Comment letters on the PCAOB’s concept release on auditor independence and audit firm rotation reveal a growing consensus among the audit committee chairs of complex global corporations that mandatory audit firm rotation would undermine the audit committee as overseer of the company’s relationship with its outside auditor in the post-Sarbanes-Oxley era. Peter V. Ueberroth, audit committee chair of Coca-Cola, Inc. noted that, since the passage of the Sarbanes-Oxley Act in 2002, independent audit committees have had the primary responsibility for engaging, overseeing, and terminating the outside auditor. In passing Sarbanes-Oxley, he noted, Congress clearly recognized that the audit committee brings a unique and informed perspective to consideration of which firm is best positioned to serve as a company’s outside auditor.
The audit committee chair at the Louisiana-Pacific Corporation said that, in the Sarbanes-Oxley Act, Congress explicitly rejected mandated audit firm rotation. Instead, the Act strengthened the role of audit committees, which enhanced the communication between the independent auditors and the audit committee, increased the discussion around independence and provided more transparency to the services provided by the audit firms.
Mr. Ueberroth, a former chair of the United States Olympic Committee board of directors, also posited that imposing a mandatory rotation requirement would inevitably interfere with the audit committee’s responsibility for assessing the effectiveness of the auditor and choosing whether to retain the auditor based on this assessment. That key responsibility would be subordinate to a mandate to choose a new firm, he said, even when that firm, in the judgment of the audit committee, may not be as qualified as the current auditor to serve the company. Further, requiring a company to rotate audit firms would presents serious risks related to the effective functioning of the audit process and, consequently, could lead to a deterioration in audit quality, particularly in the years leading up to, and after, a rotation. Mandatory audit firm rotation also would create a host of practical difficulties for Coca-Cola and similar companies with complex global business operations.
The chair of the Exxon Mobil audit committee, Michael Boskin, former Chair of the Council of Economic Advisers under President George H. W. Bush, emphasized that mandatory auditor rotation could have a detrimental effect on the quality of the independent audit function and would diminish the important role of the board audit committee, a primary function of which is to promote the independence of the audit function. The chair explained that the audit committee accomplishes this through exercising direct responsibility for appointing, compensating, retaining and overseeing the work performed by the independent auditor. Mandating rotation of the audit firm would diminish the audit committee’s responsibility to appoint and retain the independent auditor.
Mr. Boskin also noted that an auditor can achieve a profound understanding of a complex, multinational company only through active engagement over an extended period of time. Attaining this deeper understanding of the company, its philosophy, policies, standards, and systems is critical to audit effectiveness, he remarked, and takes many years to achieve. Mandatory rotation undermines the process for developing this holistic view of a company, he said, and would make audits less effective and more vulnerable to error.
The audit committee chair at AT&T observed that mandatory audit firm rotation would be ineffective in increasing audit quality and protecting investors. It would also diminish the audit committee’s oversight role. The audit committee is best positioned to select the company’s outside auditor, emphasized the chair, and industry expertise combined with institutional knowledge gained over time significantly enhances the quality of the audit.
Echoing the comments of other audit committee chairs, the Union Pacific Corp. audit committee chair noted that mandatory audit firm rotation may lead to increased audit costs as a newly engaged audit firm may require additional staff and time to ensure a comprehensive audit.
The chair of the audit committee at New York Life Insurance Co. said that mandatory audit firm rotation would result in no meaningful improvement in auditor independence, objectivity and professional skepticism and would come with significant cost and risk. The chair stressed the importance of the continued autonomy of the audit committee to choose the right auditor, based on the audit firm's experience and industry knowledge, instead of being forced to choose an auditor due to a mandated requirement. Any
requirement to adopt mandatory rotation would take away discretion from the audit committee to do what is in the best interest of the company. The audit committee is in the best position to evaluate whether the company’s outside auditors are independent, objective and are exercising an appropriate level of professional skepticism.
The chair of the audit committee at Imperial Oil said that mandatory rotation of the audit firm effectively supersedes the board audit committee's important responsibility to appoint and retain the independent auditor. Further, since there are only a limited number of audit firms large enough to audit companies like Imperial Oil, mandatory rotation, based on arbitrary points in time could limit the availability of qualified firms, placing the audit committee in an unacceptable position.