09 December 2011

FEE commented on the PCAOB Rulemaking Docket Matter No 37: Concept Release on Auditor Independence and Audit Firm Rotation

FEE provided its comments on the PCAOB Rulemaking Docket Matter No 37: Concept Release on Auditor Independence and Audit Firm Rotation. FEE has only responded to the questions in the PCAOB Concept Release that are relevant from a European or international perspective.

FEE´' detailed responses to the relevant questions can be summarised as follows:

1. FEE supports the aim of enhancing independence and objectivity of auditors as it strongly believes that the independence of auditors is fundamental to public confidence in audited financial information, thereby providing credibility and value to all stakeholders. In this context, there are legitimate concerns regarding independence and excessive client familiarity that mandatory audit firm rotation could attempt to address.
2. FEE is also of the opinion that professional scepticism could be enhanced even further to have audit quality at the highest level achievable. This could be sufficiently done by reassessing the requirements in the auditing standards as well as focusing on their application, including, for example, analysing the findings from PCAOB inspections as a first step. However, FEE believes that mandatory audit firm rotation would not be conducive to further enhancing professional scepticism. Indeed, inspections by audit oversight bodies have already contributed to enhanced professional scepticism. Further analysis should be carried out to substantiate the impact of this development with a specific focus on whether the duration of the engagement term has an impact on auditor independence and the application of professional scepticism.
3. With this in mind, mandatory audit firm rotation is not the most appropriate policy option to achieve such enhancements in practice. It may even have a potential adverse impact on audit quality.
4. The European Commission recently proposed the introduction of mandatory audit firm rotation as an instrument to reduce concentration in the top end of the audit market. Though this impact is not extensively debated in the PCAOB Concept Release, FEE believes that it would not reduce and potentially could result in an increasing concentration within the audit market, especially in segments of the market where high concentration is already observed.
5. Due to the evident extraterritorial consequences of such a requirement, or any other requirement with similar characteristics, it is essential to consider carefully the practical feasibility of such measures - if introduced in only one jurisdiction - for companies with global activities and their auditors. Therefore, in case any initiative were to be taken, FEE strongly encourages the PCAOB to coordinate any initiatives with its counterparts in Europe and in other parts of the world, such as in Asia, in order to achieve a coherent, practical and sustainable solution.

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