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Holding the line on auditor rotation.

Among the many oversight and regulatory challenges facing financial executives, mandatory auditor rotation is one that's a source of particular consternation. The idea behind the Public Company Accounting Oversight Board's proposal is to increase auditor independence and cut down--as much as possible--on any future mishandling of financial reports.

Naturally, we should strive to improve processes, resolve emerging issues and endorse changes that bring real value to the profession. FEI has always recognized and supported the need for auditor independence and impartiality. But mandatory rotation isn't the answer. In our view, such a step would dramatically raise costs, disrupt operations and potentially strip corporate leadership of the kind of seasoned, industry-smart advisers on whom they've come to rely.


Questioning the Benefits

There is no guarantee that auditor rotation will raise standards and quality, or automatically bring about greater independence. Providing auditors of maximum skill, experience and deep industry expertise should be the ideal, but a forced replacement of auditors, necessitating more resources and added expense at a time so many companies are still recovering from the recent economic collapse, may not accomplish that.

Second, regular rotation of auditors can hurt multinational corporations. How many global accounting firms have the capacity to handle all of the accounting demands of an enterprise that is actively engaged in dozens of locales across the globe? Very few. Individual country tax codes are different and complex, requiring depth and broad skills.

Multinationals predominately use the Big Four, as they are ideally situated to handle these global issues, and thus may have only three viable alternatives if mandatory rotation is imposed. In some cases, one or two of the other large firms may not be available or may lack sufficient capability in a particular area. When the upper tier of the accounting world was populated by the Big Eight, competition was more plentiful and offered wider options for those seeking new auditors.

Besides cost and operational concerns, institutional knowledge is lost. An auditor who has developed a long and productive experience with a particular client attains an industry knowledge that is not always easily transferrable to a new accounting team.

What happens if a major business transaction is still ongoing when auditor rotation requires a transition from that client? How do businesses account for a selection process that, for big companies, can be a long and time-consuming undertaking?

Additionally, many companies maintain strong non-audit relationships with their auditors, notably in the areas of consulting, valuation or internal audit. This only further complicates the situation. And, as good and deep as the Big Four are, their strengths are not fungible; areas of expertise are not the same--they do not necessarily overlap.

Recently, FEI voiced its opposition to the auditor rotation proposal on Capitol Hill, before the House Sub-Committee on Capital Markets and Government Sponsored Enterprises (as part of a hearing to discuss accounting and auditing oversight and pending proposals under review by regulators and standard setters).

Appearing on behalf of FEI was Gary Kabureck, vice president and chief accounting officer of Xerox Corp. and chairman of FEI's subcommittee on relations with the Financial Accounting Standards Board. He presented the FEI view on the hardships that auditor rotation would create and noted that any good intentions would be more than outweighed by the imposition of excessive cost and operational hardships.

We are optimistic that both House members and standard setters will come to the same conclusion. Meanwhile, FEI will continue to advocate on behalf of members on issues of such profession-wide import.

Marie N. Hollein, CTP

President and CFO

Financial Executives International
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Author:Hollein, Marie N.
Publication:Financial Executive
Geographic Code:1USA
Date:May 1, 2012
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