State Board Report

September 2011

Should there be a limit on the number of years a public company can use the same auditor? That is one of the basic questions raised by the Concept Release on Auditor Independence and Audit Firm Rotation (PCAOB Release No. 2011-006) issued by the Public Company Accounting Oversight Board on August 16, with comments due December 14. PCAOB Chairman James R. Doty explained, “One cannot talk about audit quality without discussing independence, skepticism and objectivity. Any serious discussion of these qualities must take into account the fundamental conflict of the audit client paying the auditor.” Audit firm term limits may “reduce the pressure auditors face to develop and protect long-term client relationships to the detriment of investors and our capital markets.” Chairman Doty will be the keynote speaker at NASBA’s Annual Meeting, October 24-26 in Nashville (see here).

When the concept release was presented at the PCAOB’s August 16 meeting, all the members voted for its exposure for a 120-day period. However, several pointed out that audit firm rotation has been considered since the 1970s and it might not be the most efficient way to enhance audit quality. PCAOB Member Daniel Goelzer said he supported the concept release because he hopes it will trigger wide-ranging discussion of auditor independence, skepticism and objectivity. He recalled that the GAO’s 2002 report did not recommend audit firm rotation, “but now with almost eight years and 1700 inspections” it makes sense to revisit what may enhance auditor independence. He believes analytical work needs to be done on the connection of auditor tenure and audit deficiencies. Also cost/benefit analyses of auditor changes need to be performed. PCAOB Member Steven B. Harris also agreed that the time had come to re-examine this proposal.

The need to carefully consider if the benefits outweigh the costs was stressed by PCAOB Member Jay D. Hanson. “I see this release as a vehicle to gather information and spark discussion, rather than a particular measure that the Board will take,” he said. It will be interesting to see if the audit committees are viewed as living up to investor expectations, Mr. Hanson reflected.

Beyond the comment period, in March 2012, there will be a PCAOB roundtable to discuss auditor independence and mandatory audit firm rotation. NASBA’s Regulatory Response Committee is studying this document, as well as the Concept Release on Possible Revisions to PCAOB Standards Related to Reports on Audited Financial Statements (PCAOB Release No. 2011-003), which has a comment deadline of September 30, 2011. Committee Chair Richard Isserman (NY) said the Committee will be developing comments on each of these documents. The Concept Releases can be found on

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