Former SEC Chair Harold Williams emphasized his belief in
mandatory auditor rotation before a recent PCAOB forum on auditor independence.
The former Chair stressed that the auditor’s term under mandatory rotation must
be a fixed and secure term under which the auditors would serve whether
management liked them or not. If mandatory rotation is undertaken, he
recommends that it begin on a limited basis so that the Board and the firms can
learn from the experience.
Additional
costs associated with auditor rotation are exaggerated, he noted, and to the
extent that there are costs, they would be justified. The former SEC official
also dismissed concerns that audit quality might deteriorate in the last
several years of the departing auditor’s engagement since accepting those
concerns would cast serious doubt on confidence in auditor professionalism and
suggest a more serious problem than is warranted. Also, he does not believe
that such an auditor rotation requirement would reduce the authority and the
role of the audit committee.
He noted that
any uncertainty around mandatory auditor rotation is due to the international
oligopoly of the Big Four accounting firms. Auditing is a profession run as a
business, he said, and business oligopolies generally are not inclined to rock
the boat in relation to each other. Status quo rather than competition is the
name of the game. He questioned if the auditing business would behave any differently. What would it take, for example, for an
auditor coming in to embarrass the one it is replacing. On the other hand,
mandatory rotation would provide incentive to middle size firms to develop
their capabilities to serve larger clients. In turn, if successful, this would
enlarge and destabilize the Big Four oligopoly. In this sense, mandatory rotation would promote competition.
PCAOB Member Steve Harris quoted from the testimony of
Chairman Williams before the Senate Banking Committee on February 12, 2002
during the run-up to the enactment of the Sarbanes-Oxley Act in which he urged
the SEC to consider a requirement that a public company retain its auditor for a fixed term with no right to terminate. This could be for five years or perhaps the Biblical seven. After that fixed term, the company would be required to change auditors. Consequently, the auditor would be assured of the assignment and thus would not be threatened with the loss of the client and could exercise truly independent judgment.
On a separate
issue, Chairman Williams doubted the capability of the audit committee to address
the issues of lack of auditor professional skepticism, bias, and lack of
independence. While recognizing that many audit committees have been doing a
great job in discharging their responsibilities under Sarbanes-Oxley, he said
that a vigilant audit committee, discharging its responsibilities under
Sarbanes-Oxley, would not have discovered the lack of skepticism, bias, and lack
of independence identified in the PCAOB audits, at least not systemically. If
the relationship between management and auditors is harmonious, let alone cozy,
he asked, how can the audit committee effectively probe behind it. He cautioned
not to expect the audit committee to intercede
and become the referee between the audit firm and the client.