Are there good reasons for auditor rotation? Auditor rotation remains a concern of regulators and governance activists, and Financial Executives Research Foundation (FERF) asks whether it's good corporate governance or a question of costs versus benefits.

• Author: Sinnett, William M.
• Position: Audit

The controversial issue of mandatory auditor rotation--which again caught fire in the immediate aftermath of the Enron Corp. collapse and the subsequent demise of its auditor, Arthur Andersen--isn't going away, despite generally firm opposition from corporate America, auditors themselves and a government study suggesting that its cost benefits may be elusive.

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Shareholder activists and pension funds seem to be the forces still fanning the embers for reform. CalPERS, the California Public Employees Retirement System, for one, says it is continuing to assess the rotation issue as part of its more general stance of stressing auditor independence.

In February 2002, for instance, when the Enron collapse was still fresh, CalPERS publicly asked the Securities and Exchange Commission (SEC) to adopt a package of financial market reforms, and listed a series of proactive efforts of its own. One would be to publicly oppose shareholder approval of any auditor that has been retained by a company for more than five years.

At the time, questions were raging about whether Andersen, Enron's independent public auditor, was indeed "independent" of its client, and CalPERS thought that auditor rotation would prevent that sort of problem in the future. Ensuring auditor independence has been a long-standing objective of good corporate governance, and some have questioned whether public auditors can truly be independent from the public companies that pay for their own audits.

In the years since, CalPERS hasn't actively challenged companies about auditor rotation, but it "is still an issue for CalPERS today," says Brad Pacheco, a spokesman for CalPERS. "The auditor independence issue is still important to our board. While we do support auditor rotation, and continue to support it, we did not withhold our vote on this issue last proxy season. We only withheld our vote when the auditor was performing non-audit services."

CalPERS' February 2002 press release on the subject was the focus of a Feb. 21, 2002, article in The Wall Street Journal. This article provided the germ of an idea for an accounting research project by Dr. James N. Myers and Dr. Linda A. Myers, assistant professors of accountancy at the University of Illinois at Urbana-Champaign, and Dr. Thomas C. Omer, associate professor of accounting at the University of Illinois at Chicago (see sidebar).

The three professors designed a research project to determine if there was any...