This article was first published in the July/August International edition of Accounting and Business magazine.
For many years, auditor rotation has been a key topic in the debate about how to improve auditor independence. Since 2008, however, it reached new heights, culminating in 2011 with the EU’s financial services chief, Michel Barnier, proposing that in Europe, banks, insurers and listed companies change their auditors every six to 12 years, and stop providing extra consulting work to their clients.
In April, the European Parliament’s legal affairs committee essentially threw the baby out with the bath water by changing the proposed term, from six to 14 years, to up to 25 years, which is very close to the typical audit-engagement status quo, and mixed the proposed moratorium on consulting services altogether.
In the US, things have taken an even more interesting turn. I have previously noted the overwhelming opposition to auditor rotation on the part of the corporate community, as well as US accounting firms.
As of the closing of the Public Companies Accounting Oversight Board’s comment period on the topic on 15 December 2012, that sentiment hadn’t changed; in fact, US lawmakers are now attempting to ensure the auditor-rotation topic never raises its unpopular head again… ever.
On 17 April, US Republican representative Robert Hurt and co-sponsored by Democratic Congressman Gregory Meeks introduced a bi-partisan bill (ie, the Audit Integrity and Job Protection Act), which would prohibit the PCAOB from requiring public companies to use specific auditors or require the use of different auditors on a rotating basis.
While the bill clearly supports the corporate sentiment against auditor rotation, the underlying rationale is more than curious. In a recent press release, Meeks suggests that denying the PCAOB the right to implement constraints on the length of audit engagements will remove the threat of more compliance costs to start-ups, thereby ‘getting our communities back to work’, as well as ‘take one step toward removing the federal government as a barrier to job creation’. Hmmm… anyone see any red herrings, here?
Can anyone explain how reducing audit-engagement length on large public companies will erase compliance costs on start-ups? I would also like to be able to trace the logic trail between the authority of the PCAOB and grass-roots job creation. As an economist, I’m trained in theoretical gymnastics, but this one has me stumped. Let’s see, reducing audit terms to once every 12 years or so leads to higher audit fees, thereby lowering profits to clients, leading to a lower return on investment to shareholders, leading to higher costs of capital generally and thus fewer start-ups… and hence reduces jobs in America?
Also, I had hoped that US regulators, if they wanted to become involved in this debate, would call a spade a spade. To wit, neither the corporate sector nor the audit community sees any relationship between reducing audit tenure and improving auditor independence, and, by extension, raising investor security.
As to when and if this bill will get a second reading, stay tuned. It’s ironic that the argument for less government intervention in the US had to be made by even more of the same in private-sector business.
Ramona Dzinkowski is an economist and business journalist