02 February 2012

GO USA: Comment letter on the PCAOB concept release on “Auditor independence and audit firm rotation”

As an investor and advocate of good corporate governance, GO USA supports the policy of auditor rotation. If the PCAOB does not wish to move to such a policy at the present time however, it should at least consider a policy of auditor retendering – that is, periodically seeking bids from other audit firms that meet the audit committee’s eligibility standards. Investors are quite concerned about the independence of audit firms. The tender/bid process and periodic firm rotation will improve auditor independence. As long as company management pays the audit fee directly to the audit firm, there will always be concern about the independence of the auditor. GO USA acknowledges that many companies have strong audit committees that provide the appropriate level of independence that should satisfy investors. Nevertheless, it would be mistaken to assume that all companies have such strong audit committees and many investors do not accept that broad assumption. Under current disclosure rules, it is extremely difficult for investors to determine which companies have the proper level of independence. Thus, the PCAOB should consider ways in which investors can be assured that the audit is performed with the utmost of independence, including the current tenure practices of company/auditor relationships.

How often should the audit firm be considered for change to achieve the goal of increased independence? There is no magic number, but some number around 10 is probably workable, and certainly less than 20 years. GO USA suggests consideration of compulsory retendering every 5 – 10 years with a rebuttable presumption of change every 10 – 20 years. If there were no change, better disclosure of the audit committee decision should be required.

There are clams that the quality of audits will suffer because of firm rotation. GO USA sees no evidence of that. GO USA has confidence that a transition to a new firm can be worked out in a professional manner that would not decrease audit quality. The PCAOB staff has more intimate knowledge of audit quality and can address any potential concern in its rulemaking. Anecdotally, investors were unaware of significant audit quality declines with the "forced rotation" of all Arthur Andersen firm clients.

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