Mandatory auditor rotation: where things stand: the PCAOB's proposal to implement mandatory auditor rotation has drawn a slew of comments. Here are some of the arguments--both for and against auditor limits.

• Author: Kroll, Karen M.
• Position: Audit - Public Company Accounting Oversight Board

In August, the Public Company Accounting Oversight Board ignited a firestorm with its proposal, "Concept Release on Auditor Independence and Audit Firm Rotation." To be sure, no one argues against the idea that auditors must be independent and objective to provide the information that investors need.

But the idea of mandatory auditor rotation, also discussed in the proposal, remains controversial. The PCAOB proposal states"... questions persist about whether more can and should be done to enhance auditor independence, objectivity and professional skepticism." One possible way, the proposal notes, is through mandatory rotation.

In a statement accompanying the proposal, PCAOB Chairman James Doty asked: "Will term limits, set at some appropriate length, with clue regard for implementation complexities, reduce the pressures auditors face to develop and protect long-term client relationships to the detriment of investors and our capital markets?"

"The PCAOB and investors have a right to demand that auditors exercise objectivity, independence and skepticism," says Loretta Cangialosi, senior vice president and controller of Pfizer Inc., who chairs Financial Executives International's Committee on Corporate Reporting.

A Global Effort

The PCAOB isn't alone in its efforts. On Nov. 30, 2011, the European Commission released its proposal, "Regulation of the European Parliament and of the Council on Specific Requirements Regarding Statutory Audit of Public-Interest Entities." It contains a provision introducing mandatory rotation of audit firms after a maximum period of six years, with the possibility of a two-year extension. For companies with two or more audit firms, engagements would be limited to nine years, with a possible three-year extension.

Some investors also support the i idea. The United Brotherhood of Carpenters and Joiners of America submitted a proposal for inclusion f: in Deere & Co.'s proxy statement for its 2012 annual meeting requesting that the company's board and audit committee establish an audit rotation policy that would limit audit engagements to seven years.

A letter to the SEC from the carpenters' union called this "an important reform designed to protect the necessary independence, skepticism and objectivity auditors have toward their audit clients in light of the extremely long and lucrative tenures that characterize the relationships between for-profit audit firms and their corporate audit clients."

However, the SEC allowed Deere to keep the proposals off its proxy materials, and ruled similarly in cases involving The Disney Co. and Hewlett-Packard Co., says Robert Wild, a partner in the law firm of Katten Muchin Rosenman LLP.

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Behind the appeal of mandatory auditor rotation to its supporters is the recognition that an auditor's professional objectivity may wane as he or she develops a...