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June 22, 2011



This is meant to address mandatory rotation and the posts “Audit Firm Term Limits: Nothing Else Left to Try” (June 15) and “Why Won't the SEC Investigate Motorola … Again?” (June 22).

I agree with “Bitter Audit Partner”, who stated “Rotation is not the answer, and not really the problem.”

Moreover, I read about KPMG with interest, although it’s been nearly six years since I left the firm. That time allows me to reveal that the events described in your post on IFRS in September 2009 occurred at KPMG.

In my short time there, the duration of the engagement relationship never mattered. What mattered was not displeasing the client, it was the principal elementof “professionalism”.

In the discussion detailed in the link above with the (now former) partner, I was lectured “if there’s no client, there’s no business”. Big firms don’t care if it’s a five year or fifty year relationship, they care that it’s an ongoing relationship.

The problem isn’t unlimited tenure; it’s that management hires and fires the audit firm (basically at will, with disclosure). When foxes hire and can fire the hound that guards the henhouse some chickens die.

Rotation that retains the present system of management retention of the auditor will ironically intensify this effect, because the costs of client acceptance will need to be amortized over a fixed period of time. Audit efficiency and effectiveness will decrease with every rotation as the new firm “ramps up” its specific knowledge of the client.

To really want to fix situations like the one at Motorola, you need remove management’s power over the auditor. I prefer the Board retain the auditor, because they are supposed to be acting in the interest of the investors anyway. This is the very reason that the IIA insists that internal audit report to the BOD. Or maybe there’s a committee of shareholders-just not management.

Of course there’s other problems, the insufficient alternatives that exist with only four firms at the top industry segments. It won't change because, S-Ox made formidable barriers to entry to the “Big” segment insurmountable. No Congress is going to repeal S-Ox even though it’s a rain dance, because they fear blame for the next scandalous audit failure, when, not if, it occurs (no matter what laws are on the books). Also, there’s just too much money to be spent on lobbying and campaigning by the constituencies that profit handsomely from S-Ox compliance services.

Unfiled Tax Returns

I am not sure if this should really surprise anyone. The SEC has so much on it's plate these days that I'm not sure that can actually investigate everything. Seems they are taking a closer look at the hedge funds (thanks to Madoff) and not investigating many corporate clients.

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