The Public Company Accounting Oversight Board is formally considering whether to force public companies to routinely replace the firms that audit their financial disclosures.
The PCAOB voted 5-0 on Tuesday to open a public comment period on the idea of establishing term limits for auditors. Proponents said such restrictions may eliminate inappropriate company influence on long-term auditors.
The $235.9 billion California Public Employees' Retirement System, Sacramento, and pension manager TIAA-CREF are among those that already use auditor rotations, according tTIAA-CREFtem, Sacramento, and pension manager TIAA-CREF are among those that already use auditor rotations, according to the PCAOB.
“The long association of the largest audit firms with their major audit clients is an issue that must be addressed in order to fulfill the mission of the PCAOB,” said Chairman James R. Doty before the vote. Mandatory rotation of auditors should be considered because of “the very size, complexity and systemic risk found in today's issuer population,” he said.
The board's “concept release” would limit the number of consecutive years that an auditor could work for a client. It would combat “the pressure auditors face to develop and protect long-term client relationships to the detriment of investors,” Mr. Doty said. The board said it's open to alternative ideas that would foster auditor independence.
Martin Baumann, PCAOB's chief auditor, pointed out that the board's research and analysis staff so far found “no correlation between audit failures and tenure.”
Of the so-called “Big Four” accounting firms, PricewaterhouseCoopers declined to commentDeloitte & Toucheote. DeErnst & Younghe, Ernst & Young and KPMG didn't comment individually, saying their response would come through the Center for Audit Quality, an industry group.
“As stressed by several board members, a cost-benefit analysis should be central to the project,” Cynthia Fornelli, CAQ executive director, said in a statement.