By this time, your annual audit is either complete or winding down. You have documented the auditor’s requests and considered how you could make the process easier next year. You may have had your exit discussion and are in the process of considering how and when to implement any suggested process improvements. In year’s past, that was it, until you received your engagement letter next November/December.
But this year may be different. One change being discussed may alter the process, in the next twelve months –
In August 2011, the Public Company Accounting Oversight Board (http://pcaobus.org) released for comment PCAOB Release No. 2011-006, which proposed an audit FIRM rotation. PCAOB questions how objective an auditing firm could be if the audit firm and the client have had a long-standing relationship.
As of March 24, 636 letters were received, i.e. some for the proposal and some against. The comment period will stay open until April 22, 2012.
This proposal represents a more stringent requirement than the one imposed by the Sarbanes-Oxley Act (2002). As a way to ensure independence and objectivity of audit firms, Sarbox requires senior managing audit PARTNER rotation every five years.
The primary objection, for those that oppose the PCAOB proposal, are that as you shorten the time of engagement, you lose the expected efficiencies and cost savings associated with a long-standing relationship.
According to a study entitled “Audit Partner Rotation: An Analysis of Benefits and Costs” audit partners reported that it required two-to-three years before client familiarity was established. Based on this research, audit clients only receive the benefits of an established audit relationship for two years, prior to a partner rotation. At this early stage, Firm Rotation research is spotty.
Even though these actions technically are imposed only on public companies, it would be prudent for a CFO to take note. Quickly when business methods are adopted and accepted by key stakeholders, they have a way of becoming a “Best Practice,” i.e. a business requirement that is expected, but not legally based.
What is your experience?