Auditor Rotation Won’t Make Audits Better

Last week, CFO Magazine published an article online about CFOs opposing the potential proposal by the  Public Company Accounting Oversight Board (PCAOB) requiring companies to switch auditors every 5 to 10 years.  More than 625 comment letters, many from CFOs, controllers, chief accounting officers, and audit committee chairs,  have been submitted to PCAOB since the organization raised the issue of mandatory auditor rotation in August.

The PCAOB is suggesting that forcing companies to change auditors every few years will make the audits better. They say that a new accounting firm would equal a fresh set of eyes, and therefore a more skeptical audit.

But opponents to the possible rule say there are other issues, such as new auditors not fully understanding complex companies, and the cost and time that would be incurred every time new auditors come in. They also say that since large companies prefer to use Big Four firms, and they already must use separate firms for auditing and consulting services, that only leaves a choice between two firms if auditor rotation is required.

The problem here is that it is not the length of time an auditor is engaged by a company. The problem is the process of auditing itself. Audits have never been designed to detect fraud. And unless audits are fundamentally changed, they probably never will detect fraud with any great regularity.

For decades, audits have been aimed at checking the math and making sure that companies are following Generally Accepted Accounting Principles (GAAP) in creating their financial statements. The only way to start finding more fraud would be to completely change the process of auditing, or to require companies to engage fraud-focused consultants to perform procedures specifically designed to detect fraud.

It has been almost a decade since Sarbanes Oxley was enacted, and still audits are no better at preventing and detecting fraud. The investing  public, however, still seems to believe that auditors can and will find fraud in their financial statement audits. They should not be fooled by this proposal. The problem isn’t with the length of time auditors have had a client. It is with the process of auditing itself, and unless that changes drastically, fraud will not be detected with any great regularity by the financial statement auditors.

Similar Posts:

3 Comments

  • Dave Ellrich says:
    22 March 2012

    Rotation of audit partners is already a requirement. This provides a fresh set of eyes in theory. Also, auditors with a long client relationship can be far more aware of facts and issues relating to financial reporting.

  • Joel Ungar says:
    22 March 2012

    I’ve attended the PCAOB’s “Auditing in the Small Business Environment” seminar the last two years, and various other SEC focused conferences that include PCAOB representatives. Someone has the PCAOB’s ear, and it isn’t CFOs, controllers, chief accounting officers, and audit committee chairs. It certainly isn’t the auditors. And at the rate they are going, the only public company auditors that will be left with be the Big 4.

Leave a Reply