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June 15, 2011

Comments

DougT

Why do you assume that regulation can accomplish what the lack of competition leaves behind. Having newbie auditors every few years just makes it easier for management to "hide the bodies."

There are plenty of legal ways for managers to skirt the rules. Changing the guard too often just weakens the guard.

I agree there are agency problems. But this seems likely to make them worse.

Bitter Audit Partner

Rotation is not the answer, and not really the problem. When I deal with an issue, I'm not thinking about the long relationship we have with the client; I'm thinking about my own license. The answer is really about who pays us and the circumstances under which we can get terminated. It really is that simple - a point that seems to be totally lost on academics and Doty.

Cubby

Great idea, a way to burden US companies with yet more costs of doing business that our foreign counterparts don't have to deal with.

In my experience as both auditor and preparer, the first year of an audit from a new firm is not only expensive (higher fees for sure, but internal client disruption is more costly) but also lower in quality. The quality of the audit (by which I mean how effectively it addresses the key financial statement risk areas) increases over the years as the team becomes more familiar with the company and its key risks.

older than the hills

I am a lawyer who has both sued and defended national accounting firms since 1973. The model is untenable. Firms make money by keeping clients happy and avoiding audits that bust the budget, but competition among firms keeps fees low. Audits become "risk-based" with less emphasis on substantive testing. Staff learn that the way to partner is to master "client handling" skills. Is it any surprise that the PCAOB found so many audit failures? It is not really true that we've tried everything else. The PSLRA, passed over Clinton's veto in 1995, has basically eliminated private securities class actions against firms. The SEC's enforcement program, two years after the Madoff disaster, is no more effective than before.

Rotation is an attractive idea because it would likely put some iron in the partner's and manager's backbones, knowing that management cannot use the threat of replacement to deter a truly skeptical auditor from peeling away the onions.

Steve

The audit firms should not be allowed to provide other services (i.e., tax) to their audit clients. Period.
The audit firms could never ever be independent if there are other significant financial interest involved with their clients.

Independent Accountant

Tom:
I once favored mandatory CPA firm rotation. I haven't for about 25 years. Why? What will happen as a practical matter? Every say 5-7 years Big 87654 firm A replaces Big 87654 Firm B. And? Is A going to "rat out" B or vice versa? CPA firm rotation is a solution in search of a problem.
As for KPMG, didn't it have a similar fiasco at National Student Marketing about 40 years ago?

IA

File back taxes

Rotation might not be a bad thing. A fresh set of eyes can work and may even improve dialog with the client. Obviously, we need to try things out to see what works.

When will we learn...

I started my career as an auditor at a BigFirm and now I work for a regulating agency. The problem is the model; just as it is with the credit rating agencies. You can't effectively audit your boss. Until we come up with a new model, all we are doing is wasting time and money by requiring more oversight and regulation - which will never be as effective as a truly independent hands-on audit by someone competent enough to do the work. The role of regulators needs to expand to become a better resource to companies and auditors in dealing with complex issues, and they need to be given the teeth to put incompetent auditors out of public practice - without having to jump through 1 million hoops to do it.

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