The Public Company Accounting Oversight Board (PCAOB) published a concept release that asks for public input on how to get auditors to become more independent, more objective, and more skeptical – and especially whether a mandatory rotation system for audit firms would achieve that objective. While mandatory rotation has been considered and dismissed in the past, PCAOB Chairman James Doty wants to take a fresh look at the idea to see if it might reduce the pressure on auditors to put concerns about the client relationship ahead of sound audit judgment.
Proponents of mandatory rotation believe it could free the auditor from client pressure and enable them to look at the financial statements more objectively. Opponents raise concerns about the cost and complexity of changing auditors, especially in the early years of new engagements as auditors learn a company’s business and its risks. The concept release outlines a number of questions for discussion, such as whether the concept of rotation should be confined to only the largest firms, or only those that have been entrenched for a decade or more on a specific engagement. It also invites other ideas on how to develop greater independence, objectivity and skepticism if not through rotation. The concept release is open for comment through Dec. 14, with a public roundtable to be held in March. (PCAOB Opens Debate on Term Limits for Audit Firms – Compliance Week)
I view this as a real opportunity. Although I agree that auditor rotation would be better than what we have now, even better would be an approach suggested by Mark Latham, the founder of VoterMedia.org. Let shareowners choose the auditor by vote. See section 5 of Latham’s article “Proxy Voting Brand Competition” in the Journal of Investment Management, January 2007.
Latham proposes shareowners should at least be permitted to vote on a company-by-company basis through private. Unfortunately, the SEC has allowed management to exclude such proxy proposals, buying the argument that auditor selection is an “ordinary business” matter. I don’t know how anyone can agree with that after the collapse of Enron after a relatively clean bill of health from their auditor.
The following two examples are illustrative of Latham’s proposals and the SEC’s response:
- Shareowner proposal submitted to SONICblue on November 24, 2000 and the SEC’s No-Action Letter.
- Shareowner proposal submitted to Fleetwood Enterprises on January 25, 2002 at http://www.votermedia.org/proposals/20020125-FLE-AuditorInd.html and the SEC’s No-Action Letter.
Please e-mail PCAOB at email@example.com. Include “Docket 037: Concept Release on Auditor Independence and Audit Firm Rotation” in the subject line. All comments will be posted to the PCAOB site. Further instructions on providing comments. Instead of requiring auditor rotation, ask PCAOB to work with the SEC, giving shareowners the power to change practices at our own companies. Get the SEC to ensure they will stop issuing no-action letters on proxy proposals seeking to facilitate shareowner input into the auditor selection process. Untie our hands and let shareowners hold directors and CEOs accountable! We can do it, if shareowners can choose the auditors.