Last month, Jay Hanson, a PCAOB (Public Company Accounting Oversight Board) member, stated at an AICPA Conference that implementation of a mandatory audit firm rotation was unlikely. In a written statement presented at a CPAB roundtable in Houston in October, Hanson said that one obstacle to implementing mandatory auditor rotation was the absence of research proving a clear correlation between audit quality and auditor tenure. A second… was a cost benefit analysis.
This is a topic that has been debated and hopefully will only remain as a debate (it would if I had my way.) I am not a proponent of audit firm rotation. I don’t see the benefit to the user of the financial statements. The current system is not broken. If auditing standards are properly followed, the system works fine.
Required firm rotation would be a costly proposition. From a time perspective, the business’ financial team would have to be taken away from their normal daily routine to interview prospective audit firms. They would then have to educate the new audit firm about their business and operations. From an actual dollars and cents prospective, audit fees would increase. Typically, audit firms will not charge for their initial “ramp up” time in learning the new client’s business, instead they write off this time as an expense of doing business and investing in a long-term relationship. Required rotation would cause firms not to write this time off and thus pass it along to the new client.
The chances that firm rotation would find the fraud is not increased by having a new firm perform the audit. In fact, if a study was done, I think you would find just the opposite. Anytime you learn something new there is always the chance of missing something until you become familiar with it.
The financial debacles are not an audit problem at all. If someone wants to commit a crime they will do it and the chances an audit will find it are slim. Unless I am testing 100% of all the transactions, there is a chance I will not select the one or two fraudulent transactions. Even the best controls can be circumvented and not be detected through an audit.
What we really have is the CPA being held out as a scape goat for all the financial debacles. We obviously need better lobbyists.