Musical chairs anyone? PCAOB considers mandatory audit firm rotation

The idea that mandating public companies to regularly change their external auditor will ensure greater auditor independence and skepticism has been discussed over the years in a variety of contexts.

Hi, I’m Eric Turner, National Practice Area Leader for Audit and Assurance at the CICA.   As policy makers in Europe and the United States turn the spotlight on audit quality in the wake of the global financial crisis, a question I often hear is:  What happens when Canada is placed under the heat of those lights?

Close to home, the U.S. Public Company Accounting Oversight Board (PCAOB) issued a concept release last year on ways that auditor independence, objectivity and professional skepticism could be enhanced. The proposals included mandatory audit firm rotation, a solution that is also being proposed in the European Union (EU). Unlike Canada, many large financial companies in both jurisdictions experienced financial difficulties resulting in failure or the need for government support in the aftermath of the 2008 financial crisis. 

The idea that mandating public companies to regularly change their external auditor will ensure greater auditor independence and skepticism has been discussed over the years in a variety of contexts. Up till now, firm rotation has been rejected because there has not been compelling evidence that it will improve audit quality.

Instead, many countries, including Canada, have adopted requirements for the regular rotation of the audit partner as a way of addressing potential independence concerns.  At the same time, instances have been noted where a company has appointed the same audit firm for decades, which some commentators believe is incompatible with desirable standards of independence.

Given the importance of this issue for Canadian companies and their auditors, it is critical that we understand the developments in the U.S. and Europe and consider our own perspective on the issue as Canadians.

Is there any truth to the premise that the financial crisis was caused solely or in part by a lack of auditor independence? If so, is mandatory firm rotation a useful response or does it carry risks that outweigh potential benefits?  Are there other approaches that would be more effective and, if yes, what are they?  Are the solutions adopted in the U.S. and EU necessarily right for Canada? How will these changes impact large, medium and small audit firms, audit committees and management?

Several of these important questions are addressed in CICA’s response to the PCAOB concept release

Keep the conversation going…what are your thoughts on the question of audit firm rotation?  Do you agree with CICA’s position or are PCAOB and the European Commission on the right track?Email me

I look forward to hearing from you and to continuing the discussion as PCAOB considers its next steps during the second quarter of 2012.

Eric

Conversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.


This was originally published by one of CPA Canada’s legacy bodies.

About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada