PCAOB Considers Mandatory Auditor Rotation
The Public Company Accounting Oversight Board has issued a concept release seeking serious consideration of mandatory audit firm rotation. The release states that the PCAOB’s inspection program (created by Sarbanes-Oxley) has uncovered many instances where the auditors did not exercise sufficient independence and professional skepticism. PCAOB proposes mandatory rotation as a solution to the suggested problem of the auditor becoming too close to management.
OUR TAKE: The PCAOB offers no empirical support that mandatory audit rotation leads to more independent or better audits. In fact, the PCAOB cites several academic studies supporting the opposite conclusion i.e. lesser-tenured firms may perform worse. Whatever the PCAOB ultimately decides, we hope that it exempts registered investment companies, which are already subject to extensive regulation.