By GUNDI JEFFREY
A
fter endless debate and
comments on the U.S.
Public Company
Accounting Oversight Board’s con-
cept release on auditor rotation —
with most interested parties totally
opposed — a member of the House
of Representatives has stepped into
the fray to propose a legislative
amendment that would put an end
to the idea once and for all.
Republican Rep. Mike Fitzpat-
rick’s proposed amendment to the
Sarbanes-Oxley Act of 2002,
“would prohibit the PCAOB from
requiring public companies to use
specific auditors or require the use
of different auditors on a rotating
basis.” The March 21 amendment
came during the PCAOB’s two-
day roundtable on auditor rotation.
The House financial services
committee then scheduled a
hearing on the proposal for March
28, calling on standard setters and
other interested parties to debate
the issue — again.
The PCAOB aired its concept
release issued last August to invite

discussion on how to enhance
auditor independence, objectivity
and professional skepticism. The
release primarily focused on man-
datory audit firm rotation and
audit term limits of no more than
10 years as a way to achieve those
objectives.
“Independence, objectivity, and
professional skepticism form the
foundation for investor confi-
dence in the integrity of the audit,
and our inspections have made
clear that improvement is needed
in these areas,” said PCAOB
chairman James Doty in February,
when he announced the March
21-22 roundtable on mandatory
audit firm rotation.
The concept release drew more
than 600 comments — with 94 per
cent strongly opposed to the
notion — and Doty wanted to
“further explore these issues.”
Forty-seven regulators, investors,
corporate officials, heads of audit
committees, academics and
leaders of the audit profession
came to offer their views.
Regulators were divided on the

need for mandatory audit firm
rotation. One of the first speakers,
former Federal Reserve chairman
Paul Volcker, supported the idea,
saying it would “provide a
powerful incentive to maintain
professional discipline.”
It seemed to him that “regular
audits should not become a long-
term annuity for the accounting
firm paid for by the company
being audited, rather than being
responsive … to the investing
public.”
Former U.S. comptroller
Charles Bowsher agreed. “There’s
an inherent conflict of interest
when big corporate clients pay the
fees of their auditors.” But Bow-
sher wants the measure introduced
for only the biggest 25 to 40 com-
panies in the country, such as GE
or GM and all the major financial
institutions, as well as companies
with significant accounting and
auditing problems.
Former SEC chairman Richard
Breeden was more worried about
auditor concentration, which he
said “limits practical choices.”

Large companies may be reluc-
tant to have the same audit firm as
their principal competitors,
Breeden suggested.
“There may be many reasons,
including lack of industry depth or
geographic presence, that make
one or more of the non-incumbent
firms unattractive as a business
matter. Therefore, for many large
companies, there may at worst be
no viable alternative to the incum-
bent auditor and, at most, only one
or two viable alternatives The
benefits of rotation in enhancing
objectivity may well be offset by
increased conflicts, loss of a non-
audit service provider or other
adverse impacts.”
Another former SEC chair,
Arthur Levitt, was also in favour
of rotation. “Investors deserve the
perspectives of different profes-
sionals every so often, especially
when an auditor’s independence
can reasonably be called into
question.”
But Harvey Pitt, yet another
former SEC chairman, was decid-
edly anti-rotation. “I believe this

board should be reluctant simply
to command that, after the passage
of a specified number of years —
irrespective of the particular
number of years chosen — all
companies must replace their cur-
rent outside audit firm, no matter
how well, capably and independ-
ently those auditors have per-
formed.”
Pitt recommended that
independent audit committees be
required to consider (and docu-
ment their consideration) whether
the performance of their auditors
over a prescribed period of time
— say five years — warrants their
reappointment or another firm
should get the job.
Most corporate panelists were
also anti-rotation.
Steven Buller, managing dir-
ector of BlackRock Inc., voiced
concern about restrictions in a
company’s ability to select the
most qualified audit firm, the loss
of institutional knowledge and the
reduced incentive for audit firms
to invest in the audit relationship
when their time horizon is short.

Because BlackRock sponsors a
variety of investment funds, “man-
datory rotation would be a logis-
tical challenge given our monthly
fund year-end cycles and the need
to co-ordinate auditor selection
with over a dozen corporate and
fund boards of directors that must
select auditors.”
Theodore Bunting, senior vice-
president and chief accounting
officer of Entergy Corp., believes
that “a mandatory audit firm rota-
tion diminishes audit quality and
becomes an unnecessary distrac-
tion to the company, which, in
turn, creates more financial state-
ment risk.”
Academics had decidedly split
opinions.
Max Bazerman, a professor at
the Harvard School of Business,
wants auditors to be hired under
fixed contracts stipulating rotation
of both individual auditors and the
auditing firm. “During that con-
tracted period, the client should
not be able to fire the audit firm.”
On the other hand, Greg Jen-
kins, an accounting professor at

the Virginia Polytechnic Institute,
cited research showing that
KPMG audits the greatest number
of companies in the financial
industry, while PwC audits the lar-
gest proportion of the industry
based on market capitalization.
Ernst & Young audits 40 per cent
of the companies in the pharma-
ceutical industry, yet
PwC audits almost 50 per cent
of the industry based on market
capitalization. Other industries,
such as retail and utilities, are
mostly audited by Ernst & Young
and Deloitte, both in terms of the
number of clients and the relative
market capitalization.
“Mandatory firm rotation may
have significant unintended nega-
tive consequences for companies
that require specialist auditors if
they are required to retain an audit
firm that possesses less industry
specialization than their former
firm.”
Not surprisingly, audit firms
are not enthusiastic about rotation.
Stephen Howe, Jr., managing
partner of Ernst & Young believes

“audit quality has improved in
recent years, and the board and
profession should seek to build on
this foundation rather than strike
out in a new and, we believe, dam-
aging direction that poses risk not
only to audit quality but to our
capital markets as well.”
Joe Echevarria, CEO of
Deloitte, would prefer to see work
on reinforcing the audit commit-
tee’s responsibility for overseeing
the audit firm, expanding com-
munications between audit firms
and audit committees, enhancing
the expertise of audit committees
and creating audit quality councils
to advise audit firms.
“One of the ironies of this pro-
fession is that the public rarely
hears or sees anything when an
audit is done well,” said PwC
chairman and senior partner
Robert Moritz. “A lot of good
work is done behind the scenes.
Our auditors make the tough calls,
and 92 per cent of our audit firm
staff reported that in the last two
years they had a difficult conver-
sation with a client about an audit

firm judgment or suggested an
improvement.”
And KPMG LLP’s chair and
CEO John Veihmeyer said “we
don’t find a nexus between audit
tenure and insufficient scepticism,
and we see significant disadvan-
tages to term limits, including dif-
ficulty in attracting and retaining
talented people. My view is that a
‘sales culture’ that some contend
is increasing in accounting firms,
is far more likely to exist in a
system of mandatory firm rotation
— where every year a significant
percentage of a firm’s audit
engagements will be lost and will
have to be replaced.”
Robert Pozen, also from the
Harvard Business School, wants
the PCAOB to adopt a middle
ground — requiring the audit
committees of public companies
to periodically issue a request for
proposal for auditing services, but
allowing the existing auditor to
bid on this RFP. “In my view, this
approach would reinforce the
accountability of the external aud-
itor to the audit committee, rather

than management, without
imposing some of the costs asso-
ciated with mandatory auditor
rotation.”
Larry Harrington, chairman of
the Institute of Internal Auditors,
cited a survey showing that the
majority of internal auditors
Auditor rotation idea on thin ice
4
The Bottom Line May 2012
NEWS
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Regional Correspondents
Geoff Kirbyson (Western Canada); Jeff Buckstein (Ottawa); Luis Millan (Quebec);
donalee Moulton (Halifax); Special Correspondent: Gundi Jeffrey
“The benefits of rotation in enhancing objectivity may well
be offset by increased conflicts, loss of a non-audit service
provider or other adverse impacts.”
Richard Breeden, former SEC chairman
BReeden
See Chamber on page 26
26
The Bottom Line May 2012
NEWS
whose companies experienced a
change in auditors did not per-
ceive the independence, objec-
tivity and professional skepticism
of the new auditing firm as mark-
edly different from that of the
prior firm. “The potential benefit
in this area may already have been
realized through existing require-
ments for rotation of lead and
reviewing audit partners.”
But the strongest objection

came from David Hirschman,
senior vice president, U.S.
Chamber of Commerce. Noting
that more than 90 per cent of
commenters to the concept
release opposed mandatory firm
rotation and that the majority of
investors were also against it, he
said “the failure to demonstrate a
need for mandatory firm rotation
and a universal rejection of the
concept by investors, business
and governmental actors leads us
to question why valuable
resources, time and monies are
being spent on this project.”
A week after the panelists at
the PCAOB roundtable stopped
slugging it out, many of the same
views were aired at the hearing
by the House financial services
committee on the proposed legis-
lative amendment blocking the
PCAOB from mandating auditor
rotation.
At that hearing, Doty pointed
out that the board had not yet
mandated mandatory audit firm
rotation — or even proposed it —
but was simply looking for a

wide-ranging discussion of the
idea. “If this process results in
the PCAOB proposing any rules
— whether they involve term
limits or not — they will be sub-
ject to further public comment
and SEC approval.”
Should the PCAOB proposal
be adopted, said Barry Melancon,
CEO of the American Institute of
Certified Public Accountants, it
would be “a very clear example
of unbalanced regulation. It
would impose significant strains
on the audit profession and the
public company business com-
munity with no evidence that the
Sarbanes-Oxley formula, which
assigned authority to hire and fire
the auditor to the independent
audit committee, is not working
in a way that protects the public
interest.”
Joseph Carcello, director of
research of the Corporate Gov-
ernance Center, University of
Tennessee, focused on the Fitzpa-
trick amendment, saying it is
“potentially flawed” because it
would prohibit the PCAOB from

requiring public companies to use
specific auditors. “PCAOB Aud-
iting Standard No. 5 already
requires an issuer to use the same
auditor to audit the financial
statements and internal control
over financial reporting. This
requirement in AS5 could be
interpreted as the board requiring
an issuer to use a specific auditor.
Eliminating this AS5 requirement
would likely make audits more
expensive and less effective.”
Speaking on behalf of the
Financial Executives Institute,
Gary Kabureck, a vice-president
with Xerox Corp., pointed out
that the process for selecting and
transitioning in a new auditor
“will be extremely costly for both
the company and the new auditor.
Company time and money are
finite — every hour and dollar
spent on changing auditors is not
available for other uses in the
business or return to investors.”
Tom Quaadman, vice-
president, Center for Capital Mar-
kets Competitiveness, U.S.
Chamber of Commerce, added

that “the concept releases on
mandatory audit firm rotation and
auditor discussion and analysis
have the chamber concerned that
the PCAOB is engaged in mission
creep. It is leaving the realm of
audit regulation and crossing the
threshold of regulating corporate
governance, a subject area that
has been left to state corporate
law and the Securities Exchange
Commission.”
So, where does this issue go
from here? Bruce Pounder, dir-
ector of Professional Programs,
Loscalzo Associates, Ltd.,
believes the legislative amend-
ment will never see the light of
day. “This is only the first stage of
the federal legislative process. In
my opinion, what lies ahead for
this draft bill is a long and circu-
itous political process, with little
likelihood that the process will
ever actually result in a change in
federal law.”
Chamber frets over ‘mission creep’
“One of the ironies of this profession
is that the public rarely hears or sees
anything when an audit is done well.”

Robert Moritz, PwC LLP chairman
Continued from page 4
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