Following the most recent proxy season with a spotlight on executive compensation and the repeal of proxy access, boards now have a new area of focus—their relationship with auditors. An article in Wednesday’s Wall Street Journal, highlighted in NACD Directors Daily, reports that the Public Accounting Oversight Board (PCAOB) voted to explore whether companies should be required to rotate their outside auditors every several years.
According to the article, the vote represents the PCAOB’s first steps to establish term limits for outside auditors. The intent of the proposed change, which stands to sever the often long-standing relationships between companies and outside auditors, is to increase the independence of auditing firms and the quality of audits. However, critics of the PCAOB’s proposed requirement believe it is not the best solution, creating inefficiencies for companies that have to educate a new auditor every few years.
It should be noted that this proposal is in the early stages—the PCAOB is currently accepting public comments until December 14, 2011. A public discussion on the topic is slated for March 2012, and any final rules will have to come with approval from the Securities and Exchange Commission.
In addition to the proposed audit-firm rotation,, the PCAOB issued a concept release on the auditor’s reporting model earlier this summer. In an attempt to increase transparency in the auditing process, the concept release offers several alternatives to the currently used processes. These alternatives include:
- An auditor’s discussion and analysis;
- Required and expanded use of emphasis paragraphs;
- Auditor assurance on other information outside the financial statements; and,
- Clarification of language in the standard auditor’s report.
The PCAOB will accept comments on this concept release until September 30, 2011. Submitted comments can be viewed here.