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Mandatory Auditor Rotation – Not Happening

March 20, 2014

PCAOB recently announced that it is no longer pursuing this project.

In August 2011 I wrote about The End of the Audit Industry as we Know It. In that blog I reported about the disturbing proposal from the Public Company Accounting Oversight Board or the PCAOB wherein they wanted to impose a regulation calling for the mandatory rotation of audit firms every x number of years. The exact number of years was never really pinned down.

I am happy to report that the PCAOB recently announced that it is no longer pursuing this project. This is their conclusion after nearly three years of study – three years marked by negative reactions by almost everyone in the financial community. Some of the resistance that the PCAOB received came from Congress where some accused the PCAOB of overreaching on its mission and in July of last year, the House passed a bill to prevent the board for ever requiring mandatory auditor rotation.

Although this initiative is dead in the water in this country, it is still moving forward in other countries. Last year India proposed corporate auditor rotation every 10 years and the European Union agreed in principal to require companies to rotate auditors every 10 to 24 years. While PCAOB chair James Doty indicated that they are no longer moving forward on term limits for auditors they will continue to think about what impacts auditor independence. So while this specific proposal is gone, the concept of imposing some regulation to strengthen auditor independence continues.

We at KLR understand that auditor independence is the backbone of the auditing industry. This is one of the reasons we made the strategic decision to grow the size of the firm and better enable us to rotate staff on jobs right up to the partner level. New staff provides a fresh look at a client’s fiscal health while still having access to the organization’s historical information maintained by the firm from years of previous experience. In this way, clients have a continual fresh perspective while still maintaining the expertise and history afforded by a long-term relationship.

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