehman Brothers work. 

One prominent accounting industry blogger puts it well: "Throughout the period of review, examination, and introspection on the causes and solutions to the latest financial crisis, the auditors have stayed well above the fray. They've never been called to testify before Congress like they were in the U.K. at the House of Lords. They've only recently started to show up as defendants in subprime, credit crisis, and financial crisis related lawsuits, although some key cases were settled early in the process. They escaped any mention in the Dodd-Frank reform bill. And they've continued to benefit from the chaos, and extra work, by grabbing lucrative contracts with government and staying on board as auditors of some of the most troubled companies such as AIG, Bank of America, Citgroup, and GM. Compared to the ratings agencies, the auditors have gotten away with murder." 

The Big Four would no doubt deny that they've committed murder, but you get the rhetoric. 

All of this serves as an interesting prelude to the whole issue of mandatory auditor rotation, which the PCAOB has put out for comment, which are due on December 14. Recall that the idea nearly made it into the Sarbanes-Oxley reform bill back in 2002. Since then, the idea has been pushed to the back burner, until fairly recently when the PCAOB revived the idea. 

My sense is that the idea will not soon become a formal requirement, as the justification--that is the actual proof that changing auditors periodically leads to better audits--seems kind of skimpy. Meanwhile, the costs would likely be hefty. By one estimate, the increase in costs in the first year after an auditor change would be 20 percent. At least one board member has voiced these concerns. To be sure, the PCAOB has noted that between 2003 and 2006, more than half of public companies, changed auditors. 

If  such a rule was to be imposed, it would be a huge event, as about 175 companies in the S&P 500 index have had the same auditor for 25 years or more, according to Audit Analytics.  It may be more likely that get a variation of the mandatory rotation rule. An alternative might be a proposal that calls for a change if the company runs into regulatory trouble. 

While we doubt a mandatory auditor rotation rule will pass, it's clear that the PCAOB is aggressively aiming to enhance the quality of audits. For that it, it deserves some credit. Under James Doty, the new chairman, the board has put forward other proposals. One would require accountant in charge of an audit to sign off on the results, in the style of Sarbox. The other would allow for a more complete narrative about the audit's results. -Jim