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February 6, 2023

Auditors Will Be Happy to Know That Term Limits Are Still on the Table

In a keynote speech at the AICPA's National Conference on SEC and PCAOB developments, Chairman Jim Doty passed on the opportunity to mention extremely recent developments and instead focused on things like the importance of independent auditing to "our economic success" and audit firm culture and the PCAOB's current initiatives.

In fact, Mr. Doty doesn't mention China once in his remarks, but goes on in considerable length about how the Board's initiatives are "aimed at enhancing the relevance, credibility and transparency of audits." The enhancement of "relevance" of course, means that the PCAOB remains "relevant."
Anyway, this part of the speech included a discussion of the analysis and reporting that member Jay Hanson recently spoke about, so that audit firms don't consider the inspection process to be a big SALY finger-wagging exercise. Truth be told, they don't really appreciate that
Perhaps most interesting is a passing mention of the idea that auditors love to hate – auditor rotation. The Board was all gung-ho about this idea for quite some time, but had seemingly backed off the idea when almost everyone (according to an E&Y report) went on record that auditor rotation is an awful idea.
Here's how Doty brought it up:
Above all, emphasis should be placed on identifying and reacting appropriately to risk, and on establishing counterweights to circumstances that could detract from the ultimate goal of obtaining a high level of assurance that the financial statements are free of material misstatement.11 This is why I believe it is so important to reexamine how we protect the auditor's independence, including by considering term limits.12
The term limits footnote goes on to explain that 97 panelists "with various, often conflicting, viewpoints" have discussed the topic which is a nice way of saying that this topic has been beat to death and FOR WHATEVER REASON, it still lives.
Although it states that rotation has generated conflicting viewpoints, it's generally accepted that the idea is impractical on a number of levels, so much so that when research found support of the idea, the authors reacted in disbelief. The opposition of auditor rotation has unified Francine McKenna and Big 4 CEOs. That should be enough to tell you that it's not a great idea.
But Doty's statement suggests that auditor rotation is still being kicked around and presumably, not even its universally accepted dreadfulness will stop it. Maybe a new member of Congress can earn their wings on this issue?
[via PCAOB]

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