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PCAOB hints at mandatory audit firm rotation – Are they dropping a hint to the audit profession?

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The chairman of the PCAOB, James Doty, gave a speech this week that got some attention. He pointed out that the PCAOB had found “hundreds” of audit failures amongst the 2,800 reviews the agency has conducted. Not a particularly encouraging passing rate for the big firms that work on publicly traded clients (or the mighty bold smaller ones that want to run in that world).

He suggested that auditors aren’t taking independence quite seriously enough. Mandatory firm rotation is one of several ideas he is mulling in public.

What kind of problem is the PCAOB seeing that generates these ideas?

Going Concern calls attention to one comment in their article, PCAOB Chairman James Doty Is Concerned That Some Auditors Either Don’t Care or Are Completely Ignorant About the Notion of Independence:

From the speech, found here:

Another audit partner’s self-assessment claimed that he “overcame long-standing barriers against non-audit services at [two audit clients] with a series of well-planned meetings and supporting presentations with the Audit Committee Chair, the full Audit Committee, the CEO and the CFO at both companies.”

In response, his reviewing partner noted that he was —

highly alert to cross service line opportunities and has successfully penetrated both of his accounts where few services had been provided in the past. The results of these efforts were a number of proposals and wins but the efforts will likely impact FY 11 in [a] more significant way.

Patting yourself on the back for that? In an annual review?  Um. Yeah. Maybe that’s a problem for the PCAOB.

Any changes for the firms working in the PCAOB world are a long way off. Changes for the rest of us would be further in the future. When I read the article in the WSJ, my first thought was this is a warning to all firms, not just the big guys, but little firms as well.  I think we all need to maintain attentiveness to independence and keeping lots of skeptical professional judgment in play.

John Hufnagle has a great comment on this being a warning, especially for the trickle-down effect, in his article, PCAOB Warns Profession:

It seems to me that this could be the PCAOB’s “fair warning” to the profession, and that some of Chairman Doty’s musings could very well be implemented. While not having a direct impact on GAAS for non-issuers, recent experience informs us that when the PCAOB jumps, the AICPA begins to flex its knees.

All the articles I’ve linked above would be worth your read.  Other discussions:

Written by Jim Ulvog

June 4, 2011, 10:04 am at 10:04 am

Posted in Audits

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