On August 16, 2011, the PCAOB issued a concept release seeking comments on ways that auditor independence, objectivity, and professional skepticism could be enhanced.  While the PCAOB seeks advice on any approach, the concept is focused on mandatory audit firm rotation.  Consequently, the release could lead to companies having to change their auditors every few years. 

The ill advised concept of mandatory audit firm rotation has been considered since at least the late 1970s.  While this is merely a concept release, this release should concern public companies as this is a “one size fits all” approach that doesn’t appropriately weigh the costs and benefits.  In fact, the PCAOB admits to having “little or no relevant empirical data on mandatory audit rotation.”  While no one discounts the key role independent auditors play in relation to the efficiency of the capital markets, independence has been maintained through mandatory audit partner rotation, second partner review, PCAOB inspections, as well as the audit firms’ fear of reputation loss though litigation, restated financial statements, and Department of Justice proceedings.  Adding mandatory audit firm rotations will merely increase the cost of audits as new firms will have to “get up to speed” every few years rather than increase the independence of auditing firms.

The deadline to submit comments to the PCAOB is December 14, 2011.  To view the concept release, click here.