A new team of audit regulators is starting to think about whether companies should be required to rotate audit firms.

In eight years of inspecting more than 2,800 engagements of the largest audit firms, the Public Company Accounting Oversight Board has uncovered “hundreds” of audit failures, said James Doty, chairman of the Public Company Accounting Oversight Board since January, in an accounting conference speech. Addressing audit quality through inspection and enforcement may not be enough, he said. “The board is prepared to consider all possible methods of addressing the problem of audit quality,” including mandatory audit firm rotation, he said.

Doty is disturbed that auditors just aren't skeptical enough because they view the companies they audit as their clients. He recounted examples found in partner evaluation and compensation documentation of “seemingly unrestrained enthusiasm” for selling services to audit clients. “The examples are galling in their simplicity,” he said. “Auditors must approach their jobs with independence and skepticism. They cannot allow themselves to be caught up in their audit clients' business goals.”

Existing auditor independence rules haven't done enough, said Doty. Auditors are paid by the companies whose financial statements they police, and if they want to advance in their careers they must keep the client happy and grow the business, he said. It may be time to revisit the term limits that Congress considered and dismissed in 2002 when it wrote the Sarbanes-Oxley Act, he said.

“I don't have a predetermined idea as to whether the PCAOB ultimately should adopt term limits,” he said. But the PCAOB should dig deeper into how to “insulate auditors from client pressure and shift their mindset to protecting the investing public.” The board is preparing a concept release to explore audit firm rotation and other ideas that would achieve this objective, Doty said.

The PCAOB has already taken up an analysis of whether the auditor's report should be altered to give investors more information about what auditors do and what they find in the course of their work. A concept release describing that analysis and seeking feedback is due in June, Doty said. A second concept release on possible audit firm rotation or other ideas on improving independence would be published in tandem, he said, so they can be considered holistically.

In addition, Doty promised companies and auditors will soon get an earful on how to help audit committees better understand the implications of the PCAOB's inspection process. The specific findings are not disclosed to audit committees, so the PCAOB can't tell audit committees where their auditors have failed them and where they may even have serious problems in their financial statements.

Doty is disturbed by how auditors typically characterize such PCAOB findings to their clients. “We hear that auditors are often less than forthcoming with audit committees that try to elicit information about inspection results,” Doty said. The PCAOB can't share inspection results or force auditors to disclose inspection information to audit committees. “But we can and should help audit committees be better informed about our processes and better equipped to engage with their auditors about inspections without settling for responses that distort the significance of inspection results.”

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