Top watchdog, U.S. Chamber clash on auditor rotation

Thu Mar 22, 2012 5:51pm EDT

Related Topics

* Forum on auditor rotation turns contentious

* Watchdog head asks Chamber to defend criticism

* Several speakers warn rotation not good solution

By Dena Aubin

WASHINGTON, March 22 (Reuters) - In the buttoned-down world of corporate auditing, sharp words are rarely heard, but the industry's chief U.S. regulator on Thursday blasted the U.S. Chamber of Commerce in public.

At a forum on whether corporations should be required by regulation to switch auditors every few years, Public Company Accounting Oversight Board Chairman James Doty said the chamber should choose its words more carefully.

Referring to an unsigned letter from the chamber that accused the PCAOB of mission creep, Doty asked David Hirschmann, a senior chamber officer: "Do you want to sign this letter now or do you want to withdraw the letter?

"Can I go to sleep tonight thinking that the chamber is okay with me holding these meetings? Or am I to take away the notion that whatever we do ... we're going to have some letter from the chamber saying we've done too much?"

Hirschmann, a senior vice president at the chamber, was one of the last speakers at a two-day forum on whether to require periodic auditor switching, also known as auditor rotation.

The chamber, which advocates for large business interests on many fronts, had written the PCAOB urging it to withdraw a white paper, or "concept release," that it issued asking for public comment on auditor rotation.

The letter questioned why the PCAOB was spending time on the project. It said "one-size-fits-all mandates do not work."

The Big Four audit firms that dominate auditing - Deloitte , Ernst & Young, KPMG and PwC - oppose rotation, as do many of their large corporate clients.

Rotation would disrupt many long-standing auditor-client relationships, some extending over decades, while also forcing audit firms to spend more money on marketing because they would have to compete vigorously with each other for business.

The audit industry is now largely an oligopoly, say its critics, with the Big Four handling the audits of 497 of the companies listed on the S&P500 index in 2010. The four firms reported combined revenue of more than $100 billion in 2011.

POST-ENRON

Formed in 2002 under the post-Enron Sarbanes-Oxley accounting and corporate governance reforms, the PCAOB oversees and disciplines the audit firms that review and pass judgment on the financial books of corporations.

The board put the idea of auditor rotation up for debate last August after finding numerous audit deficiencies over the years. The idea is to make auditors more independent and prevent them from getting too close to companies whose books they check.

Hirschmann stood by the Chamber's letter, saying "that is our formal statement for the record."

"What we recommend you do, respectfully, is that you step back from just looking at mandatory rotation," Hirschmann said.

Doty countered that the PCAOB has been looking at other ways of improving audit quality at the two-day forum. He suggested it was important for the PCAOB to look into rotation so it could have input on an issue being considered in other countries.

He said on Wednesday that discussion about the rotation idea would stretch at least into 2013.

Other speakers, including former regulators and board members, also urged the PCAOB not to require rotation, saying it would replace corporate governance and the judgment of board audit committees with a bureaucratic mandate.

If rotation is required, salesmanship would become the most important quality of auditors, former U.S. Securities and Exchange Commission Chairman Roderick Hills said.

"Think of the chaos that mandatory rotation would cause," said Hills, the fourth former SEC chairman to speak at the forum.

Arthur Levitt voiced support for the idea on Wednesday, while Harvey Pitt opposed it and Richard Breeden expressed doubts it would improve objectivity.

Although opposing mandatory rotation, several speakers supported options such as requiring audit committees to put the audit work out for bid after a set number of years.

Former SEC Chief Accountant Donald Nicolaisen said mandatory rotation would be a blunt instrument to deal with independence issues.

"It essentially throws out the good to deal with what are perceived to be bad situations," he added. (Reporting By Dena Aubin; editing by Kevin Drawbaugh and Andre Grenon)

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