An effort made by the Public Company Accounting Oversight Board (PCAOB) to require companies to rotate their auditors is receiving an overall negative response from the community it would affect.
In February of this year, the Competition Commission expressed their idea of limiting the time an external audit firm can work for a company to seven, ten, or fourteen years. Their reasoning is that this will help avoid audit firms and banks from becoming too close and help prevent potential collusion on fraud. They believe it would also allow for more competition in a market dominated by PwC, Deloitte, KPMG, and Ernst & Young.
In particular, UK companies are hostile to the idea of mandatory rotation. Llyod’s TSB, which is currently audited by PwC, claims the regulation would be “counter-productive.” Many also believe the room for competition would still be slim, as the Big Four audit firms would just be handing contracts back and forth. They believe a more practical approach would be to re-tender their audit contract at least once a decade.
We at Vibato believe that the audit firm rotation is generally, a good idea. Granted, a new perspective from an entirely new firm and audit team can be a painful, expensive experience but in keeping with the idea that the audit team is there to be the eyes and ears of the shareholder, it could be good to change things up. It is easy to make concessions for people you know and loose the professional skepticism that is required to perform a quality audit. It is also easy for auditors to make concessions to keep a client long-term, which makes the privatization of the external audit role a conflict of interest (in our opinion) and not necessarily in the best interest of the shareholders.
We will be curious to see if the people most against this change wind up having the most restatements – should be interesting. We’ll keep you posted.