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February 6, 2023

PCAOB Is Giving You a Second Chance to Tell Them How Much You Love the Idea of Auditor Rotation

Yesterday, Monday Morning Auditor that everyone loves to hate, the PCAOB, announced that they would be having an open meeting on March 21-22 that will focus on auditor independence and rotation. Sorry! I meant auditor term limits. Anyway, there are going to be several big names on various panels including Paul Volcker, Harvey Pitt, Arthur Levitt, Stephen Chipman, Joe Echevarria, Steve Howe, Bob Moritz, John Veihmeyer, among others. It's open to the public and it just so happens that I'll be in the District, so maybe I'll drop by and try to get some autographs. 

What's amusing about all this, other than the fact that "term limits" is a nice euphemism for "rotation," is that the Board is also re-opening the comment period on its concept release until April 22nd. The Board appears to believe that by inviting more people to comment on the matter it will somehow result in a flood of positive letters to counter the 94% of letters already received that say auditor rotation is an awful idea. Remember Ernst & Young's concept release? Here's the first paragraph from the overview:

An overwhelming 94% of the roughly 600 letters the Public Company Accounting Oversight Board (PCAOB or Board) received on its concept release on possible ways to enhance auditor independence opposed mandatory audit firm rotation. It was the second-largest number of responses the Board has received on a rule-making project since it was created by the Sarbanes-Oxley Act of 2002. Only 6% of the respondents — mostly individuals who didn’t disclose an affiliation — favor mandatory audit firm rotation.
That seems pretty clear, doesn't it? But with this second comment period the Board seems like a parent encouraging their 5 year-old to eat their vegetables, saying, "Yep, it doesn't look so good and you may not like the taste now, but down the road you'll thank me." I've gone on the record in favor of rotation – term limits, musical chairs, whatever you want to call it – mostly because everyone is against the idea. I admit that's pretty superficial, but don't forget we're talking about an industry that is very resistant to change and typically sits around waiting for Armageddon before finally taking any kind of action to keep itself in line. 
Putting mischevious spite aside, there are very smart people out there (including Big 4 critics) who are firmly against rotation, so the merits of auditor term limits as policy are definitely debatable, but the Board seems convinced this is the right path. And it appears they'll drag the whole industry kicking and screaming down that path if they have to.

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