Company auditors need term limits likely: US watchdog

NEW YORK: Accounting firms are doing a less-than-adequate job auditing corporations, and term limits should be considered to ensure more independence, the head of the main US audit industry watchdog group said on Tuesday.

"The very size, complexity and systemic risk found in today's issuer population supports the need for reconsideration of audit firm rotation," James Doty, chairman of the Public Company Accounting Oversight Board, said at a meeting of the board.

The PCAOB, which inspects audit firms across the United States, has found hundreds of audit failures and "it's hard not to question" whether lack of a properly sceptical attitude among auditors contributed to the problems, Doty said.

The PCAOB is considering whether to limit the number of years an audit firm can work for the same client an action that could break up some business relationships more than a century old. About 175 companies in the S&P 500 index have had the same auditor for 25 years or more, according to data from Audit Analytics.

Many large companies that failed or required government support during the 2008 credit crisis, including Lehman Brothers, AIG and Merrill Lynch, had long-running relationships with their auditors, a PCAOB subcommittee reported in March.

Auditor rotation could mean the loss of some of the highest-fee clients for the Big Four auditors Deloitte, Ernst & Young, KPMG and PwC which check the books of most public companies.

Some PCAOB board members questioned how effective auditor rotation would be and whether the mandatory switch every so many years would justify the disruptions and costs of auditor changes.

"I have serious doubts that mandatory rotation is a practical or cost-effective way of strengthening independence," board member Daniel Goelzer said.

Firm rotation would not be cheap, Goelzer said, citing a 2003 US General Accounting Office survey of auditors, who estimated that getting up to speed on new clients could increase first-year audit costs by 20 percent.

Goelzer said the PCAOB should consider new ways to promote auditor independence.

"An auditor-client relationship that spans decades might lead to a sense of partnership or mutual interest between the auditor and the client," he said.

The board voted to seek public comment through Dec. 14 on a "concept release," or initial report on auditor rotation and other ways of assuring auditor independence. A concept release is the first step in drafting changes in auditor standards.

Considered as early as the 1970s, auditor rotation has drawn strong opposition from auditors, who say it would be disruptive because of the time needed to become familiar with new clients. The 2002 Sarbanes-Oxley act, which created the PCAOB, mandated that lead audit partners be switched after five years but put no term limits on the audit firms. For details click on

Doty pledged the PCAOB would take care to "first do no harm," but added, "If not mandatory rotation, then what?"

AUDITOR INDEPENDENCE A GLOBAL ISSUE

One alternative might be to selectively require rotation when audit failures occur and long auditor tenures seem to have played a role, Goelzer said.

If auditors knew they might lose a client when they were not skeptical enough, "we might stimulate a change in mental attitude" without imposing auditor rotation across the board, he said.

Though there may be a learning curve when a new auditor starts a job, Doty said companies have changed auditors in large numbers in the past.

Between 2003 and 2006, more than 6,500 public companies, or nearly 52 percent of public companies, changed auditors, Doty said, citing data from research firm Glass Lewis.

"The learning curve and cost-based issues involved in changing audit firms cannot be fairly described as uncharted waters," he said.

One way of easing the transition might be to require more communication between incoming and outgoing audit firms, PCAOB staff members said.

Copyright Reuters, 2011