Other than being almost impossible to implement, audit firm rotation is a great idea

Jim Peterson points out several rather severe problems with mandatory firm rotation.

Mandatory Auditor Rotation – The PCAOB Sails Off the Charts into the waters where

the legend written on the old flat-earth maps – that beyond the horizons of ignorance, (says) “there be dragons.”

First, he points out that PCAOB doesn’t have authority to tell other countries what to do. So how does a Fortune 500 deal with the demand from PCAOB to rotate firms when the regulators in lots of other countries get irritated and respond in some unpleasant way?

As for auditor displacement at the parent level, there should be no reason to think that regulators of the securities markets and the accounting profession in those countries would tolerate, much less welcome, such an uninvited intrusion.

The practical problems are severe. For example, major concentration in large company capacity, which varies by country.

…in many major economies one firm has clear leadership in large-company audits – e.g., PwC in the UK, KPMG in Germany, E&Y inFrance, and Deloitte in Spain.

A result is significantly lop-sided distribution of technical and industry expertise and personnel even among the Big Four, constraining rotation choices because such talent shortfalls are not readily or quickly solvable.

Even in the U.S., the concentration of industries with certain firms makes rotation a serious problem. When I was at KPMG (then PMM, so you can gauge the timing of my experience), there was, so I was told, a major concentration of insurance companies in the PMM practice. If all of those clients have to go elsewhere in about 15 years, how will the other firms gain the high-level capacity to take on all those clients? And do so over the span of just a few years when all the rotation deadlines hit?  You have to have hard-core experience to take on those kind of huge jobs.  Hmmm. Maybe the other 3 could hire all the displaced partners and managers from KPMG.

Likewise with every other industry where there is a concentration in one firm.

Mr. Peterson doesn’t have space to get into the cost factors and learning curve (even assuming away the people capacity issue and the technical knowledge issue).

His rhetorical closing question:

…how does a large company rotate its auditors, if there is no place to turn?

Read the full article. It is great.