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Monday, January 16, 2012

WSJ: Should Accountants Have Term Limits?

CPAWall Street Journal, One Cure for Accounting Shenanigans, by Jason Zweig:

Should accountants have term limits? One giant company after another has gone bust without any warning to investors from its independent auditors that it was in danger. Like the credit-rating firms whose triple-A seals of approval often turned out to be signs of impending doom, accounting firms appear to have analyzed many companies not with green eyeshades but through rose-colored glasses.

One possible explanation: Auditors work for the same company for so long that instead of being independent, they end up co-dependent. Since the Securities Act of 1933, public companies have been required to get independent audits each year, assuring investors that a fresh set of eyes has inspected the books. But those eyes aren't always the freshest.

According to Audit Analytics, a research firm in Sutton, Mass., 30% of the 1,000 leading U.S. companies have used the same firm to audit their books for at least a quarter-century. Fully 11% have used the same audit firm continuously for 50 years or more. Eight companies haven't changed auditors in at least a century; the last time any of them hired a new accounting firm, William Howard Taft was in the White House.

The Public Company Accounting Oversight Board, which regulates auditing firms, is asking whether long tenure might lead to complacency. Late last year, the board sought opinions on whether it should require listed companies to rotate their accounting firms every few years. The last of those 611 public comments came in to the PCAOB earlier this month.

An overwhelming 94% were opposed to term limits. The common refrain: Rotating audit firms every few years would raise costs, reduce the familiarity of accountants with a company's books and impair the quality of audits. ... The problem, says Howard Schilit, an accounting expert at Financial Shenanigans Detection Group in Key Biscayne, Fla., is simple: "When you're an auditor who's trying to protect a long-term relationship, you have to suck up to the client, and the client knows it."...

As the Arab Spring shows, presidents-for-life are finally going out of fashion. For the sake of investors, we should phase out auditors-for-life, too.

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Comments

As a tax attorney working for one of the Big 4, I wholeheartedly respond with a yes! Too many years working for the same client removes that wall of independence. There will always be the inherent conflict between an auditor and a paying client, but this would be a step in the right direction.

Even if it was a fairly long period, 5 or perhaps 10 years, rotating auditors would be good for everyone. A fresh pair of eyes and perspective might uncover quite a lot, and make the cost of integrating a new team worthwhile.

Posted by: Todd | Jan 16, 2012 5:38:05 PM

It should be legislated that Auditors be rotated no less then 5 and no longer then 10 years. There are only so many Accounting firms that can audit large companies so rotation would do good.

Posted by: Oscar | Jan 17, 2012 6:45:22 PM

Several so called "third world" countries require rotation of auditors for auditing books of public companies.

The US is one place where the profession is hesitant to allow this change. If rotating auditors would decrease the overall quality of audits, why do these firms take on new clients coming from other firms? Both result in a change in audit firms.

Having been an auditor with one of the large firms, I fully support this since I have seen and heard how some of these audits are conducted.

Posted by: Prema | Jan 18, 2012 6:25:06 PM

I studied for the CPA exam but never sat as I have an EA already. I did it to better understand corporate accounting as it relates to my tax work. Buried somewhere amongst the thousands of little codes by which CPAs are supposed to live by is the joyful little gem that you shouldn't work on the same accounts for more than five years (or maybe it was three). CPAs seem to get around this rule by regularly putting different rookies and juniors on the case but not changing the partner in charge. It seems like as the rule already exists, what should be done is to enforce it and/or clarify that the rule extends to partners and service providers as well as the busy little doobies assigned to the case.

Posted by: liz zitzow | Jan 19, 2012 12:42:02 PM