PCAOB Considers New Auditor's Report, Mandatory Audit Firm Rotation

Posted by Nancy Johnson on August 26, 2011

The Public Company Accounting Oversight Board (PCAOB) is considering making significant changes in two key areas of public company audits.

  • Adding a new section - tentatively called the "Auditor's Discussion and Analysis" or AD&A -  to the Auditor's Report
  • Mandatory Audit Firm Rotation - Public companies would be required to switch audit firms on an as-yet-undefined interval, such as every ten years.

The PCAOB is exploring these options in its effort to improve audit quality and the usefulness of financial reporting and audit-related information available to investors. 

The "Auditor's Discussion & Analysis" section would be an auditor's report on any difficult or contentionous issues discussed with a public company's management during an audit, including those issues resolved to the auditor's satisfaction. This information could have value to investors who want more insight into the factors going into an auditor's unqualified judgement of that company.

The mandatory audit rotation proposal aims to disrupt what some feel are cozy relationships between audit firms and their public company clients. Proponents of the idea claim that switching audit firms on some regular interval - every ten years is what has been suggested - will help reduce the pressure on audit firms (and individual auditors) to maintain the client relationship at the cost of accuracy and financial integrity. Opponents of the idea assert that it will decrease audit quality and result in increased audit fees. Others feel that mandatory audit firm rotation is not worth pursuing because it does not solve the inherent conflict in having auditors paid by their clients. 

Investors, auditors, public company executives and board members, and citizens interested in financial reporting should take the time to educate themselves about these issues. Reviewing information culled from a wide range of sources -- such as industry associations, the PCAOB (AD&A Proposal and Audit Firm Rotation), and audit-industry critics like Francine McKenna -- should help to raise your awareness about the issues and formulate your own opinion. Just be sure to share that opinion with the PCAOB during the public comment period for each issue: September 30, 2011, for the AD&A proposal and December 14, 2011, for the mandatory audit firm rotation proposal.






Tags: PCAOB News & Information