State Board Report

July 2012

The Public Company Accounting Oversight Board's concept release considering mandatory audit firm rotation was the topic of panel sessions at the Eastern and Western Regional Meetings. "At the heart of the PCAOB's discussions is trying to raise audit quality – but at what cost?" asked Vice Chair Gaylen Hansen (CO). While the GAO examined the issue in 2003, at that time the impact of the newly formed Public Company Accounting Oversight Board was not known. The time for re-examination of the issue has now come as the Europeans are considering their Green Paper's recommendation as to how long a firm can remain the auditor of record.

"There is no burning bed we are facing at the moment," NASBA Past Chair Billy Atkinson (TX) observed. "There seems no reason for the PCAOB to act without some research." He referred to NASBA's December 14, 2011 comment letter to the PCAOB that stated: "To justify mandatory rotation of audit firms, it is necessary to establish that there is a strong correlation between length of service and loss of professional skepticism, objectivity and independence." Mr. Atkinson said, "Auditor firm rotation is a process that is supposed to solve a fundamental problem that we do not see now….The issue we need to work on is building an interactive relationship between the auditor and the audit committee. We don't have a way to say why we are resigning. What we have is all boilerplate."

"I don't agree with Billy," Mr. Hansen said. "MF Global went down: Where was the skepticism or objectivity? What is the root cause? Why are these things happening?" Mr Hansen does not think the PCAOB will require firm rotation because it has shifted focus. However, he pointed out, in the European Union, joint audits and audit-only firms are being talked about now, as are more restrictions on non-audit services and placing more emphasis on the composition of the audit committees, including having an audit expert on those committees.

"This is seen as a global issue," NASBA Pacific Regional Director Ray Johnson (OR) stated. Having just returned from teaching in Australia, Dr. Johnson reported: "In Australia, they felt the proposals failed to address the underlying firm culture. When people come into your firm, do you know how to balance client, firm and public interest? I don't think we uniformly believe that the public must come first."

The PCAOB's initial two-day roundtable was very contentious, observed Richard G. David (MI) at the Eastern panel. The number of restatements is dropping, but the "PCAOB is saying the auditors aren't doing it right," he said. "Sometimes the PCAOB is looking for something to hunt that is not there."

Also speaking at the Eastern Regional Meeting's panel, Ray Stephens (OH) said: "I think there are alternatives that exist that could increase skepticism, such as increasing the responsibility of the audit committee, or requiring an automatic change of auditor if a restatement is required – rather than going to mandatory rotation." Dr. Stephens warned: "Some legislator is going to say that whatever the PCAOB does, it is appropriate for us at the state level."

Mr. Hansen noted that Arthur Levitt had commented that rotation just feels right and that long client/auditor relationships do not. Mr. Atkinson stressed there are alternatives to be considered, such as better promotion of the PCAOB's firm inspection reports to the audit committee, increasing disclosures by companies when they change auditors to say why, or involving the audit committee more in the selection of the key audit team.

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