Audit Firm Perspective on Audit Firm Rotation and Enhancing Independence: Evidence from PCAOB Comment Letters

Abstract

SUMMARY This study examines practitioners' perspectives on audit firm rotation and alternative solutions to enhance independence in the audit industry as solicited by the PCAOB's “Concept Release on Audit Firm Rotation and Auditor Independence.” Accordingly, we synthesize the opinions found in comment letters of 15 American public accounting firms—eight of which are annually inspected by the PCAOB and seven of which are inspected tri-annually. Altogether, we find the firms generally offer homogenous rationale for opposition to audit firm rotation. However, most importantly, we note that the overwhelming majority of the alternative solutions offered by the firms to enhance the independence relationship between auditor and client lies with fortifying the audit committee. To that end, while regulators have generally attempted to strengthen independence by introducing regulation at the auditor level, our review indicates that perhaps a shift in regulatory philosophy is warranted—one that suggests progressing regulation at the client level. Data Availability: Publicly available.

Audit retention versus audit rotation - an update of the debate

“…Surveys (Williams & Wilder, 2017) and literature reviews (Velte & Freidank, 2015) were jointly the second most common research method, both with 4 articles utilizing this method.…”

“…On the other hand, auditors perceived that AR reduces audit quality due to a loss of experience (Mohamed & Habib, 2013). The majority of alternative solutions to AR offered by these auditors focused on strengthening the audit committee, thus suggesting that regulators should shift from auditors to the client in their bid to ensure auditor confidence (Williams & Wilder, 2017). As for audit committee members, they were completely opposed to mandatory AR as they felt it threatened their authority to make audit firm appointment decisions (Fontaine et al, 2016).…”

Independent oversight of the auditing profession: A review of the literature

“…They find evidence of lower financial reporting quality following audit partner changes. Williams and Wilder (2017) examine the extent to which audit rotation might improve auditors' independence from the practitioners' perspective. Their findings indicate that audit firms are against the compulsory audit rotations, suggesting that the PCAOB's regulations should strengthen the independence rules at the client level rather than the auditor level.…”

“…It is also noted that prior research has produced contradictory evidence related to the effectiveness of mandatory audit rotation (as a proxy for auditors' independence) on audit quality (Litt et al, 2014; Sharma et al, 2017; Williams & Wilder, 2017). Further research is needed to provide more evidence on the maximum period of audit rotation and whether there should be audit partner rotation or audit firm rotation.…”

“…investigate the effects of implementing audit partner rotation on the quality of financial reporting. They find evidence of lower financial reporting quality following audit partner changes Williams and Wilder (2017). examine the extent to which audit rotation might improve auditors' independence from the practitioners' perspective.…”