Next week, the Public Company Accounting Oversight Board (PCAOB) will hold its second public hearing on a proposed rule that would mandate audit firm rotation for all publicly traded companies. One concept the PCAOB has floated is a requirement that public companies rotate audit firms at least every 10 years.
The concept has been floated as a way to address flagging investor confidence in the ability of public audit firms to maintain strict independence. However, the proposal could have an unintended adverse and far-reaching impact on public companies, not only for directors but also for executives, investors and shareholders.
NACD members across the nation are raising concerns about this concept. In response, NACD is leading an initiative to engage the corporate governance community and propose an alternative solution—one that allows directors to retain their governance authority while also addressing what the PCAOB perceives to be a lack of investor confidence in the processes by which companies ensure auditor independence.
Audit quality and independence are important issues for directors, and reassuring investor and regulator confidence is a worthy goal. But in our view, mandatory auditor rotation devalues and undermines the important role boards—and audit committees in particular—play in helping auditors maintain independence, objectivity and skepticism.
In our formal comment letter to the PCAOB, NACD expressed concerns about this proposal on behalf of our members and the entire boardroom community. We objected to a mandated “one-size-fits-all” solution that would detract from the authority of the audit committee, supplant the board’s governance process and possibly generate unintended risk for the company.
The NACD was not alone in raising questions about the concept. The public comment period triggered a record-breaking volume of comment letters to the PCAOB and vigorous discussion at a roundtable in which NACD participated here in Washington last March. Several roundtable panelists suggested that NACD was a key source to weigh in on board-level solutions, and the PCAOB noted that it would be receptive to our input.
The NACD Audit Committee Chair Advisory Council is spearheading this initiative, building a coalition comprised of investor representatives (including the Council of Institutional Investors) and the audit profession (including the Center for Audit Quality). This coalition has a dual mission:
- Identify and evaluate with the corporate governance community an alternative solution to mandated regulations on auditor rotation.
- Promote this solution within the community and advocate its beneficial effects to the PCAOB and other influencers.
Our goal is to provide our recommendations and rationale to the PCAOB no later than December 2012, in anticipation of the PCAOB finalizing its recommendations in early 2013.
We need your input. As a first step to formulating an alternative solution to mandatory auditor rotation, we are asking our 12,000 members to offer their own insights on how boards—and audit committees in particular—can apply leading practices to build investor and public trust.
Click here to provide your thoughts through a brief electronic survey. Responses are anonymous and will only be reviewed in aggregate form.
Your participation in this initial survey is a first step in shaping a framework for recommendations that will guide audit committee behavior and actions on matters of auditor independence, objectivity and skepticism. These recommendations will be shared with the director and investor communities over the course of the coming months.
Ultimately, NACD will deliver these recommendations to the PCAOB by the end of the year, and we will position those concepts as representative of the will and the expertise of the public company directors and boards.
At NACD, we are committed to advancing and promoting best practices of companies to ensure proper board oversight that protects shareholders, investors and employees.