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entitled 'Mandatory Audit Firm Rotation Study: Study Questionnaires,
Responses, and Summary of Respondents' Comments' which was released on
February 26, 2004.
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Report to the Senate Committee on Banking, Housing, and Urban Affairs
and the House Committee on Financial Services:
February 2004:
Mandatory Audit Firm Rotation Study:
Study Questionnaires, Responses, and Summary of Respondents' Comments:
GAO-04-217:
GAO Highlights:
Highlights of GAO-04-217, a report to the Senate Committee on Banking,
Housing, and Urban Affairs and House Committee on Financial Services
Why GAO Did This Study:
The Sarbanes-Oxley Act of 2002 required GAO to study the potential
effects of requiring public companies registered with the Securities
and Exchange Commission (SEC) to periodically rotate the public
accounting firms that audit their financial statements. On November
21, 2003, GAO issued its report entitled Public Accounting Firms:
Required Study on the Potential Effects of Mandatory Audit Firm
Rotation (GAO-04-216). This supplemental report contains a copy of
each questionnaire used in our study, annotated to show summary
responses for each question and selected comments from respondents.
GAO is issuing this supplemental report to provide additional detail
on the responses to our surveys on the potential effects of mandatory
audit firm rotation and to facilitate future research efforts in
performing studies related to these matters.
What GAO Found:
In its November 2003 report, Public Accounting Firms: Required Study
on the Potential Effects of Mandatory Audit Firm Rotation (GAO-04-
216), GAO reported that, considering the costs and benefits of
mandatory audit firm rotation and the recent reforms being implemented
as a result of the Sarbanes-Oxley Act of 2002, several years
experience will be needed to evaluate the effects of the act. GAO
concluded that the most prudent course of action at this time is for
the SEC and the Public Company Accounting Oversight Board (PCAOB) to
monitor and evaluate the effectiveness of the Sarbanes-Oxley Acts
requirements for enhancing auditor independence and audit quality. In
that respect, GAO reported that audit committees, with their increased
responsibilities under the act, can play a very important role in
enhancing auditor independence and audit quality. For example, if
audit committees regularly evaluate whether audit firm rotation would
be beneficial, given the facts and circumstances of their companies
situation, and are actively involved in helping to ensure auditor
independence and audit quality, many of the intended benefits of audit
firm rotation could be realized at the initiative of the audit
committee rather than through a mandatory requirement.
As part of the study cited above, GAO surveyed the 97 public
accounting firms that reported having 10 or more SEC clients and drew
a random sample of 330 of the Fortune 1000 public companies chief
financial officers and their audit committee chairs. This report
contains summary survey responses to each question received from 74 of
the public accounting firms, 201 chief financial officers, and 191
audit committee chairs.
A number of the survey questions also provided an opportunity for
respondents to explain their answers to certain questions, write in
other answers to the questions rather than the choices provided, and
to provide any other comments on the issues presented in the surveys.
Selected comments to some of the open-ended questions included in the
surveys reflect the range of views that were provided by the
respondents. While they provide valuable insights, the number of
comments reproduced in this report is not necessarily proportional to
the number of similar responses, and, therefore, the comments are not
meant to be representative of the views that might be found in each of
the populations as a whole.
[hyperlink, http://www.gao.gov/products/GAO-04-217]
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Jeanette M. Franzel
at 202-512-9471 or franzelj@gao.gov.
[End of section]
Contents:
Letter:
Appendixes:
Appendix I: Public Accounting Firm Survey on Mandatory Audit Firm
Rotation:
Appendix II: Public Company Survey on Mandatory Audit Firm Rotation:
Appendix III: Survey of Public Companies' Audit Committees on the
Effects of Mandatory Audit Firm Rotation:
Appendix IV: Selected Written Comments from Tier I Public Accounting
Firms:
Auditor's Ability to Detect Financial Reporting Issues:
Additional Audit Procedures for New Auditor of Record:
Client-Specific Knowledge and Experience:
Auditor Independence:
Audit Quality and Audit Failure:
Audit-Related Costs and Audit Fees:
Audit Procedures for PCAOB Consideration:
Competition for Audit Services:
Implementing Mandatory Audit Firm Rotation:
Overall Views on Requiring Mandatory Audit Firm Rotation:
Appendix V: Selected Written Comments from Fortune 1000 Public Company
Chief Financial Officers:
Competition for Audit Services:
Audit-Related Costs and Audit Fees:
Auditor's Ability to Detect Financial Reporting Issues:
Impact of the Sarbanes-Oxley Act on Achieving the Benefits of a "Fresh
Look":
Implementing Mandatory Audit Firm Rotation:
Overall Views on Requiring Mandatory Audit Firm Rotation:
Additional Comments on the Effects of Mandatory Audit Firm Rotation:
Appendix VI: Selected Written Comments from Fortune 1000 Public Company
Audit Committee Chairs:
Potential Costs and Benefits under Mandatory Audit Firm Rotation:
Implementing Mandatory Audit Firm Rotation:
Overall Views on Requiring Mandatory Audit Firm Rotation:
Additional Overall Comments on Mandatory Audit Firm Rotation:
Appendix VII: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
Tables:
Table 1: Other Factors Affecting the Auditor's Ability to Detect
Financial Reporting Issues:
Table 2: Other Audit Procedures of Value to New Auditor of Record in
Reducing the Risk of Not Detecting Material Misstatements:
Table 3: Comments on Auditor's Client-Specific Knowledge and Mandatory
Audit Firm Rotation:
Table 4: Comments Concerning Auditor Independence and Mandatory Audit
Firm Rotation:
Table 5: Comments Related to Audit Quality and Audit Failure:
Table 6: Comments on Why Audit Fees Would Be Higher under Mandatory
Audit Firm Rotation:
Table 7: Comments on Why Audit Fees Would Be Lower under Mandatory
Audit Firm Rotation:
Table 8: Comments Concerning Audit Costs and Audit Fees:
Table 9: Audit Procedures the PCAOB Should Consider under Mandatory
Audit Firm Rotation:
Table 10: Comments on Why the Likely Change in the Number of Firms
Would Impact Audit Fees:
Table 11: Comments Related to Competition for Audit Services:
Table 12: Comments on Whether Mandatory Audit Firm Rotation Should Be
Applied Uniformly for Audits of All Public Companies:
Table 13: Reasons for Not Supporting Mandatory Audit Firm Rotation:
Table 14: Additional Comments on the Potential Effects of Mandatory
Audit Firm Rotation:
Table 15: Impact on Audit Fees from Potential Change in Number of Audit
Firms Available:
Table 16: Potential Audit Fee Impact under Mandatory Audit Firm
Rotation:
Table 17: Auditor Knowledge and Experience with a Company's Operations
and Financial Reporting Practices:
Table 18: Comment Received: Checks and Balances Are Already in Place
for the Auditors to Achieve the Benefits of a "Fresh Look":
Table 19: Comments on the Uniform Application of Mandatory Audit Firm
Rotation to All Public Companies:
Table 20: Explanations of Overall Current Views:
Table 21: Additional Comments:
Table 22: Views on Costs and Benefits:
Table 23: Comments on Whether Mandatory Audit Firm Rotation Should Be
Applied Uniformly for Audits of All Public Companies:
Table 24: Explanation for Overall Opinion on Requiring Mandatory Audit
Firm Rotation:
Table 25: Additional Overall Comments:
Letter February 27, 2004:
The Honorable Richard C. Shelby:
Chairman:
The Honorable Paul S. Sarbanes:
Ranking Minority Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Michael G. Oxley:
Chairman:
The Honorable Barney Frank:
Ranking Minority Member:
Committee on Financial Services:
House of Representatives:
On November 21, 2003, we reported[Footnote 1] on mandatory audit firm
rotation[Footnote 2] as required by Section 207 of the Sarbanes-Oxley
Act of 2002.[Footnote 3] GAO reported that, considering the costs and
benefits of mandatory audit firm rotation and the recent reforms being
implemented as a result of the Sarbanes-Oxley Act of 2002, several
years' experience will be needed to evaluate the effects of the act. We
concluded that the most prudent course of action at this time is for
the Securities and Exchange Commission (SEC) and the Public Company
Accounting Oversight Board (PCAOB) to monitor and evaluate the
effectiveness of the Sarbanes-Oxley Act's requirements for enhancing
auditor independence and audit quality. In that respect, we reported
that audit committees, with their increased responsibilities under the
act, can play a very important role in enhancing auditor independence
and audit quality. For example, if audit committees regularly evaluate
whether audit firm rotation would be beneficial, given the facts and
circumstances of their companies' situation, and are actively involved
in helping to ensure auditor independence and audit quality, many of
the intended benefits of audit firm rotation could be realized at the
initiative of the audit committee rather than through a mandatory
requirement. Our November 21, 2003, report contains the views of the
larger public accounting firms (referred to in the report as Tier 1
firms) and Fortune 1000 public companies' chief financial officers and
their audit committee chairs, population estimates of these views, and
disclosures of sampling errors as well as nonsampling errors generally
found in surveys. Nearly all of the respondents opposed mandatory audit
firm rotation for public accounting firms registered with the PCAOB.
Our study methodology included developing detailed questionnaires to
obtain the views of public accounting firms and public company chief
financial officers and their audit committee chairs on the issues
associated with mandatory audit firm rotation. This supplemental report
contains a copy of each questionnaire, annotated to show summary survey
responses to each question for the Tier 1 firms and the Fortune 1000
public companies' chief financial officers and their audit committee
chairs, and selected narrative comments to some of the open-ended
questions included in the surveys. We are issuing this supplemental
report to provide additional detail on the responses to our surveys on
the potential effects of mandatory audit firm rotation and to
facilitate future research efforts in performing studies related to
these matters.
Appendixes I, II, and III of this report contain the questionnaires
administered to the Tier 1 firms and the Fortune 1000 public companies'
chief financial officers and their audit committee chairs,
respectively, annotated with summary responses for each question. Our
questionnaires were developed after extensive research of studies and
other documents that addressed issues concerning auditor independence
and audit quality associated with the length of a public accounting
firm's tenure and the costs and benefits of mandatory audit firm
rotation. We used the issues identified to develop detailed
questionnaires that were pretested with public accounting firms and
public companies prior to administering the surveys. Appendixes IV, V,
and VI of this report present selected comments to some of the open-
ended questions included in the questionnaires for the Tier 1 firms and
the Fortune 1000 public companies' chief financial officers and their
audit committee chairs, respectively. The number of comments of a
particular type is not necessarily proportional to the number of other
similar responses, and therefore, the comments are not meant to be
representative of the views that might be found in each of the
populations as a whole.
Our survey population of Tier 1 firms included 92 public accounting
firms that were members of the American Institute of Certified Public
Accountants' (AICPA) self-regulatory program for audit quality that
reported having 10 of more SEC clients in 2001 and 5 public accounting
firms that were not members of the AICPA's self-regulatory program but
had 10 or more public company clients registered with the SEC in 2001.
We requested that the Tier 1 firms' chief executive officers or
managing partners, or their designated representatives, complete the
survey. We received responses from 74 of the 97 Tier 1 firms, or 76.3
percent.
After removing 40 private companies from the Fortune 1000 list, we drew
a random sample of 330 public companies and asked their chief financial
officers and audit committee chairs to complete separate
questionnaires. Of the 330 Fortune 1000 public companies sampled, we
received responses from 201 (60.9 percent) of their chief financial
officers and 191 (57.9 percent) of their audit committee chairs.
As discussed in our November 21, 2003,[Footnote 4] report, a
significant part of our study included comprehensive research and
discussions regarding the development and administration of the survey
instruments to gather experienced-based views on the potential costs
and benefits of mandatory audit firm rotation, and the compilation and
analysis of survey data. Our work for the November 21, 2003, report was
conducted in Washington, D.C., between November 2002 and November 2003
in accordance with U.S. generally accepted government auditing
standards. This supplemental report is based on the survey work
performed for the November 21, 2003, report. For additional information
on the scope and methodology for our study, including further details
about the samples, response rates, and a discussion of sampling and
nonsampling errors and efforts to follow up with nonrespondents to our
surveys, see appendix I to our November 2003 report [Hyperlink,
[hyperlink, http://www.gao.gov/products/GAO-04-216].
We are sending copies of this report to the Chairman and Ranking
Minority Member of the House Committee on Energy and Commerce. We are
also sending copies of this report to the Chairman of the Securities
and Exchange Commission, the Chairman of the Public Company Accounting
Oversight Board, and other interested parties. This report will also be
available at no charge on GAO's Web site at [Hyperlink,
http://www.gao.gov].
If you or your offices have any questions concerning this report,
please contact me at (202) 512-9471 or William E. Boutboul, Assistant
Director, at (202) 512-6924. Key contributors are acknowledged in
appendix VII.
Signed by:
Jeanette M. Franzel:
Director:
Financial Management and Assurance:
[End of section]
Appendixes:
Appendix I: Public Accounting Firm Survey on Mandatory Audit Firm
Rotation:
United States General Accounting Office:
Public Accounting Firm:
Survey On Mandatory Audit Firm Rotation:
Introduction:
The Sarbanes-Oxley Act of 2002 (the Act) contains various requirements
to protect investors by improving the accuracy and reliability of
financial reporting of public companies registered with the Securities
and Exchange Commission (SEC). The Act also mandated certain studies,
one of which (contained in Section 207) requires the General
Accounting Office (GAO), the independent audit, investigative, and
evaluation arm of the Congress, to study the potential effects of
requiring mandatory rotation of public accounting firms registered
with the new Public Company Accounting Oversight Board (PCAOB).
To provide a thorough, fair and balanced report to Congress on this
issue, it is essential that we obtain the experiences and viewpoints
of a representative sample of public accounting firms. Your firm has
been selected from a group of public accounting firms comprising the
American Institute of Certified Public Accountants' (AICPA) SEC
Practice Section member firms and other public accounting firms that
performed audits of public companies registered with the SEC, which
are not members of the AICPA's SEC Practice Section.
In conducting the study, the GAO is asking for your cooperation and
assistance by providing the views of your public accounting firm on
the potential effects of mandatory audit firm rotation. This survey
should be completed by the senior executive of your firm (e.g. the
Chief Executive Officer/Managing Partner) or their designated
representative.
The results of the survey will be compiled and presented in summary
form only as part of our report, and GAO will not release individually
identifiable data from this survey, unless compelled by law or
required to do so by Congress. Proprietary business information is
protected by a federal law (18 U.S.C. 1905, the "Trade Secrets Act")
that makes unauthorized disclosure a crime.
Relevant Definitions:
* "public company" refers to issuers of securities subject to the
financial reporting requirements of the Securities Exchange Act of
1934, the Investment Company Act of 1940, and registered with the
Securities and Exchange Commission (SEC). For purposes of this survey,
mutual funds and investment trusts that meet the
statutory definition of issuer of securities are considered public
companies.
* "multinational or foreign public company" is a public company with
significant operations (10 percent or more of total revenue) in one or
more countries outside the United States.
* "domestic public company" is a public company with no significant
operations (10 percent or more of total revenue) outside the United
States.
* "auditor," "auditor of record" and "public accounting firm" refer to
an independent public accounting firm registered with the SEC that
performs audits and reviews of public company financial statements and
prepares attestation reports filed with the SEC. In the future, these
public accounting firms must be registered with the Public Company
Accounting Oversight Board (PCAOB) as required by the Sarbanes-Oxley
Act.
* "mandatory audit firm rotation" refers to the imposition of a limit
on the number of consecutive years in which a particular registered
public accounting firm may be the auditor of record for a public
company (an "issuer").
* "audit quality" refers to the auditor conducting the audit in
accordance with Generally Accepted Auditing Standards (GAAS) to
provide reasonable assurance that the audited financial statements and
related disclosures are (1) presented in accordance with Generally
Accepted Accounting Principles (GAAP) and (2) are not materially
misstated whether due to errors or fraud. This definition assumes that
reasonable third parties with knowledge of the relevant facts and
circumstances would have concluded that the audit was conducted in
accordance with GAAS and that, within the requirements of GAAS, the
auditor appropriately detected and then dealt with known material
misstatements by (1) ensuring that appropriate adjustments, related
disclosures, and other changes were made to the financial statements
to prevent them from being materially misstated, (2) modifying the
auditor's opinion on the financial statements if appropriate
adjustments and other changes were not made, or (3) if warranted,
resigning as the public company's auditor of record and reporting the
reason for the resignation to the SEC.
* "audit failure" refers to audits for which audited financial
statements filed with the SEC contained material misstatements whether
due to errors or fraud, and reasonable third parties with knowledge of
the relevant facts and circumstances would have concluded that the
audit was not conducted in accordance with GAAS, and, therefore, the
auditor failed to appropriately detect and/or deal with known material
misstatements by (1) ensuring that appropriate adjustments, related
disclosures, and other changes were made to the financial statements
to prevent them from being materially misstated, (2) modifying the
auditor's opinion on the financial statements if appropriate
adjustments and other changes were not made, or (3) if warranted,
resigning as the public company's auditor of record and reporting the
reason for the resignation to the SEC.
Public Accounting Firm Background[1]
[1] The appearance of * in place of a statistic indicates that there
were 3 or fewer responses to that question.
1. Is your public accounting firm currently a member of the AICPA's
SEC Practice Section?
N=73:
1. Yes: 97%;
2. No: 3%;
3. No answer.
2. At this time, does your public accounting firm plan to register
with the PCAOB?
N=72:
1. Yes: 96%;
2. No: 1%;
3. Uncertain: 3%;
4. No answer.
3. In total and for each of the following categories, approximately
how many public companies did your public accounting firm serve as
auditor of record during your firm's last fiscal year? Enter numeric
digits in each box.
Total Audit Clients:
Total number of public companies for which your firm served as auditor
of record during your last fiscal year.
N=72;
Mean=143;
Median=20;
Range=2-2528.
Multinational or Foreign Public Company Audit Clients:
Revenue of $5 billion or more: N=*.
Revenue of more than $1 billion but less than $5 billion: N=*.
Revenue of more than $100 million but less than $1 billion: N=*.
Revenue of less than $100 million:
N=16;
Mean=9;
Median=3;
Range=1-65.
Domestic Public Company Audit Clients:
Revenue of $5 billion or more: N=*.
Revenue of more than $1 billion but less than $5 billion: N=*.
Revenue of more than $100 million but less than $1 billion N=18:
Mean=35;
Median=2;
Range=1-495.
Revenue of less than $100 million:
N=70;
Mean=44;
Median=18;
Range=2-659.
If you had no public company audit clients during your last fiscal
year, please skip to question 7.
4. With respect to your public company audit, review, and attest
clients during your firm's last fiscal year, did your firm serve as
auditor of record for one or more public companies that taken together
represented over 25% of the market share of a specific industry?
N=72;
1. Yes: 6%;
2. No: 94%;
3. No answer.
5. Please identify each industry for which your public company audit,
review, and attest clients last fiscal year, represented in the
aggregate, at least 25 percent of the public company market share in
the industry. In addition, for each industry you identified please
also provide your firm's estimate of the aggregate market share your
public company clients represented and the basis your firm used for
estimating market share (for example, share of the number of public
companies in an industry, share of industry revenue, share of industry
market capitalization, etc.)
6. With respect to your public company audit, review and attest
clients during your firm's last fiscal year, please indicate those
industries for which 5 percent or more of your public company audit,
review and attest practice resources (based on hours, staff, etc.)
were devoted to public companies whose primary business activity was
in a specific industry. [Note: the following industry classification
is based on the North American Industry Classification System (NAICS).
Generally, we have included classifications covering each NAICS
industry sector and, with respect to the Manufacturing sector,
selected sub-sectors.]
Accommodations and Food Services: N=4;
Administrative and Support Services and Waste Management and
Remediation Services: N=3;
Agricultural, Forestry, Fishing, and Hunting: N=0;
Ambulatory Health Care Services: N=1;
Arts, Entertainment, and Recreation: N=8;
Construction: N=3;
Educational Services: N=1;
Finance and Insurance: N=30;
Information Services: N=18;
Management of Companies and Enterprises: N=1;
Manufacturing-Chemical: N=4;
Manufacturing-Computer and Electronic Products: N=12;
Manufacturing-Food: N=2;
Manufacturing-Paper: N=0;
Manufacturing-Primary Metal: N=1;
Manufacturing-Transportation Equipment: N=2;
Manufacturing-Other: N=24;
Mining: N=8;
Professional, Scientific, and Technical Services: N=17;
Public Administration: N=1;
Real Estate and Rental and Leasing: N=8;
TradeRetail: N=5;
TradeWholesale: N=8;
Transportation and Warehousing: N=4;
Utilities: N=3;
Other-please specify in box below: N=30;
If you checked "Other" industries - specify below:
7. During your firm's last three fiscal years, approximately how many
times did your firm succeed another public accounting firm as auditor
of record for a public company client?
N=72;
Mean=38;
Median=10;
Range=1-500.
8. Since December 31, 2001, approximately how many times did your firm
succeed Arthur Andersen as auditor of record for a public company
audit, review, and attest client?
N=28;
Mean=44;
Median=2;
Range=1-308.
Potential Effects Of Mandatory Audit Firm Rotation:
Auditor Knowledge and Experience:
The following questions address issues concerning how mandatory audit
firm rotation may affect the auditor's ability to detect financial
reporting issues that may indicate material misstatements in a public
company's financial statements.
9. In your opinion, how important are each of the following factors in
affecting the auditor's ability to detect financial reporting issues
that may indicate material misstatements in a public company's
financial statements? Please check one button in each row.
Appropriate staff education, training and experience: N=73;
Very Great Importance: 70%;
Great Importance: 30%;
Moderate Importance: 0%;
Some Importance: 0%;
Little or No Importance: 0%;
Don't Know: 0%.
Appropriate knowledge of Generally Accepted Accounting Principles:
N=73;
Very Great Importance: 59%;
Great Importance: 36%;
Moderate Importance: 5%;
Some Importance: 0%;
Little or No Importance: 0%;
Don't Know: 0%.
Appropriate knowledge of Generally Accepted Auditing Standards: N=73;
Very Great Importance: 59%;
Great Importance: 33%;
Moderate Importance: 8%;
Some Importance: 0%;
Little or No Importance: 0%;
Don't Know: 0%.
Appropriate audit team staffing level: N=73;
Very Great Importance: 60%;
Great Importance: 36%;
Moderate Importance: 4%;
Some Importance: 0%;
Little or No Importance: 0%;
Don't Know: 0%.
Appropriate access to the firm's technical resources (whether locally
or nationally): N=73;
Very Great Importance: 48%;
Great Importance: 32%;
Moderate Importance: 19%;
Some Importance: 1%;
Little or No Importance: 0%;
Don't Know: 0%.
Appropriate firm experience within the public company's industry: N=73;
Very Great Importance: 38%;
Great Importance: 41%;
Moderate Importance: 21%;
Some Importance: 0%;
Little or No Importance: 0%;
Don't Know: 0%.
Appropriate risk assessment process for the client acceptance process
N=73;
Very Great Importance: 34%;
Great Importance: 43%;
Moderate Importance: 16%;
Some Importance: 4%;
Little or No Importance: 3%;
Don't Know: 0%.
Appropriate knowledge of the client's operations, systems, and
financial reporting practices: N=73;
Very Great Importance: 73%;
Great Importance: 22%;
Moderate Importance: 5%;
Some Importance: 0%;
Little or No Importance: 0%;
Don't Know: 0%.
10. Please describe any relevant factors not listed above that you
believe would likely affect the auditor's ability to detect financial
reporting issues that may indicate material misstatements in a public
company's financial statements and, in your response, please specify
the level of its importance using the same categories as above.
11. Recognizing that auditors of record likely respond to their less
specific knowledge and experience of new public company clients by
applying additional audit resources during the early years of an audit
engagement, how long, on average, does it take your firm, for each
category of public company listed below, to become "sufficiently
familiar" with a new client's operations and financial reporting
practices to no longer require the additional audit resources often
associated with a new public company client?
Multinational or Foreign Public Company with revenue of $5 billion or
more: N=60;
1 Year: 0%;
2-3 Years: 7%;
4-5 Years: 0%;
More than 5 Years: 0%;
No experience or basis with this category of public company: 93%.
Domestic Public Company with revenue of $5 billion or more: N=61;
1 Year: 0%;
2-3 Years: 8%;
4-5 Years: 0%;
More than 5 Years: 0%;
No experience or basis with this category of public company: 92%.
Multinational or Foreign Public Company with revenue of $100 million
but less than $5 billion: N=60;
1 Year: 0%;
2-3 Years: 18%;
4-5 Years: 2%;
More than 5 Years: 0%;
No experience or basis with this category of public company: 80%.
Domestic Public Company with revenue of $100 million but less than $5
billion: N=69;
1 Year: 7%;
2-3 Years: 42%;
4-5 Years: 3%;
More than 5 Years: 0%;
No experience or basis with this category of public company: 48%.
Multinational or Foreign Public Company with revenue of less than $100
million: N=65;
1 Year: 8%;
2-3 Years: 41%;
4-5 Years: 8%;
More than 5 Years: 2%;
No experience or basis with this category of public company: 41%.
Domestic Public Company with revenue of less than $100 million: N=69;
1 Year: 25%;
2-3 Years: 65%;
4-5 Years: 8%;
More than 5 Years: 1%;
No experience or basis with this category of public company: 1%.
12. Under mandatory audit firm rotation, new audit firms would provide
a "fresh look" at clients' operations and financial reporting
practices. In general, how does the fresh look a new auditor provides
affect the likelihood that the new auditor will detect financial
reporting issues that may materially affect a public company's
financial statements, which the previous auditor may not have
detected? N=73;
1. Significantly increased likelihood: 2%;
2. Somewhat increased likelihood: 29%;
3. No effect on likelihood: 33%;
4. Somewhat decreased likelihood: 18%;
5. Significantly decreased likelihood: 18%;
6. No answer.
13. Under mandatory audit firm rotation, how would you compare the new
public accounting firm's likely initial level of knowledge of the
client's specific operations and financial reporting practices to the
previous auditor of record's level of knowledge of the client's
operations and financial reporting processes? N=73;
1. Significantly less: 54%;
2. Somewhat less: 41%;
3. About the same: 4%;
4. Somewhat more: 0%;
5. Significantly more: 1%;
6. No answer.
If you answered question 13 by selecting 3, 4 or 5, please skip to
question 15.
14. If, under mandatory audit firm rotation, the new public accounting
firm is likely to have initially less specific knowledge of the
client's operations and financial reporting practices, how would this
less specific knowledge likely affect the risk that the new auditor
would not detect material misstatements in the financial statements
during the first year of the auditor's tenure? N=69;
1. Significantly increase the risk: 36%;
2. Somewhat increase the risk: 57%;
3. Neither increase nor decrease the risk: 6%;
4. Somewhat decrease the risk: 1%;
5. Significantly decrease the risk: 0%;
6. No answer.
15. Under mandatory audit firm rotation, how would you rate the
potential value of the PCAOB requiring additional and/or enhanced
audit procedures (as listed below) to assist the new auditor of record
in reducing the risk of not detecting material misstatements in the
client's financial statements to an acceptable level? Please select
one box in each row.
Additional procedures in areas material to the financial statements
over what would likely be applied if the firm was more client
experienced: N=72;
Very Great Value: 3%;
Great Value: 22%;
Moderate Value: 22%;
Some Value: 25%;
Little or No Value: 22%;
Don't Know: 6%.
Additional verification of client-supplied statements and data likely
to be material to the financial statements: N=72;
Very Great Value: 3%;
Great Value: 18%;
Moderate Value: 22%;
Some Value: 21%;
Little or No Value: 32%;
Don't Know: 4%.
Enhanced access to key members of the previous firm's audit engagement
team: N=72;
Very Great Value: 4%;
Great Value: 28%;
Moderate Value: 28%;
Some Value: 22%;
Little or No Value: 17%;
Don't Know: 1%.
Enhanced access to audit documentation of the previous firm's audit
engagement team: N=72;
Very Great Value: 7%;
Great Value: 29%;
Moderate Value: 27%;
Some Value: 21%;
Little or No Value: 15%;
Don't Know: 1%.
16. Please describe other additional and/or enhanced audit procedures
not listed above that you believe would be of added value to the new
auditor of record in reducing the risk of not detecting material
misstatements in a public company's financial statements and, in your
response, please indicate the level of its value using the same
categories as above.
17. Under existing generally accepted auditing standards, does your
firm, as auditor of record, have sufficient flexibility to implement
the audit procedures without the PCAOB requiring the additional and/or
enhanced audit procedures, including those listed above, needed to
reduce your firm's risk of not detecting material misstatements in a
public company's financial statements to an acceptable level? N=73;
1. Yes: 95%;
2. No: 5%;
3. No answer.
18. Please identify which audit procedures listed above the PCAOB
should consider requiring under mandatory audit firm rotation to
further reduce your firm's risk of not detecting material
misstatements to an acceptable level.
19. Do you have any additional comments on the issues covered in this
section or comments concerning mandatory audit firm rotation as
related to the auditor's client-specific knowledge and experience
(including any other issues not covered)?
Auditor Independence:
Some say a public accounting firm's and/or its partners' independence
may be adversely affected by economic pressures to retain the audit
client as well as by developing too close a relationship with the
public company and its management. These pressures may cause a public
accounting firm and/or its partners to not appropriately challenge the
client's accounting and financial reporting practices.
Concern about auditor independence relates to the public accounting
firm's and its partners' ability and willingness to appropriately deal
with known financial reporting issues that may indicate materially
misstated financial statements.
An auditor appropriately deals with financial reporting issues that
arise during an audit by (1) ensuring that appropriate adjustments,
related disclosures, and other changes are made to the financial
statements to ensure that they are fairly stated in accordance with
generally accepted accounting principles, (2) modifying the auditor's
opinion on the financial statements if appropriate adjustments and
other changes are not made, or (3) if warranted, resigning as the
public company's auditor of record and reporting the reason for the
resignation to the SEC.
20. In your opinion, under mandatory audit firm rotation, what is the
likely impact that the new auditor's focus ("fresh look") on a
client's operations and financial reporting practices would have on
the auditor's potential for dealing more appropriately with financial
reporting issues that may indicate material misstatements in a public
company's financial statements? N=72;
1. Significantly increase the potential: 6%;
2. Somewhat increase the potential: 21%;
3. Neither increase nor decrease the potential: 54%;
4. Somewhat decrease the potential: 15%;
5. Significantly decrease the potential: 4%;
6. No answer.
21. How would you rate the pressure on your public accounting firm and
the engagement partner(s) to retain clients as a factor in whether or
not they appropriately deal with financial reporting issues that may
materially affect a public company's financial statements?
Pressure on the firm in the absence of mandatory audit firm rotation:
N=72;
Significant Factor: 3%;
Strong Factor: 3%;
Moderate Factor: 18%;
Small Factor: 22%;
No Factor: 53%;
Don't Know: 1%.
Pressure on the firm with mandatory audit firm rotation: N=72;
Significant Factor: 1%;
Strong Factor: 1%;
Moderate Factor: 16%;
Small Factor: 29%;
No Factor: 50%;
Don't Know: 3%.
Pressure on the engagement partner(s) with mandatory audit firm
rotation: N=72;
Significant Factor: 3%;
Strong Factor: 3%;
Moderate Factor: 22%;
Small Factor: 22%;
No Factor: 49%;
Don't Know: 1%.
Pressure on the engagement partner(s) in the absence of mandatory
audit firm rotation: N=72;
Significant Factor: 1%;
Strong Factor: 3%;
Moderate Factor: 14%;
Small Factor: 32%;
No Factor: 49%;
Don't Know: 1%.
22. How would you rate the pressure on your public accounting firm and
the engagement partner(s) to retain clients as a factor in whether or
not they appropriately challenge "overly aggressive and/or optimistic"
financial reporting positions taken by public company management in
interpreting and applying generally accepted accounting principles?
Pressure on the firm in the absence of mandatory audit firm rotation:
N=72;
Significant Factor: 0%;
Strong Factor: 1%;
Moderate Factor: 15%;
Small Factor: 24%;
No Factor: 60%;
Don't Know: 0%.
Pressure on the firm with mandatory audit firm rotation: N=72;
Significant Factor: 1%;
Strong Factor: 0%;
Moderate Factor: 15%;
Small Factor: 24%;
No Factor: 59%;
Don't Know: 1%.
Pressure on the engagement partner(s) in the absence of mandatory
audit firm rotation: N=72;
Significant Factor: 0%;
Strong Factor: 1%;
Moderate Factor: 17%;
Small Factor: 26%;
No Factor: 56%;
Don't Know: 0%.
Pressure on the engagement partner(s) with mandatory audit firm
rotation: N=72;
Significant Factor: 1%;
Strong Factor: 0%;
Moderate Factor: 17%;
Small Factor: 26%;
No Factor: 56%;
Don't Know: 0%.
23. How would you rate the potential of a subsequent lawsuit and/or
regulatory action against the public accounting firm and/or the
engagement partner(s) as a factor in whether or not the public
accounting firm and the engagement partner(s) appropriately deal with
financial reporting issues that may materially affect a public company
client's financial statements?
Pressure on the firm in the absence of mandatory audit firm rotation;
N=72;
Significant Factor: 21%;
Strong Factor: 22%;
Moderate Factor: 18%;
Small Factor: 15%;
No Factor: 24%;
Don't Know: 0%.
Pressure on the firm with mandatory audit firm rotation: N=72;
Significant Factor: 24%;
Strong Factor: 22%;
Moderate Factor: 18%;
Small Factor: 14%;
No Factor: 22%;
Don't Know: 0%.
Pressure on the engagement partner(s) in the absence of mandatory
audit firm rotation: N=72;
Significant Factor: 21%;
Strong Factor: 22%;
Moderate Factor: 18%;
Small Factor: 15%;
No Factor: 24%;
Don't Know: 0%.
Pressure on the engagement partner(s) with mandatory audit firm
rotation: N=72;
Significant Factor: 24%;
Strong Factor: 22%;
Moderate Factor: 18%;
Small Factor: 14%;
No Factor: 22%;
Don't Know: 0%.
24. In the absence of mandatory audit firm rotation, to what extent do
you believe that the possibility of being replaced by another firm as
auditor of record is a factor in whether or not the incumbent audit
firm appropriately deals with financial reporting issues that may
materially affect the public company client's financial statements?
N=71;
1. A significant factor: 1%;
2. A strong factor: 6%;
3. A moderate factor: 16%;
4. A small factor: 38%;
5. No factor: 39%;
6. No answer.
25. Under mandatory audit firm rotation, to what extent do you believe
the incumbent audit firm's knowledge that a new firm will replace the
incumbent firm as auditor of record at the end of a specified audit
tenure period would be a factor in whether or not the incumbent firm
appropriately deals with financial reporting issues that may
materially affect the public company client's financial statements?
N=71;
1. A significant factor: 3%;
2. A strong factor: 4%;
3. A moderate factor: 20%;
4. A small factor: 35%;
5. No factor: 38%;
6. No answer.
26. How would establishing a limit on a public accounting firm's
tenure as a public company's auditor of record affect the perception
of the auditor's independence held by the following:
Perception of auditor independence held by the capital markets
(including analysts, banks, brokers, exchanges, and rating agencies):
N=71;
Significantly Increase: 4%;
Somewhat Increase: 30%;
Neither Increase or Decrease: 52%;
Somewhat Decrease: 1%;
Significantly Decrease: 0%;
Don't Know: 13%.
Perception of auditor independence held by institutional investors:
N=71;
Significantly Increase: 4%;
Somewhat Increase: 30%;
Neither Increase or Decrease: 52%;
Somewhat Decrease: 1%;
Significantly Decrease: 0%;
Don't Know: 13%.
Perception of auditor independence held by individual Investors: N=71;
Significantly Increase: 6%;
Somewhat Increase: 36%;
Neither Increase or Decrease: 44%;
Somewhat Decrease: 1%;
Significantly Decrease: 0%;
Don't Know: 13%.
27. Traditionally, a change in the auditor of record for a public
company has been viewed as a "red flag" signal to the capital markets
and the public to inquire into the underlying reason for the change in
auditor. What impact would the scheduled change in auditors required
under mandatory audit firm rotation have on the "red flag" signal
otherwise associated with a change in auditor? N=70;
1. Significant likelihood of retaining the "red flag" signal: 47%;
2. Some likelihood of retaining the "red flag" signal: 42%;
3. No change in the "red flag" signal: 11%;
4. Some likelihood of eliminating the "red flag" signal: 0%;
5. Significant likelihood of eliminating the "red flag" signal: 0%;
6. No answer.
28. Assuming that under mandatory audit firm rotation public companies
and public accounting firms can, on the initiative of either party,
terminate their relationship, how likely is it that for any
unscheduled change in the auditor of record, the traditional "red
flag' signal to the capital markets and the public would be retained
(an unscheduled change would be one that does not occur as a direct
result of an audit firm rotation requirement)? N=71;
1. Significant likelihood of retaining the "red flag" signal: 48%;
2. Some likelihood of retaining the "red flag" signal: 35%;
3. No change in the "red flag" signal: 17%;
4. Some likelihood of eliminating the "red flag' signal: 0%;
5. Significant likelihood of eliminating the "red flag" signal: 0%;
6. No answer.
29. Do you have any additional comments on the issues covered in this
section or comments concerning mandatory audit firm rotation as
related to the auditor's independence (including any other issues not
covered)?
Audit Quality and Audit Failure:
A quality audit occurs when the audit, conducted in accordance with
GAAS, of a public company's financial statements filed with the SEC
provides reasonable assurance that the audited financial statements
and related disclosures are presented in accordance with GAAP and not
materially misstated whether due to errors or fraud. An audit
failure occurs when audited financial statements filed with the SEC
contained material misstatements whether due to errors or fraud and
reasonable third parties with knowledge of the relevant facts and
circumstances would have concluded that the audit was not conducted in
accordance with GAAS.
30. As the end of a set audit tenure approaches under mandatory audit
firm rotation, how likely is it that the audit firm will move its most
knowledgeable and experienced audit personnel from the current audit
engagement to other efforts or engagements to enhance the firm's
ability to attract and retain other clients? N=71;
1. Very likely: 13%;
2. Somewhat likely: 46%;
3. Neither likely nor unlikely: 28%;
4. Somewhat unlikely: 7%;
5. Very unlikely: 6%;
6. No answer.
If you answered question 30 by selecting 3, 4 or 5, please skip to
question 32.
31. If under mandatory audit firm rotation, public accounting firms
move their most knowledgeable and experienced audit personnel from the
current audit engagement to other efforts to enhance the firm's
ability to attract and/or retain clients in the future, how would this
affect the risk of audit failure on the current audit engagement? N=42;
1. Significantly increase the risk: 14%;
2. Somewhat increase the risk: 72%;
3. No change in the risk: 14%;
4. Somewhat decrease the risk: 0%;
5. Significantly decrease the risk: 0%;
6. No answer.
32. Based on public company audit clients your firm served during the
firm's last fiscal year, what is your estimate of the average period
for which the firm has served your public company clients as auditor
of record (the average audit tenure period)? N=68;
0 years: 0%;
1-5 years: 41%;
6-10 years: 46%;
11-15 years: 12%;
16-20 years: 1%;
21-25 years: 0%;
More than 25 years: 0%;
No answer.
33. For approximately how many of your firm's public company audit
clients has your firm served as auditor of record for more than 25
years? N=67;
No public companies: N=53: 79%;
1-5 public companies: N=11: 16%;
6-10 public companies: N= 3: 5%.
34. In your opinion, how would mandatory audit firm rotation likely
change the future average audit tenure period for your firm's public
company audit clients? N=70;
1. Average audit tenure period would likely increase: 0%;
2. Average audit tenure period would likely stay the same: 24%;
3. Average audit tenure period would likely decrease: 76%;
4. No answer.
If you answered question 34 by selecting either 1 or 2, please skip to
question 36.
35. If your firm's average audit tenure period would likely decrease
under mandatory audit firm rotation, what will be the affect on your
firm's existing incentives to invest the resources needed to
understand the client's operations and financial reporting practices
in order to devise effective audit procedures and tools? N=53;
1. Existing incentives will be significantly reduced: 11%;
2. Existing incentives will be somewhat reduced: 25%;
3. There is likely to be no change on existing incentives: 62%;
4. Existing incentives will be somewhat increased: 2%;
5. Existing incentives will be significantly increased: 0%;
6. No answer.
For the following four statements, please indicate the extent to which
you agree or disagree.
36. The risk of an audit failure is higher in the early years of an
audit tenure period as the new public accounting firm is more likely
to have not fully developed and applied an in depth understanding of
the new client's operations and financial reporting practices. N=71;
1. Strongly agree: 34%;
2. Generally agree: 45%;
3. Neither agree nor disagree: 10%;
4. Generally disagree: 10%;
5. Strongly disagree: 1%;
6. No answer.
37. The risk of an audit failure is higher in the early years of an
audit tenure period because the new public accounting firm is more
likely to place heavy reliance on information provided by client
management. N=72;
1. Strongly agree: 11%;
2. Generally agree: 17%;
3. Neither agree nor disagree: 23%;
4. Generally disagree: 39%;
5. Strongly disagree: 10%;
6. No answer.
38. The risk of an audit failure is likely to increase as the audit
tenure period increases due to the "comfort level" (familiarity with
client management and the desire to retain the client over many years)
provided by the public accounting firm's long-term relationship with
client management. N=71;
1. Strongly agree: 1%;
2. Generally agree: 13%;
3. Neither agree nor disagree: 17%;
4. Generally disagree: 39%;
5. Strongly disagree: 30%;
6. No answer.
39. The risk of an audit failure is likely to increase as the audit
tenure period increases due to client management becoming too familiar
with the auditor's approach and procedures. N=72;
1. Strongly agree: 3%;
2. Generally agree: 18%;
3. Neither agree nor disagree: 29%;
4. Generally disagree: 31%;
5. Strongly disagree: 19%;
6. No answer.
40. Do you have any additional comments on the issues covered in this
section or comments concerning mandatory audit firm rotation as
related to audit quality and audit failures (including any other
issues not covered)?
Audit-Related Costs and Audit Fees:
The following questions involve audit costs and fees of public
accounting firms, and costs incurred by public companies in selecting
new firms and supporting the firms selected in performing the initial
audit. Audit cost is the cost incurred by a public accounting firm to
perform the public company's financial statement audit. In addition to
the firm's actual audit cost, public accounting firms also incur
marketing costs associated with their efforts to acquire or retain
audit clients. Audit fee is the amount the public accounting firm
charges the public company to perform the financial statement audit.
A public company incurs internal costs associated with the company's
efforts to select and support the new public accounting firm's efforts
to understand the public company's operations and financial reporting
practices. The internal selection costs and support costs incurred by
a public company are in addition to the audit fees paid to the public
accounting firm for the financial statement audit.
41. To overcome the learning curve associated with understanding the
public company's operations and financial reporting practices, a
public accounting firm's initial-year audit costs are likely to exceed
the firm's subsequent annual audit costs? N=73;
1. Yes: 96%;
2. No: 4%;
3. No answer.
If you answered no to question 41, please skip to question 45.
42. On average, how would the additional audit costs a firm is likely
to incur in an initial year audit of a new public company client
compare to the annual audit costs in subsequent years for the same
client? Additional audit costs are likely to be: N=69;
1. More than 50 percent of subsequent years' audit costs: 10%;
2. More than 40 percent but less than 50 percent of subsequent years'
audit costs: 10%;
3. More than 30 percent but less than 40 percent of subsequent years'
audit costs: 19%;
4. More than 20 percent but less than 30 percent of subsequent years'
audit costs: 49%;
5. More than 10 percent but less than 20 percent of subsequent
years' audit costs: 10%;
6. Less than 10 percent of subsequent years' audit costs: 2%;
7. No answer.
For the following two statements, please indicate the extent to which
you agree or disagree.
43. When a change in public accounting firm is voluntary, the new
firm's additional initial year audit costs are more likely to be
absorbed by the firm and not passed on to the public company in the
form of higher audit fees because of the firm's interest in retaining
the audit client. N=68;
1. Strongly agree: 28%;
2. Generally agree: 57%;
3. Neither agree nor disagree: 5%;
4. Generally disagree: 7%;
5. Strongly disagree: 3%;
6. No answer.
44. A likely consequence of limiting a public accounting firm's tenure
as the auditor of record under mandatory audit firm rotation is that
firms will be more likely to increase audit fees during the now
limited audit tenure period to increase the likelihood of recovering
any additional initial year audit costs incurred to fully understand
the public company's operations and financial reporting practices.
N=68;
1. Strongly agree: 49%;
2. Generally agree: 41%;
3. Neither agree nor disagree: 4%;
4. Generally disagree: 6%;
5. Strongly disagree: 0%;
6. No answer.
45. Under mandatory audit firm rotation, will your public accounting
firm likely incur additional marketing costs associated with the
increased opportunities to compete for new audit clients? N=72;
1. Yes: 79%;
2. No: 15%;
3. Uncertain: 6%;
4. No answer.
If you answered 2 or 3 to question 45, please skip to question 48.
46. How will additional marketing costs to compete for a new audit
client under mandatory audit firm rotation compare to the likely
initial-year audit fee? Additional marketing costs are likely to be:
N=57;
1. More than 10 percent: 37%;
2. More than 5 percent but less than 10 percent: 30%;
3. More than 1 percent but less than 5 percent: 12%;
4. Less than 1 percent: 2%;
5. No basis or experience on which to estimate: 19%;
6. No answer.
For the following statement, please indicate the extent to which you
agree or disagree.
47. The additional marketing costs that are likely to occur under
mandatory audit firm rotation will be passed on to public companies
through higher audit fees. N=56;
1. Strongly agree: 32%;
2. Agree: 46%;
3. Neither agree nor disagree: 11%;
4. Disagree: 7%;
5. Strongly disagree: 0%;
6. No basis or experience on which to base a response: 4%;
7. No answer.
48. Under mandatory audit firm rotation, assuming new public
accounting firms are selected to replace incumbent firms through the
increased opportunities to compete by firms willing and able to
perform the audit, what are your views on the likely affect on audit
fees over the long-term? N=73;
1. Likely lead to lower audit fees over time: 6%;
2. Likely lead to higher audit fees over time: 81%;
3. No affect on audit fees over time: 8%;
4. Uncertain: 5%;
5. No answer.
If you answered 2 in response to question 48, skip to question 53. If
you selected 3 or 4 as your response to question 48, please skip to
question 55.
49. If you believe that increased opportunities to compete under
mandatory audit firm rotation will lead to lower audit fees over the
long-term, do you believe that audit fees will decrease by: N=4;
1-5 percent: 0%;
6-10 percent: 75%;
11-15 percent: 0%;
16-20 percent: 0%;
Greater than 20 percent: 25%;
No basis to estimate: 0%;
No answer.
For the following two statements, please indicate the extent to which
you agree or disagree.
50. The lower audit fees likely to occur from increased opportunities
to compete under mandatory audit firm rotation will likely result from
increased audit efficiencies and related lower audit costs. N=4;
1. Strongly agree: 0%;
2. Agree: 25%;
3. Neither agree nor disagree: 0%;
4. Disagree: 25%;
5. Strongly disagree: 50%;
6. No answer.
51. The lower audit fees likely to occur from increased opportunities
to compete under mandatory audit firm rotation will likely be achieved
through reduced firm profitability. N=4;
1. Strongly agree: 25%;
2. Agree: 50%;
3. Neither agree nor disagree: 25%;
4. Disagree: 0%;
5. Strongly disagree: 0%;
6. No answer.
52. If you believe that the lower audit fees that may result from
increased opportunities to compete are likely to occur for reasons
other than increased audit efficiencies/related lower audit costs or
reduced firm profitability, please describe why you think audit fees
would be lower?
If you answered the questions above about lower audit fees, please
skip the next two questions.
53. If you believe that increased opportunities for audit firms to
compete likely to occur under mandatory audit firm rotation will lead
to higher audit fees, by what percentage do you believe that over the
long-term audit fees will increase by? N=58;
1-5 percent: 0%;
6-10 percent: 14%;
11-15 percent: 10%;
16-20 percent: 33%;
Greater than 20 percent: 34%;
No basis to estimate: 9%;
No answer.
54. If you believe that the increased competition likely to occur
under mandatory audit firm rotation will lead to higher audit fees
over the long-term, please indicate why you think audit fees would be
higher?
55. Under mandatory audit firm rotation, assuming the incumbent public
accounting firm is replaced through a competition among interested
firms, do you believe that public companies will incur selection costs
associated with holding the competition? N=72;
1. Yes: 90%;
2. No: 3%;
3. No basis to estimate: 7%;
4. No answer.
If you answered 2 or 3 to question 55, please skip to question 57.
56. In your opinion, what is the likely level of selection costs that
public companies are likely to incur as a result of changing their
audit firms as compared to the cost of the initial year audit fee for
the financial statement audit. Selection costs are likely to be: N=64;
1. 20 percent or more: 5%;
2. More than 15 percent but less than 20 percent: 8%;
3. More than 10 percent but less than 15 percent: 20%;
4. More than 5 percent but less than 10 percent: 20%;
5. Less than 5 percent: 17%;
6. No basis to estimate: 30%;
7. No answer.
57. Following a change in public accounting firms (whether voluntary
or under a mandatory audit firm rotation), do you believe the public
company will likely incur additional initial year support costs
associated with supporting the new public accounting firm in its
efforts to gain an understanding of the public company's operations
and financial reporting practices? N=70;
1. Yes: 94%;
2. No: 3%;
3. No basis to estimate: 3%;
4. No answer.
If you answered 2 or 3 to question 57, please skip to question 59.
58. What is the level of the additional initial year support costs
(internal costs that exceed level needed to support the previous
auditor of record) public companies are likely to incur following a
change in audit firm as compared to initial year audit fee for the
financial statement audit? Additional initial year support costs are
likely to be: N=66;
1. 50 percent or more: 8%;
2. More than 40 percent but less than 50 percent: 0%;
3. More than 30 percent but less than 40 percent: 12%;
4. More than 20 percent but less than 30 percent: 27%;
5. More than 10 percent but less than 20 percent: 21%;
6. Less than 10 percent: 11%;
7. No basis or experience on which to estimate: 21%;
8. No answer.
59. Some have argued that mandatory audit firm rotation would benefit
auditor independence and audit quality by providing a new auditor
focus ("fresh look") on the public company's operations and financial
reporting practices. Others have argued that under mandatory audit
firm rotation (1) the new auditor's lower level of client-specific
knowledge and experience may negatively affect audit quality, and it (2)
would increase the cost that public companies pay for financial
statement audits because of higher initial audit fees and/or
additional costs associated with selecting and supporting a new audit
firm.
With respect to audits of public companies performed by your firm,
which of the following statements best expresses your firm's views on
the potential costs and benefits that may result under mandatory audit
firm rotation. N=72;
1. Costs are likely to significantly exceed the benefits: 61%;
2. Costs are likely to moderately exceed the benefits: 24%;
3. Costs and benefits are likely to be about equal: 4%;
4. Benefits are likely to moderately exceed costs: 3%;
5. Benefits are likely to significantly exceed the costs: 4%;
6. No basis to judge: 4%;
7. No answer.
60. With respect to the costs and benefits that may result from
mandatory audit firm rotation, to what extent do you believe the
likely costs and benefits of mandatory audit firm rotation varies
based on the nature and size of the public company being audited?
Multinational or Foreign Public Company with revenue of $5 billion or
more: N=69;
Costs are Likely To Significantly Exceed Benefits: 25%;
Costs are Likely To Moderately Exceed Benefits: 10%;
Costs and Benefits Are Likely To Be About Equal: 3%;
Benefits Are Likely To Moderately Exceed Costs: 0%;
Benefits Are Likely To Significantly Exceed Costs: 6%;
No Basis To Judge: 56%.
Domestic Public Company with revenue of $5 billion or more: N=69;
Costs are Likely To Significantly Exceed Benefits: 23%;
Costs are Likely To Moderately Exceed Benefits: 12%;
Costs and Benefits Are Likely To Be About Equal: 3%;
Benefits Are Likely To Moderately Exceed Costs: 0%;
Benefits Are Likely To Significantly Exceed Costs: 6%;
No Basis To Judge: 56%.
Multinational or Foreign Public Company with revenue of $100 million
but less than $5 billion: N=69;
Costs are Likely To Significantly Exceed Benefits: 32%;
Costs are Likely To Moderately Exceed Benefits: 13%;
Costs and Benefits Are Likely To Be About Equal: 3%;
Benefits Are Likely To Moderately Exceed Costs: 0%;
Benefits Are Likely To Significantly Exceed Costs: 6%;
No Basis To Judge: 46%.
Domestic Public Company with revenue of $100 million but less than $5
billion: N=69;
Costs are Likely To Significantly Exceed Benefits: 35%;
Costs are Likely To Moderately Exceed Benefits: 23%;
Costs and Benefits Are Likely To Be About Equal: 4%;
Benefits Are Likely To Moderately Exceed Costs: 2%;
Benefits Are Likely To Significantly Exceed Costs: 3%;
No Basis To Judge: 33%.
Multinational or Foreign Public Company with revenue of less than $100
million: N=70;
Costs are Likely To Significantly Exceed Benefits: 43%;
Costs are Likely To Moderately Exceed Benefits: 23%;
Costs and Benefits Are Likely To Be About Equal: 1%;
Benefits Are Likely To Moderately Exceed Costs: 4%;
Benefits Are Likely To Significantly Exceed Costs: 3%;
No Basis To Judge: 26%.
Domestic Public Company with revenue of less than $100 million: N=70;
Costs are Likely To Significantly Exceed Benefits: 57%;
Costs are Likely To Moderately Exceed Benefits: 32%;
Costs and Benefits Are Likely To Be About Equal: 4%;
Benefits Are Likely To Moderately Exceed Costs: 4%;
Benefits Are Likely To Significantly Exceed Costs: 3%;
No Basis To Judge: 0%.
61. Do you have any additional comments on the issues covered in this
section or comments concerning mandatory audit firm rotation as it
relates to audit costs and audit fees (including any other issues not
covered)?
Competition:
The following questions are intended to obtain the views of survey
respondents on various competition-related issues associated with the
acquisition and performance of financial audit services for public
companies and how those views might be affected by mandatory audit
firm rotation.
62. To what extent do you believe that the spin-off of consulting
services by three of the Big 4 firms is likely to affect your public
accounting firm's opportunities to provide financial audit services to
potential public company clients? N=71;
1. Significantly increase the opportunities: 2%;
2. Somewhat increase the opportunities: 14%;
3. Neither increase nor decrease the opportunities: 63%;
4. Somewhat decrease the opportunities: 11%;
5. Significantly decrease the opportunities: 0%;
6. No basis to estimate: 10%;
7. No answer.
63. To what extent do you believe that the recent additional
consolidation of the major public accounting firms (e.g. Big 5 to Big
4) is likely to affect your public accounting firm's opportunities to
provide financial audit services to public companies? N=72;
1. Significantly increase the opportunities: 4%;
2. Somewhat increase the opportunities: 49%;
3. Neither increase nor decrease the opportunities: 36%;
4. Somewhat decrease the opportunities: 8%;
5. Significantly decrease the opportunities: 0%;
6. No basis to estimate: 3%;
7. No answer.
64. To what extent do you believe that the new auditor independence
rules prohibiting the auditor of record from also providing certain
nonaudit services as stated by the Sarbanes-Oxley Act of 2002 and
related SEC regulations are likely to affect your public accounting
firm's future opportunities to provide financial audit services to new
public company clients? N=72;
1. Significantly increase the opportunities: 0%;
2. Somewhat increase the opportunities: 45%;
3. Neither increase nor decrease the opportunities: 39%;
4. Somewhat decrease the opportunities: 11%;
5. Significantly decrease the opportunities: 1%;
6. No basis to estimate: 4%;
7. No answer.
65. What are your views on how mandatory audit firm rotation would
likely affect the opportunities public accounting firms have to
provide financial audit services to public companies? N=73;
1. Significantly increase the number of opportunities to compete: 4%;
2. Somewhat increase the number of opportunities to compete: 48%;
3. Neither increase nor decrease the number of opportunities
to compete: 30%;
4. Somewhat decrease the number of opportunities to compete: 3%;
5. Significantly decrease the number of opportunities to compete: 4%;
6. No basis to estimate: 11%;
7. No answer.
66. What are your views on how mandatory audit firm rotation would
likely affect the number of public accounting firms willing and able
to compete for audits of public companies? N=72;
1. Significantly increase the number of firms: 1%;
2. Somewhat increase the number of firms: 13%;
3. Neither increase nor decrease the number of firms: 22%;
4. Somewhat decrease the number of firms: 33%;
5. Significantly decrease the number of firms: 21%;
6. No basis to estimate: 10%;
7. No answer.
If you answered 3 or 6 to question 66, please skip to question 69.
67. If you believe that mandatory audit firm rotation would likely
change the number of public accounting firms willing and able to
compete for audits of public companies, what affect would the likely
change in the number of firms have on audit fees? N=49;
1. Increase the number of firms willing and able to compete
and contribute to lower audit fees: 4%;
2. Increase the number of firms willing and able to compete
and contribute to higher audit fees: 12%;
3. The likely change in the number of firms would neither
increase nor decrease audit fees: 6%;
4. Decrease the number of firms willing and able to compete and
contribute to lower audit fees: 4%;
5. Decrease the number of firms willing and able to compete
and contribute to higher audit fees: 72%;
6. No basis to estimate: 2%;
7. No answer.
If you answered 3 or 6 to question 67, please skip to question 69.
68. Please provide a brief explanation for why the likely change in
the number of firms would impact audit fees as noted in your response
to the above question.
69. What are your views on how mandatory audit firm rotation would
affect the number of firms willing and able to provide financial audit
services for public companies in specialized industries? N=73;
1. Significantly increase the number of firms willing and able to
compete: 1%;
2. Somewhat increase the number of firms willing and able to compete:
10%;
3. Neither increase nor decrease the number of firms willing and able
to compete: 29%;
4. Somewhat decrease the number of firms willing and able to compete:
29%;
5. Significantly decrease the number of firms willing and able to
compete: 19%;
6. No basis to estimate: 12%;
7. No answer.
70. How would mandatory audit firm rotation likely affect the
distribution of audits of public companies among the relatively small
number (90 to 100) of larger public accounting firms? N=71;
1. Market share of public company audits will be more concentrated in
the relatively small number of larger public accounting firms: 41%;
2. Market share of public company audits concentrated in the
relatively small number of larger public accounting firms will remain
approximately the same: 43%;
3. Market share of public company audits will be less concentrated in
the relatively small number of larger public accounting firms: 8%;
4. No basis to estimate: 8%;
5. No answer.
71. What are your views on how mandatory audit firm rotation would
affect the incentives to create and/or maintain large accounting firms?
N=73;
1. Significantly increase the incentives: 15%;
2. Somewhat increase the incentives: 29%;
3. Neither increase nor decrease the incentives: 31%;
4. Somewhat reduce the incentives: 14%;
5. Significantly reduce the incentives: 3%;
6. No basis to estimate: 8%;
7. No answer.
72. Do you have any additional comments on the issues covered in this
section or comments concerning mandatory audit firm rotation as it
relates to competition for audit services (including any other issues
not covered)?
Impact of the Sarbanes-Oxley Act:
The Sarbanes-Oxley Act contains various reform provisions intended to
enhance auditor independence and audit quality, strengthen corporate
responsibility, and improve the oversight of audits of public
companies that are subject to the securities laws of the United
States. Many of these reforms will directly or indirectly affect audit
firms and the performance and oversight of the public company audits
they perform. The Act also created the PCAOB to oversee the audits of
public companies in order to protect investors and further public
interest in the preparation of audit reports of public companies.
73. Section 203 of the Sarbanes-Oxley Act of 2002 as implemented by
SEC regulations requires the mandatory rotation of both lead and
reviewing engagement partners after 5 years and after 7 years for
other partners with a significant involvement in the audit engagement.
Some have argued that these new and enhanced audit partner
requirements sufficiently provide the "fresh look" and related
benefits to auditor independence and audit quality without the costs
of changing the public accounting firm associated with mandatory audit
firm rotation. Others have argued that a new public accounting firm is
necessary to effectively achieve the benefits associated with the
"fresh look" because changing lead and reviewing partners continues
the existing auditing practices and working relationship of the
incumbent public accounting firm.
Please select one of the following statements that best describes your
belief as to whether mandatory rotation of lead and reviewing partners
achieves the benefits to auditor independence and audit quality of the
"fresh look" or mandatory audit firm rotation is necessary to achieve
those benefits. N=71;
1. Mandatory rotation of lead and reviewing partners sufficiently
achieves the intended benefits of the "fresh look" and is less costly
than mandatory audit firm rotation: 66%;
2. Mandatory rotation of lead and reviewing partners may not be as
effective as mandatory audit firm rotation in achieving the intended
benefits of the "fresh look," but is a better choice given the higher
cost of mandatory audit firm rotation: 27%;
3. Mandatory audit firm rotation is necessary to effectively achieve
the benefits of the "fresh look," although it is more costly than
mandatory rotation of lead and reviewing partners: 6%;
4. Mandatory audit firm rotation is necessary to effectively achieve
the benefits of the "fresh look," and the added costs would not
outweigh the benefits: 1%;
5. No answer.
Please state any other response you may have.
If you answered 1 in response to question 73, please skip to question
75.
74. Considering (1) the audit partner rotation requirements of Section
203 of the Sarbanes-Oxley Act of 2002 as implemented by SEC
regulations, (2) the Act's other auditor independence requirements
(Section 201), prohibiting certain nonaudit services; Section 202,
audit committee pre-approval of audit and non-audit services not
otherwise prohibited and related public disclosures; Section 204,
certain auditor reporting requirements to the audit committee; Section
206, time restrictions before certain auditors could be employed by
the client, (3) the Act's Section 301 audit committee
responsibilities, and (4) the Act's Section 101, establishing the
PCAOB as an independent agency overseeing registered public accounting
firms, which of the following statements best describes your belief as
to whether the specific provisions of the Act noted above, would
likely achieve the intended benefits, both with respect to audit
quality and auditor independence, that might otherwise be expected to
result from implementing a mandatory audit firm rotation requirement.
The Act's above requirements, when fully implemented, can be expected
to: N=24;
1. Fully achieve the intended benefits of mandatory audit firm
rotation: 8%;
2. Substantially achieve the intended benefits of mandatory audit firm
rotation: 17%;
3. Somewhat achieve the intended benefits of mandatory audit firm
rotation: 42%;
4. Minimally achieve the intended benefits of mandatory audit firm
rotation: 21%;
5. Not achieve the intended benefits of mandatory audit firm rotation:
12%;
6. No answer.
Other Practices for Enhancing Audit Quality:
Authors of studies concerned with audit quality, regulators of the
public accounting profession, or other parties who are knowledgeable
of the accounting profession have identified various other practices
intended to enhance auditor independence and audit quality. For each
of the following practices, please provide your belief as to the
likely benefit on auditor independence and audit quality in the
absence of a requirement for audit firm rotation.
75. Practice One: The audit committee would be required to
periodically hold an open competition for audit services in which the
incumbent public accounting firm could also submit a bid for audit
services. N=73;
1. Significant benefit: 1%;
2. Less than significant but a very positive benefit: 10%;
3. Limited benefit: 29%;
4. Little benefit: 15%;
5. No benefit: 45%;
6. No answer.
76. Practice Two: Supplement the Sarbanes-Oxley Act of 2002 mandatory
audit partner rotation requirement with a requirement to periodically
require rotation of audit managers after some specified period as
audit manager on the audit engagement. N=73;
1. Significant benefit: 3%;
2. Less than significant but a very positive benefit: 11%;
3. Limited benefit: 27%;
4. Little benefit: 30%;
5. No benefit: 29%;
6. No answer.
77. Practice Three: Require another public accounting firm at the
direction of the audit committee to periodically assist the audit
committee in its responsibilities of overseeing the financial
statement audit. N=70;
1. Significant benefit: 7%;
2. Less than significant but a very positive benefit: 13%;
3. Limited benefit: 30%;
4. Little benefit: 23%;
5. No benefit: 27%;
6. No answer.
78. Practice Four: Require another public accounting firm at the
direction of the audit committee to periodically conduct a forensic
audit in areas of the public company's financial reporting process
that present a risk of fraudulent financial reporting that could
result in materially misstated financial statements. N=72;
1. Significant benefit: 7%;
2. Less than significant but a very positive benefit: 23%;
3. Limited benefit: 28%;
4. Little benefit: 18%;
5. No benefit: 24%;
6. No answer.
79. Practice Five: Require that public companies hire their auditor of
record on a non-cancelable multi-year basis (for example 3, 5, or 7
years). The incumbent firm could terminate the relationship for cause
during the contract period. In addition, the incumbent firm would be
eligible to compete for the subsequent audit contract period. N=71;
1. Significant benefit: 7%;
2. Less than significant but very positive benefit: 15%;
3. Limited benefit: 33%;
4. Little benefit: 15%;
5. No benefit: 30%;
6. No answer.
Views on Implementing Mandatory Audit Firm Rotation:
The following questions address several fundamental factors that would
have to be decided in structuring mandatory rotation of public
accounting firms, if such a practice were to be required. Regardless
of whether or not you would support mandatory rotation of public
accounting firms, please select one choice for each of the following
questions. 80. If mandatory rotation of public accounting firms were
required, what should be the limit on the incumbent firm's audit
tenure period? N=70;
1. Three or four years: 1%;
2. Five to seven years: 33%;
3. Eight to ten years: 47%;
4. Greater than 10 years: 19%;
5. No answer.
81. If mandatory rotation of public accounting firms were required,
after what period of time should the incumbent firm be permitted to
once again compete for audit services? N=69;
1. Three or four years: 86%;
2. Five to seven years: 13%;
3. Eight to ten years: 1%;
4. Greater than 10 years: 0%;
5. No answer.
82. If mandatory rotation of public accounting firms were required,
under what circumstances, if any, should the audit committee be
permitted to terminate (fire) the firm providing audit services?
N=72;
1. The audit committee should be permitted to terminate the firm at
any time if it is dissatisfied with the firm's performance or working
relationship: 82%;
2. The audit committee could not terminate the firm except for failure
to follow professional standards set by the PCAOB, violations of
securities laws, or similar unprofessional actions that may adversely
affect audit quality: 17%;
3. The audit committee could not terminate the firm unless the PCAOB
deregistered the firm: 1%;
4. Other (please specify below): 0%;
5. No answer.
83. If mandatory rotation of public accounting firms were required,
under what circumstances should the firm be able to terminate its
relationship with the audit committee/public company as the auditor of
record? N=73;
1. The firm should be able to terminate its relationship with the
audit committee/public company at any time if the firm is dissatisfied
with the working relationship: 82%;
2. The firm should be able to terminate its relationship if it is
dissatisfied with the audit committee or management's handling of
matters involving fraud or matters that materially effect the fair
presentation of the financial statements: 18%;
3. Other (please specify below): 0%;
4. No answer.
84. If mandatory rotation of public accounting firms were required, it
should be implemented over a period of years (staggered) on a
reasonable basis to avoid a significant number of public companies
changing auditors simultaneously. N=73;
1. Strongly agree: 70%;
2. Agree: 23%
3. Neither agree nor disagree: 3%;
4. Disagree: 4%;
5. Strongly disagree: 0%;
6. No opinion: 0%;
7. No answer.
85. If mandatory rotation of public accounting firms were required, do
you believe such a requirement should be applied uniformly for audits
of all public companies regardless of the nature or size of the public
company? N=72;
1. Yes: 28%;
2. No: 72%;
3. No answer.
86. Please explain why you believe such a requirement should, or
should not, be applied uniformly to all public companies:
If you believe that such a requirement should be applied uniformly,
please skip the next question.
87. If you do not believe the requirement should be applied uniformly,
please select from the following categories of public companies to
which you believe such a requirement should apply? N=74;
1. Multinational or foreign public company with revenue of $5 billion
or more: N=36;
2. Domestic public company with revenue of $5 billion or more: N=34;
3. Multinational or foreign public company with revenue of $100
million but less than $5 billion: N=23;
4. Domestic public company with revenue of $100 million but less than
$5 billion: N=16;
5. Multinational or foreign public company with revenue of less than
$100 million: N=4;
6. Domestic public company with revenue of less than $100 million:
N=11.
Overall Opinion on Requiring Mandatory Audit Firm Rotation:
This final section of the questionnaire asks for your current overall
opinion on whether or not you would support requiring mandatory
rotation of registered public accounting firms and whether your firm's
interest in being a public accounting firm that audits public
companies would change if rotation of such firms were required.
88. Regarding your firm's current overall opinion on whether or not
the firm supports requiring mandatory rotation of registered public
accounting firms, please select one of the following choices. N=72;
1. The firm supports requiring mandatory rotation of public accounting
firms at this time provided that the period of time for rotation is
reasonable: 7%;
2. The firm supports the concept of requiring mandatory rotation of
public accounting firms, but believes more time is needed to evaluate
the effectiveness of the various requirements of the Sarbanes-Oxley
Act for enhancing auditor independence and audit quality: 17%;
3. The firm does not support requiring mandatory rotation of public
accounting firms: 76%;
4. No answer.
89. If you answered 3 to the question above please tell us your
primary reasons.
90. Assuming that mandatory rotation of public accounting firms is not
required, what is your firm's interest in providing future audit
services to public companies required to file reports with the SEC
(please select one of the following choices)? N=73;
1. The firm currently provides audit services to public companies
required to file reports with the SEC and plans to continue such
services by registering with the PCAOB: 95%;
2. The firm currently provides audit services to public companies
required to file with the SEC but is in the process of considering
whether to continue to provide such audit services in the future: 3%;
3. The firm currently provides audit services to public companies
required to file reports with the SEC but plans to discontinue such
services: 1%;
4. The firm currently does not provide audit services to public
companies required to file reports with the SEC, and the firm would
likely continue not to provide such audit services: 1%;
5. The firm currently does not provide audit services to public
companies required to file reports with the SEC, but the firm would
likely register with the PCAOB and compete to provide such audit
services: 0%;
6. No answer.
91. Regarding your firm's interest in providing future audit services
to public companies as a public accounting firm (as noted in the
preceding question), would your firm's interest in providing future
audit services change if mandatory audit firm rotation were required?
Please select one of the following choices. N=72;
1. The firm currently provides audit services to public companies
required to file reports with the SEC and plans to continue such
services by registering with the PCAOB: 74%;
2. The firm currently provides audit services to public companies
required to file with the SEC but is in the process of considering
whether to continue to provide such audit services in the future: 24%
3. The firm currently provides audit services to public companies
required to file reports with the SEC but plans to discontinue such
services: 1%;
4. The firm currently does not provide audit services to public
companies required to file reports with the SEC, and the firm would
likely continue not to provide such audit services: 1%;
5. The firm currently does not provide audit services to public
companies required to file reports with the SEC, but the firm would
likely register with the PCAOB and compete to provide such audit
services: 0%;
6. No answer.
92. Please provide any additional comments or observations you may
have on the potential effects of mandatory audit firm rotation of
public accounting firms registered with the PCAOB.
[End of section]
Appendix II: Public Company Survey on Mandatory Audit Firm Rotation:
United States General Accounting Office:
Public Company Survey:
On Mandatory Audit Firm Rotation:
I. Introduction:
To provide a thorough, fair and balanced report to Congress on the
potential effects of mandatory audit firm rotation, it is essential
that we obtain the experiences and views on this subject from the
senior financial executive and the Audit Committee Chair (or head of
an equivalent body) of a representative sample of public companies. Your
company has been selected from the universe of public companies
identified as issuers registered with the SEC.
To obtain the views of your company's senior financial executive and
Audit Committee Chair, we are providing two separate surveys.
* The survey for the senior financial executive may be completed on-
line at GAO's Website or completed by hand using this survey
instrument and returned to GAO via the enclosed pre-addressed, postage-
paid envelope. However, we encourage the use of the on-line version,
as it will significantly reduce the effort needed to tabulate and
summarize your public company's responses.
* The survey for your company's Audit Committee Chair (or head of an
equivalent body or group), which is contained in a separately
addressed envelope, has been included in the survey materials sent to
your public company's senior financial executive. We are asking the
senior financial executive to ensure that the survey for the Audit
Committee Chair is delivered to the Audit Committee Chair because the
names and addresses of the Chairs of public company Audit Committees
were not readily available in a form that would facilitate a separate
mailing directly to them.
In addition to providing responses to the questions in each survey,
respondents will have the opportunity to provide any additional
comments they may have on the subject of mandatory audit firm rotation
at the end of each survey.
The results of the survey will be compiled and presented in summary
form only as part of our report, and GAO will not release individually
identifiable data from this survey, unless compelled by law or
required to do so by Congress. Proprietary business information is
protected by a federal law (18 U.S.C. 1905, the "Trade Secrets Act")
that makes unauthorized disclosure a crime.
II. Survey Glossary:
For the purpose of this survey,
* "public company" refers to issuers of securities subject to the
financial reporting requirements of the Securities Exchange Act of
1934, the Investment Company Act of 1940, and registered with the SEC.
For purposes of this survey, mutual funds and investment trusts that
meet the statutory definition of issuer of securities are considered
public companies.
- "multinational or foreign public company" is a public company with
significant operations (10 percent or more of total revenue) in one or
more countries outside the United States.
- "domestic public company" is a public company with no significant
operations (10 percent or more of total revenue) from outside the
United States.
* "auditor," "auditor of record," or "public accounting firm" refers
to an independent public accounting firm registered with the SEC that
performs audits and reviews of public company financial statements and
prepares attestation reports filed with the SEC. In the future, these
public accounting firms must be registered with the Public Company
Accounting Oversight Board (PCAOB) as required by the Sarbanes-Oxley
Act of 2002.
* "mandatory audit firm rotation" refers to the imposition of a limit
on the number of consecutive years in which a particular registered
public accounting firm may be the auditor of record for a public
company (an "issuer").
* "audit quality" refers to the auditor conducting the audit in
accordance with Generally Accepted Auditing Standards (GAAS) to
provide reasonable assurance that the audited financial statements and
related disclosures are (1) presented in accordance with Generally
Accepted Accounting Principles (GAAP) and (2) are not materially
misstated whether due to errors or fraud. This definition assumes that
reasonable third parties with knowledge of the relevant facts and
circumstances would have concluded that the audit was conducted in
accordance with GAAS and, that within the requirements of GAAS, the
auditor appropriately detected and then dealt with known material
misstatements by (1) ensuring that appropriate adjustments, related
disclosures, and other changes were made to the financial statements
to prevent them from being materially misstated, (2) modifying the
auditor's opinion on the financial statements if appropriate changes
or other adjustments were not made, or (3) if warranted, resigning as
the public company's auditor of record and reporting the reason for
the resignation to the SEC.
* "audit failure" refers to audits for which audited financial
statements filed with the SEC contained material misstatements whether
due to errors or fraud, and reasonable third parties with knowledge of
the relevant facts and circumstances would have concluded that the
audit was not conducted in accordance with GAAS, and therefore, the
auditor failed to appropriately detect and/or deal with known material
misstatements by (1) ensuring that appropriate adjustments, related
disclosures, and other changes were made to the financial statements
to prevent them from being materially misstated, (2) modifying the
auditor's opinion on the financial statements if appropriate changes
were not made, or (3) if warranted, resigning as the public company's
auditor of record and reporting the reason for the resignation to the
SEC.
* "nonaudit services" refers to any professional services provided to
an issuer by a public accounting firm registered with the PCAOB that
serves as auditor of record for the issuer, other than those provided
to the issuer in connection with an audit, review, and/or attestation
report of the financial statements of an issuer.
* "audit committee" refers to a committee (or equivalent body)
established by and amongst the board of directors of an issuer for the
purpose of overseeing the accounting and financial reporting processes
of the issuer and audit, review, and attestation engagements
associated with the financial statements of the issuer performed by
public accounting firms.
III. Public Company Background Information:
1. Based on your company's last fiscal year, please select one of the
following categories that best reflects the size and nature of your
public company's business activity.
Multinational or foreign public company: N=101;
1. Revenue of $5 billion or more: 38%;
2. Revenue of more than $1 billion but less than $5 billion: 58%;
3. Revenue of $100 million but less than $1 billion: 4%;
4. Revenue of less than $100 million: 0%;
5. Not Applicable.
Domestic public company: N=100;
1. Revenue of $5 billion or more: 25%;
2. Revenue of more than $1 billion but less than $5 billion: 70%;
3. Revenue of $100 million but less than $1 billion: 3%;
4. Revenue of less than $100 million: 2%;
5. Not Applicable.
2. From the listing of industry sectors and sub-sectors listed below,
please select the one that best reflects your public company's primary
business activity. The listing is based on the North American Industry
Classification System (NAICS). We have included industry
classifications covering each NAICS industry sector and, with respect
to the manufacturing sector, selected sub-sectors.
Accommodations and Food Services: N=4;
Administrative and Support Services and Waste Management and
Remediation Services: N=1;
Agricultural, Forestry, Fishing, and Hunting: N=3;
Ambulatory Health Care Services: N=2;
Arts, Entertainment, and Recreation: N=3;
Construction: N=3;
Educational Services: N=0;
Finance and Insurance: N=22;
Information Services: N=3;
Management of Companies and Enterprises: N=0;
Manufacturing-Chemical: N=6;
Manufacturing-Computer and Electronic Products: N=14;
Manufacturing-Food: N=6;
Manufacturing-Paper: N=2;
Manufacturing-Primary Metal: N=2;
Manufacturing-Transportation Equipment: N=5;
Manufacturing-Other: N=24;
Mining: N=2;
Professional, Scientific, and Technical Services: N=3;
Public Administration: N=0;
Real Estate and Rental and Leasing: N=1;
TradeRetail: N=23;
TradeWholesale: N=9;
Transportation and Warehousing: N=5;
Utilities: N=10;
Other-please specify in box below: N=39;
Other - please specify:
Auditor of Record:
The following series of questions concern your company's auditor of
record including changes in your auditor of record during the last 5
years. In this regard, please do not consider a change in the name of
your auditor of record's firm, which resulted from merger and/or
consolidation activity within the public accounting profession, to be
a change in your company's auditor of record. However, if as a result
of merger and/or consolidation activity involving your auditor of
record's firm, your company selected a new public accounting firm as
your auditor of record, it should be treated as a change in auditor.
3. Please provide the name of your company's current auditor of record
and the number of years the firm has served continuously as your
company's auditor of record.
(Survey responses to this question are not being provided)
Name of Current Audit Firm:
Continuous years as your company's auditor of record (Please round to
the nearest whole number.) N=198;
Range of responses=0-5: N=62: 31%;
Range of responses=6-10: N=18: 9%;
Range of responses=10+: N=118: 60%.
If your company's current auditor has served for more than 5
continuous years as auditor of record, please skip to question 5.
4. If your company's current auditor has not served as your auditor of
record for at least 5 continuous years, please provide the name of
your company's previous auditor of record and the number of years the
previous public accounting firm served continuously as auditor of
record.
(Survey responses to this question are not being provided)
Name of Previous Audit Firm:
Continuous years as your company's auditor of record (Please round to
the nearest whole number.) N=50;
Range of responses=0-5: N=9: 18%;
Range of responses=6-10: N=5: 10%;
Range of responses=10+: N=36: 72%.
5. Since December 31, 2001, has your public company selected a new
public accounting firm to replace Arthur Andersen, as your company's
auditor of record? N=200;
1. Yes: 17%;
2. No - Skip to question 11: 83%.
Replacing Arthur Andersen as Auditor of Record:
Questions 6-10 relate to your public company's experience, since
December 31, 2001, in replacing Arthur Andersen, as your public
company's auditor of record.
6. What process did your public company use to select another public
accounting firm to replace Arthur Andersen, as your public company's
new auditor of record? N=31;
1. Screened capable firms interested in serving as your new auditor of
record: 16%;
2. Held a structured competition (including submission and review of
formal bids and proposals) among capable firms interested in serving
as your company's new auditor of record: 81%;
3. Selected a new capable public accounting firm without either
screening or holding a structured competition from other firms
interested in serving as your company's new auditor of record: 3%;
4. Other - please specify in the box below: 0%;
5. No Answer;
Other (please specify):
7. Recognizing that the circumstances surrounding former Arthur
Andersen clients' need to find a new auditor of record were somewhat
unusual, how satisfied was your public company with the number of
capable public accounting firms interested in serving as your
company's new auditor of record? N=33;
1. Very satisfied: 40%;
2. Somewhat satisfied: 30%;
3. Neither satisfied nor dissatisfied: 9%;
4. Somewhat dissatisfied: 21%;
5. Very dissatisfied: 0%;
6. No Answer.
8. Did any member of Arthur Andersen's engagement team, which audited
your public company's prior year financial statements, join your new
auditor of record's engagement team for the first financial statement
audit following the change in auditor of record? N=32;
1. No: 44%;
2. Yes: 56%;
3. No Answer.
If yes, please indicate below the number (both in total and by type of
position) of former Andersen staff that moved to the new auditor of
record's engagement team for the first financial statement audit
following the change.
Total number of respondents that said one or more former Andersen
staff moved: N=17;
Total number of respondents that said one or more of the following
type of former Andersen staff moved Engagement Partner: N=8;
Other Partners: N=7;
Audit Managers: N=14;
Other Professional staff: N=12.
9. As a percentage of the new auditor of record's initial year audit
fee, how significant were your company's estimated costs (including
any internal or external costs) associated with selecting a new public
accounting firm to replace Andersen as your company's auditor of record?
Our company's estimated costs to select a new auditor to replace
Andersen were: N=33;
1. 20 percent or more of the new firm's initial year audit fee: 21%;
2. Greater than 15 percent but less than 20 percent of the new firm's
initial year audit fee: 6%;
3. Greater than 10 percent but less that 15 percent of the new firm's
initial year audit fee: 9%;
4. Greater than 5 percent but less than 10 percent of the new firm's
initial year audit fee: 21%;
5. Less than 5 percent of the new firm's initial year audit fee: 37%;
6. Zero: 6%;
7. No Answer.
10. As a percentage of the new auditor of record's initial year audit
fee, how significant were your public company's estimated additional
initial year costs to support (internal costs that exceeded the level
needed to support the previous auditor of record) the efforts by the
public accounting firm that replaced Andersen to understand your
company's operations and financial reporting practices?
Our public company's estimated additional initial year costs to
support a new audit firm were: N=31;
1. 50 percent or more of the new firm's initial year
audit fee: 13%
2. Greater than 40 percent but less than 50 percent of the new firm's
initial year audit fee: 0%;
3. Greater than 30 percent but less than 40 percent of the new firm's
initial year audit fee: 10%;
4. Greater than 20 percent but less than 30 percent of the new firm's
initial year audit fee: 29%;
5. Greater than 10 percent but less that 20 percent of the new firm's
initial year audit fee: 29%;
6. Less than 10 percent of the new firm's initial year audit fee: 16%;
7. Zero: 3%;
8. No Answer.
Services Provided by Your Auditor of Record:
11. With regard to the services provided by your auditor of record to
your company during your last fiscal year, please identify each
category of services provided by your auditor of record.
1. Audit, review and attestation: N=199;
2. Financial systems design and implementation: N=17;
3. All other services: N=166;
4. None of the above services: N=0.
Please indicate the approximate percentage of the total fees your
company paid to your auditor of record for each category of service
provided. (Please round all numbers to the nearest whole number.)
Audit, review and attestation:
N: 192;
Mean: 63%;
Median: 63%;
Range: 9-100%.
Financial systems design and implementation:
N: 18;
Mean: 31%;
Median: 31%;
Range: 1-76%.
All other services:
N: 180;
Mean: 37%;
Median: 35%;
Range: 1-86%.
Total (The means report the average answer for those citing each
function. Therefore the means across categories do not equal 100%)
12. What is the title of the management official in your company that
has been principally responsible for coordinating the various services
provided to your company by your auditor of record?
Title: Survey responses to this question are not being provided.
How long has that official been responsible for coordinating auditor
of record's services? (Please round to the nearest whole number of
years.) N=196;
Range of responses=0-5: N=144: 74%;
Range of responses=6-10: N=34: 17%;
Range of responses=11+: N=18: 9%.
Audit Committee:
13. Does your company currently have an audit committee and, if it
does, how many years has it been in existence? N=180;
1. No: 0%;
2. Yes: Please specify number of years below: 100%;
3. No Answer.
If you answered yes above, how many years has the audit committee been
in existence? (Please round to the nearest whole number.)
N=167;
Mean=21;
Median=20;
Range=2-180.
If you answered 2 to question 13, please skip to question 16.
14. Does your company currently have a body or group that carries out
the equivalent duties and responsibilities (equivalent body or group)
commonly ascribed to an audit committee and, if so, how many years has
it been in existence? N=0;
1. No - Skip to question 17;
2. Yes - If yes, please specify length of existence below;
3. No Answer.
If you answered yes above, how many years has the body been in
existence? (Please round to the nearest whole number.)
15. Does a member of your company's Board of Directors serve as the
lead person on audit committee-type issues that are considered by your
company as a body or group equivalent to an audit committee? N=0;
1. No;
2. Yes;
3. No Answer.
16. How long has the Chair of your company's Audit Committee (or the
lead person on audit committee-related issues considered by an
equivalent body or group) served in that capacity? N=192;
1. Less than 1 year: 16%;
2. One year: 9%;
3. Two years: 17%;
4. Three years: 15%;
5. Four years: 5%;
6. Five years: 8%;
7. More than five years: 30%;
8. No Answer.
Audit Firm Rotation Policy:
17. Does your company (including your company's audit committee or
equivalent body or group) currently have a policy that requires the
periodic rotation of your company's auditor of record? N=200;
1. No: 99%;
2. Yes - If yes, please briefly describe below: 1%;
3. No Answer.
If you answered yes above, please briefly describe the audit firm
rotation policy (including when established and the maximum audit
tenure period permitted).
If you answered 2 to question 17, please skip to question 19.
18. If you answered 1 to question 17, is your public company
(including your audit committee or equivalent body or group) currently
considering a policy that would require some form of periodic rotation
of your auditor of record? N=193;
1. No: 96%;
2. Yes: 4%;
3. No Answer.
IV. Potential Effects Of Mandatory Audit Firm Rotation:
A. Selection and Availability of Firms:
The following questions are intended to obtain the views of your
public company on various competition-related issues related to
changing audit firms that provide financial audit, review, and
attestation services as auditors of record to public companies and how
those views might be affected by mandatory audit firm rotation.
Selection of New Firms:
19. If your public company needed to change your auditor of record,
what method or process would your company likely use to select a new
auditor of record? Would your public company likely use the same
method or process to select a new public accounting firm to serve as
auditor of record if rotation of audit firms were required?
Screening interested and capable firms: N=116;
Without Mandatory Audit Firm Rotation: 5%;
With Mandatory Audit Firm Rotation: 6%;
With and Without Mandatory Audit Firm Rotation: 89%;
No Answer:
Holding a competition among interested and capable firms: N=154;
Without Mandatory Audit Firm Rotation: 10%;
With Mandatory Audit Firm Rotation: 2%;
With and Without Mandatory Audit Firm Rotation: 88%;
No Answer:
Selecting a capable firm without screening or holding a competition:
N=5;
Without Mandatory Audit Firm Rotation: N=5;
With Mandatory Audit Firm Rotation: N=0;
With and Without Mandatory Audit Firm Rotation: N=3;
No Answer:
Other - please describe below: N=4;
Without Mandatory Audit Firm Rotation: N=1;
With Mandatory Audit Firm Rotation: N=0;
With and Without Mandatory Audit Firm Rotation: N=3;
No Answer:
Don't know: N=4;
Without Mandatory Audit Firm Rotation: N=0;
With Mandatory Audit Firm Rotation: N=3;
With and Without Mandatory Audit Firm Rotation: N=1;
No Answer:
Other for which you answered above:
Availability of Firms:
If your public company's auditor of record is currently not one of the
Big 4 public accounting firms (PricewaterhouseCoopers, Deloitte &
Touche, KPMG, or Ernst & Young) please skip to question 22.
20. Would your public company realistically consider using a non-Big 4
public accounting firm as your public company's auditor of record?
N=179;
1. No: 96%
2. Yes - Skip to question 22: 4%
3. Uncertain - Skip to question 22;
4. No Answer.
21. To what extent are the following reasons important in explaining
why your public company would not realistically consider using a non-
Big 4 public accounting firm? Please check one box in each row.
Expectations of the Capital Markets: N=171;
Very Great Importance: 57%;
Great Importance: 35%;
Moderate Importance: 6%;
Some Importance: 2%;
Little or No Importance: 0%;
Don't Know: 0%.
Public Company geographic/global operations: N=170;
Very Great Importance: 51%;
Great Importance: 19%;
Moderate Importance: 15%;
Some Importance: 4%;
Little or No Importance: 11%;
Don't Know: 0%.
Public Company operations require specialized industry
skills/knowledge: N=171;
Very Great Importance: 38%;
Great Importance: 32%;
Moderate Importance: 22%;
Some Importance: 5%;
Little or No Importance: 3%;
Don't Know: 0%.
Public Company contractual obligations (e.g. with banks or lenders):
N=170;
Very Great Importance: 16%;
Great Importance: 32%;
Moderate Importance: 24%;
Some Importance: 14%;
Little or No Importance: 13%;
Don't Know: 1%.
Requirement of the Public Company's Board of Directors: N=166;
Very Great Importance: 24%;
Great Importance: 40%;
Moderate Importance: 14%;
Some Importance: 5%;
Little or No Importance: 10%;
Don't Know: 7%.
Sufficiency of audit firm resources: N=171;
Very Great Importance: 64%;
Great Importance: 29%;
Moderate Importance: 5%;
Some Importance: 2%;
Little or No Importance: 0%;
Don't Know: 0%.
Audit Firm's name and reputation: N=171;
Very Great Importance: 43%;
Great Importance: 40%;
Moderate Importance: 12%;
Some Importance: 5%;
Little or No Importance: 0%;
Don't Know: 0%.
Other Reason: Please describe below: N=8;
Very Great Importance: N=5;
Great Importance: N=3;
Moderate Importance: N=0;
Some Importance: N=0;
Little or No Importance: N=0;
Don't Know: N=0.
If you selected "Other Reason" abovePlease describe:
22. In the absence of mandatory audit firm rotation, how concerned are
you that the spin-off of consulting services by three of the Big 4
firms has significantly limited the realistic options your public
company has in selecting capable public accounting firms interested in
serving your public company as auditor of record? How would your level
of concern likely change under mandatory audit firm rotation?
Without Mandatory Audit Firm Rotation: N=197;
Very Concerned: 1%;
Somewhat Concerned: 16%;
Minimally Concerned: 26%;
Not Concerned: 53%;
No Basis to Evaluate: 4%.
With Mandatory Audit Firm Rotation: N=196;
Very Concerned: 11%;
Somewhat Concerned: 19%;
Minimally Concerned: 22%;
Not Concerned: 43%;
No Basis to Evaluate: 5%.
23. In the absence of mandatory audit firm rotation, how concerned are
you that the recent consolidation from the Big 5 to the Big 4 public
accounting firms will significantly limit the realistic options your
public company has in selecting capable public accounting firms
interested in serving your public company as auditor of record? How
would your level of concern change under mandatory audit firm rotation?
Without Mandatory Audit Firm Rotation: N=199;
Very Concerned: 10%;
Somewhat Concerned: 42%;
Minimally Concerned: 30%;
Not Concerned: 18%;
No Basis to Evaluate: 0%.
With Mandatory Audit Firm Rotation: N=198;
Very Concerned: 44%;
Somewhat Concerned: 35%;
Minimally Concerned: 11%;
Not Concerned: 9%;
No Basis to Evaluate: 1%.
24. In the absence of mandatory audit firm rotation, how concerned are
you that the auditor independence rules prohibiting the auditor of
record from also providing certain nonaudit services as required by
the Sarbanes-Oxley Act of 2002 and related SEC regulations will
significantly limit the realistic options your public company has in
selecting capable public accounting firms interested in serving your
public company as auditor of record? How would your level of concern
likely change under mandatory audit firm rotation?
Without Mandatory Audit Firm Rotation: N=197;
Very Concerned: 4%;
Somewhat Concerned: 30%;
Minimally Concerned: 31%;
Not Concerned: 34%;
No Basis to Evaluate: 1%.
With Mandatory Audit Firm Rotation: N=199;
Very Concerned: 28%;
Somewhat Concerned: 25%;
Minimally Concerned: 23%;
Not Concerned: 22%;
No Basis to Evaluate: 2%.
25. In the absence of mandatory audit firm rotation, if your public
company were to consider changing its auditor of record, how many
capable public accounting firms would likely be interested in serving
as your company's auditor of record? Would the likely number of
interested and capable public accounting firms change under mandatory
audit firm rotation?
Without Mandatory Audit Firm Rotation: N=200;
One Firm: 1%;
Two Firms: 12%;
Three Firms: 48%;
Four Firms: 27%;
Five Firms: 5%;
If More: Please Specify Below: 4%;
No Basis to Evaluate: 3%.
With Mandatory Audit Firm Rotation: N=199;
One Firm: 2%;
Two Firms: 16%;
Three Firms: 47%;
Four Firms: 18%;
Five Firms: 5%;
If More: Please Specify Below: 4%;
No Basis to Evaluate: 8%.
If you answered "more" above, please specify:
If, in your answer to question 25, you noted no change in the number
of capable firms likely to be interested in competing if mandatory
audit firm rotation were required, please skip to question 28.
26. If you believe mandatory audit firm rotation would likely change
the number of capable public accounting firms interested in serving as
your company's auditor of record, how do you believe the likely change
would impact audit fees?
Mandatory audit firm rotation will likely: N=43;
1. Increase the number of interested and capable firms and contribute
to lower audit fees: 7%;
2. Increase the number of interested and capable firms and contribute
to higher audit fees: 14%;
3. Result in neither higher nor lower audit fees: 5%;
4. Decrease the number of interested and capable firms and contribute
to lower audit fees: 0%;
5. Decrease the number of interested and capable firms and contribute
to higher audit fees: 67%;
6. No basis to estimate: 7%;
7. No Answer.
If you answered 3 or 6 to question 26, please skip to question 28.
27. Please provide a brief explanation for why the likely change in
the number of interested and capable firms would affect audit fees in
the manner noted in your response to question 26.
28. How would mandatory audit firm rotation likely affect the
distribution of public company audits among the relatively small
number (90 to 100) of larger public accounting firms? N=198;
1. Market share of public company audits will be more concentrated in
the relatively small number of larger public accounting firms: 18%;
2. Market share of public company audits concentrated in the
relatively small number of larger public accounting firms will remain
approximately the same: 48%;
3. Market share of public company audits will be less concentrated in
the relatively small number of larger public accounting firms: 3%;
4. No basis to estimate: 31%;
5. No Answer.
B. Costs and Fees:
The following questions involve audit-related costs and fees of public
accounting firms, and costs incurred by public companies in selecting
new firms and supporting the firms selected in performing the initial
audit.
* "marketing costs" are the actual costs incurred by public accounting
firms related to their efforts to acquire or retain financial
statement audit clients.
* "audit costs" are the actual cost incurred by the public accounting
firm to perform an audit of a public company's financial statements.
* "audit fee" is the amount the public accounting firm actually
charges the public company to perform the financial statement audit.
* "selection costs" are the internal costs incurred by a public
company in selecting a new public accounting firm as a public
company's auditor of record.
* "support costs" are the internal costs incurred by a public company
in supporting the public accounting firm's efforts to understand the
public company's operations and financial reporting practices. Such
support costs are in addition to the audit fee that the public company
pays to the public accounting firm for the financial statement audit.
Audit Fee Impact of Mandatory Audit Firm Rotation:
29. Assuming new public accounting firms are selected to replace
incumbent firms through the increased opportunities to compete by
firms willing and able to perform the audit, how would mandatory audit
firm rotation likely affect audit fees over time?
Mandatory audit firm rotation would likely: N=199;
1. Lead to lower audit fees over time: 4%;
2. Lead to higher audit fees over time: 89%;
3. Have no affect on audit fees over time: 2%;
4. No basis to evaluate - Skip to question 31: 5%;
5. No Answer.
30. Please explain your reasons for believing that over time audit
fees would be lower, higher or remain the same under mandatory audit
firm rotation that is accomplished through increased opportunities to
compete.
Public Accounting Firm Costs and Fees:
31. Do you believe that, following a change in a public company's
auditor of record (whether as a result of a voluntary or mandatory
audit firm rotation), a public accounting firm's initial-year audit
costs are likely to exceed the firm's subsequent year audit costs
because of the new firm's need to quickly develop a "sufficient
understanding of the public company's operations and financial
reporting practices" in order to perform the audit? N=200;
1. Yes: 92%;
2. No - Skip to question 35: 4%;
3. Uncertain - Skip to question 35: 4%;
4. No Answer.
32. What is your opinion on the level of additional audit costs (as
compared to the annual audit costs in subsequent years for the same
public company client) that a public accounting firm will likely incur
in an initial year audit of a public company client?
A public accounting firm's additional initial year audit costs are
likely to exceed subsequent year annual audit costs by: N=184;
1. 50 percent or more: 20%;
2. More than 40 percent but less than 50 percent: 11%;
3. More than 30 percent but less than 40 percent: 23%;
4. More than 20 percent but less than 30 percent: 24%;
5. More than 10 percent but less than 20 percent: 7%;
6. Less than 10 percent: 1%;
7. No basis or experience on which to respond: 14%;
8. No Answer.
Please indicate the extent to which you agree or disagree with the
following two statements.
33. When a change in public accounting firm is voluntary, the new
firm's additional initial year audit costs incurred by the new firm
are likely to be absorbed by the audit firm and not passed on to the
public company in higher audit fees. N=184;
1. Strongly agree: 29%;
2. Generally agree: 48%;
3. Neither agree nor disagree: 6%;
4. Generally disagree: 11%;
5. Strongly disagree: 6%;
6. No Answer.
34. Under mandatory audit firm rotation, the new public accounting
firm selected as auditor of record as part of a scheduled change in
auditor would be more likely to increase its audit fees over its
limited audit tenure period to help ensure that the firm fully
recovered its additional initial year audit costs. N=184;
1. Strongly agree: 76%;
2. Generally agree: 21%;
3. Neither agree nor disagree: 2%;
4. Generally disagree: 0%;
5. Strongly disagree: 1%;
6. No Answer.
35. A likely consequence of mandatory audit firm rotation will be that
public companies will need to change their auditor of record more
frequently. Do you believe that those public accounting firms involved
in increased opportunities to compete will, regardless of whether they
are selected, likely incur additional marketing costs? N=198;
1. Yes: 85%;
2. No - Skip to question 37: 5%;
3. Uncertain - Skip to question 37: 10%;
4. No Answer.
Please indicate the extent to which you agree or disagree with the
next statement.
36. The additional marketing costs that are likely to occur under
mandatory audit firm rotation will be passed on to public companies
through higher financial audit fees. N=168;
1. Strongly agree: 58%;
2. Agree: 33%;
3. Neither agree nor disagree: 6%;
4. Disagree: 2%;
5. Strongly disagree: 0%;
6. No basis or experience on which to respond: 1%;
7. No Answer.
Public Company Costs:
37. To the extent that your public company would select a new public
accounting firm more frequently under mandatory audit firm rotation,
do you believe that your public company will incur (internal)
selection costs?
As a percentage of initial year audit fees, estimated selection costs
are likely to be: N=198;
1. 20 percent or more: 14%;
2. More than 15 percent but less than 20 percent: 8%;
3. More than 10 percent but less than 15 percent: 20%;
4. More than 5 percent but less than 10 percent: 23%;
5. Less than 5 percent: 23%;
6. Zero: 1%;
7. No basis to know: 11%;
8. No Answer.
38. Following a change in public accounting firm (whether as a result
of a voluntary or mandatory change in auditor), the new public
accounting firm must gain an understanding of a new public company
audit client's operations and financial reporting practices. What is
the likely level of additional initial year support costs (internal
costs that exceed level needed to support the previous auditor of
record) that your public company would incur following a change in
auditor of record as compared to the new auditor of record's initial
year audit fees?
As a percentage of new auditor's initial year audit fees, our
company's additional support costs are likely to be: N=196;
1. 50 percent or more: 11%;
2. More than 40 percent but less than 50 percent: 8%;
3. More than 30 percent but less than 40 percent: 17%;
4. More than 20 percent but less than 30 percent: 28%;
5. More than 10 percent but less than 20 percent: 23%;
6. Less than 10 percent: 5%;
7. Zero: 0%;
8. No basis to estimate: 8%;
9. No Answer.
C. Auditor Knowledge and Experience:
The following questions address issues concerning how mandatory audit
firm rotation may affect the auditor's ability to detect financial
reporting issues that may indicate material misstatements in a public
company's financial statements.
39. In your opinion, how many years do you think it would likely take
a new auditor of record to become sufficiently familiar with your
company's operations and financial reporting practices to no longer
require the additional audit resources often associated with
conducting an initial year audit of a new public company client?
N=200;
1. 1 year: 7%;
2. 2-3 years: 79%;
3. 4-5 years: 11%;
4. More than 5 years: 0%;
5. No basis to know - Skip to question 42: 3%;
6. No Answer.
40. To what extent was your answer to the previous question influenced
by the nature and complexity of your company's operations and
financial reporting practices? N=195;
1. A significant extent: 46%;
2. A moderate extent: 44%;
3. A minor extent: 8%;
4. No extent: 2%;
5. No Answer.
41. Are there factors other than the nature and complexity of your
company's operations and financial reporting practices that influenced
your answer to the preceding question? N=190;
1. No: 67%;
2. If yes, please explain the other factors below: 33%;
3. No Answer.
If you answered yes above, briefly explain the other factors:
42. Under mandatory audit firm rotation, new audit firms provide a
"fresh look" at the public company's operations and financial
reporting practices. In general, how does the fresh look a new auditor
provides affect the likelihood that the new auditor will detect
financial reporting issues that may materially affect a public
company's financial statements, which the previous auditor may not
have detected? N=199;
1. Significantly increased likelihood: 1%;
2. Somewhat increased likelihood: 21%;
3. No effect on likelihood: 50%;
4. Somewhat decreased likelihood: 17%;
5. Significantly decreased likelihood: 7%;
6. No basis to know: 4%;
7. No Answer.
43. Under mandatory audit firm rotation, in your opinion how would you
compare the new public accounting firm's likely initial level of
knowledge of the client's specific operations and financial reporting
practices to the previous auditor of record's level of knowledge of
the client's operations and financial reporting processes?
The new public accounting firm is likely to have: N=200;
1. Significantly less knowledge of the client: 82%;
2. Somewhat less knowledge of the client: 17%;
3. About the same knowledge of the client: 0%;
4. Somewhat more knowledge of the client: 0%;
5. Significantly more knowledge of the client: 0%;
6. No basis to know: 1%;
7. No Answer.
If you answered 3, 4, 5, or 6 to question 43 please skip to question
46.
44. If, under mandatory audit firm rotation, the new public accounting
firm is likely to have initially less specific knowledge of the
client's operations and financial reporting practices, how would this
less specific knowledge likely affect the risk that the new auditor
would not detect material misstatements in the financial statements
during the first year of the auditor's tenure? N=196;
1. Significantly increase the risk: 20%;
2. Somewhat increase the risk: 65%;
3. Neither increase nor decrease the risk: 12%;
4. Somewhat decrease the risk: 0%;
5. Significantly decrease the risk: 1%;
6. No basis to know: 2%;
7. No Answer.
45. Under mandatory audit firm rotation, how would requiring the new
auditor of record to perform additional and/or enhanced audit
procedures (including giving the new auditor of record expanded access
to the predecessor audit firm's workpapers and key personnel) to
increase the auditor's knowledge of your company's operations and
financial reporting practices likely affect the risk of not detecting
material misstatements? N=196;
1. Significantly increase the risk: 2%;
2. Somewhat increase the risk: 5%;
3. Neither increase or decrease the risk: 24%;
4. Somewhat decrease the risk: 61%;
5. Significantly decrease the risk: 5%;
6. No basis to evaluate: 3%;
7. No Answer.
D. Auditor Independence:
Some say a public accounting firm's independence may be adversely
affected by economic pressures to retain the audit client as well as
by developing too close a relationship with the public company and its
management. These pressures may cause a public accounting firm and/or
its partners to not appropriately challenge the client's accounting
and financial reporting practices. Concern about auditor independence
relates to the public accounting firm's and its partners' ability and
willingness to appropriately deal with known financial reporting
issues that may indicate materially misstated financial statements. An
auditor appropriately deals with financial reporting issues that arise
during an audit by (1) ensuring that appropriate adjustments, related
disclosures, and other changes are made to the financial statements to
ensure that the financial statements are fairly stated in accordance
with generally accepted accounting principles, (2) modifying the
auditor's report on the client's financial statements if appropriate
changes are not made, or (3), if warranted, resigning as the client's
auditor of record and reporting the reason for the resignation to the
SEC.
46. In your opinion, under mandatory audit firm rotation, what is the
likely impact that the new auditor's focus ("fresh look") on a
client's operations and financial reporting practices would have on
the auditor's potential for dealing more appropriately with financial
reporting issues that may indicate material misstatements in a public
company's financial statements? N=198;
1. Significantly increase the potential: 1%;
2. Somewhat increase the potential: 18%;
3. Neither increase nor decrease the potential: 71%;
4. Somewhat decrease the potential: 7%;
5. Significantly decrease the potential: 0%;
6. No basis to evaluate: 3%;
7. No Answer.
47. In the absence of mandatory audit firm rotation, how would you
rate the pressure on a public accounting firm and its engagement
partner(s) to retain clients as a factor in whether or not they
appropriately deal with financial reporting issues that may materially
affect a public company's financial statements? How would that
pressure likely change under mandatory audit firm rotation?
Pressure on the firm in the absence of mandatory audit firm rotation:
N=189;
Significant Factor: 0%;
Strong Factor: 5%;
Moderate Factor: 19%;
Small Factor: 31%;
No Factor: 45%;
No Response: 0%.
Pressure on the firm with mandatory audit firm rotation: N=189;
Significant Factor: 0%;
Strong Factor: 4%;
Moderate Factor: 8%;
Small Factor: 35%;
No Factor: 53%;
No Response: 0%.
Pressure on the engagement partner(s) in the absence of mandatory
audit firm rotation: N=189;
Significant Factor: 3%;
Strong Factor: 7%;
Moderate Factor: 23%;
Small Factor: 27%;
No Factor: 40%;
No Response: 0%.
Pressure on the engagement partner(s) with mandatory audit firm
rotation: N=189;
Significant Factor: 0%;
Strong Factor: 4%;
Moderate Factor: 14%;
Small Factor: 35%;
No Factor: 47%;
No Response: 0%.
48. In the absence of mandatory audit firm rotation, how would you
rate the pressure on a public accounting firm and its engagement
partner(s) to retain clients as a factor in whether or not they
appropriately challenge overly aggressive and/or optimistic financial
reporting positions taken by public company management in interpreting
and applying generally accepted accounting principles? How would that
pressure likely change under mandatory audit firm rotation?
Pressure on the firm in the absence of mandatory audit firm rotation
N=190;
Significant Factor: 0%;
Strong Factor: 3%;
Moderate Factor: 17%;
Small Factor: 36%;
No Factor: 44%;
No Response: 0%.
Pressure on the firm with mandatory audit firm rotation: N=190;
Significant Factor: 0%;
Strong Factor: 2%;
Moderate Factor: 7%;
Small Factor: 41%;
No Factor: 50%;
No Response: 0%.
Pressure on the engagement partner(s) in the absence of mandatory
audit firm rotation: N=190;
Significant Factor: 1%;
Strong Factor: 6%;
Moderate Factor: 21%;
Small Factor: 34%;
No Factor: 38%;
No Response: 0%.
Pressure on the engagement partner(s) with mandatory audit firm
rotation: N=190;
Significant Factor: 0%;
Strong Factor: 3%;
Moderate Factor: 11%;
Small Factor: 43%;
No Factor: 43%;
No Response: 0%.
49. In the absence of mandatory audit firm rotation, how would you
rate the potential of a subsequent lawsuit and/or regulatory action
against a public accounting firm and its engagement partner(s) as a
factor in whether or not the public accounting firm and engagement
partner(s) appropriately deal with financial reporting issues that may
materially affect a public company client's financial statements? How
would that pressure likely change under mandatory audit firm rotation?
Pressure on the firm in the absence of mandatory audit firm rotation:
N=186;
Significant Factor: 30%;
Strong Factor: 20%;
Moderate Factor: 13%;
Small Factor: 12%;
No Factor: 25%;
No Response: 0%.
Pressure on the firm with mandatory audit firm rotation: N=184;
Significant Factor: 30%;
Strong Factor: 20%;
Moderate Factor: 13%;
Small Factor: 12%;
No Factor: 25%;
No Response: 0%.
Pressure on the engagement partner(s) in the absence of mandatory
audit firm rotation: N=184;
Significant Factor: 27%;
Strong Factor: 23%;
Moderate Factor: 14%;
Small Factor: 13%;
No Factor: 23%;
No Response: 0%.
Pressure on the engagement partner(s) with mandatory audit firm
rotation: N=185;
Significant Factor: 28%;
Strong Factor: 23%;
Moderate Factor: 12%;
Small Factor: 13%;
No Factor: 24%;
No Response: 0%.
50. In the absence of mandatory audit firm rotation, to what extent do
you believe that the possibility of being replaced by another firm as
auditor of record is a factor in whether or not the incumbent audit
firm appropriately deals with financial reporting issues that may
materially affect the client's financial statements? N=199;
1. A significant factor: 0%;
2. A strong factor: 3%;
3. A moderate factor: 11%;
4. A small factor: 35%;
5. No factor: 51%;
6. No Answer.
51. Under mandatory audit firm rotation, to what extent do you believe
the incumbent audit firm's knowledge that a new firm will replace the
incumbent firm as auditor of record at the end of a specified audit
tenure period would be a factor in whether or not the incumbent firm
appropriately deals with financial reporting issues that may
materially affect the public company client's financial statements?
N=198l
1. A significant factor: 3%;
2. A strong factor: 7%;
3. A moderate factor: 11%;
4. A small factor: 29%;
5. No factor: 50%;
6. No Answer.
52. How would establishing a limit on a public accounting firm's
tenure as a public company's auditor of record affect the perception
of the auditor's independence held by the following:
Perception of auditor independence held by capital markets (including
analysts, banks, brokers, exchanges, and rating agencies): N=188;
Significantly Increase: 1%;
Somewhat Increase: 36%;
Neither Increase nor Decrease: 63%;
Somewhat Decrease: 0%;
Significantly Decrease: 0%;
No Response: 0%.
Perception of auditor independence held by institutional investors:
N=189;
Significantly Increase: 2%;
Somewhat Increase: 37%;
Neither Increase nor Decrease: 61%;
Somewhat Decrease: 0%;
Significantly Decrease: 0%;
No Response: 0%.
Perception of auditor independence held by individual investors:
N=188;
Significantly Increase: 13%;
Somewhat Increase: 53%;
Neither Increase nor Decrease: 34%;
Somewhat Decrease: 0%;
Significantly Decrease: 0%;
No Response: 0%.
53. Traditionally, a change in the auditor of record for a public
company has been viewed as a "red flag" signal to the capital markets
and the public to inquire into the underlying reason for the change in
auditor. What impact would the scheduled change in auditors required
under mandatory audit firm rotation have on the "red flag" signal
otherwise associated with a change in auditor? (A scheduled change
would be one that occurs as a direct result of an audit firm rotation
requirement.) N=196;
1. Significant likelihood of retaining the "red flag" signal: 0%;
2. Some likelihood of retaining the "red flag" signal: 4%;
3. No change in the "red flag" signal: 8%;
4. Some likelihood of eliminating the "red flag" signal: 36%;
5. Significant likelihood of eliminating the "red flag" signal: 52%;
6. No Answer.
54. Assuming that under mandatory audit firm rotation either public
companies or public accounting firms can terminate their relationship,
what is the likelihood that the traditional "red flag" signal to the
capital markets and the public would be retained for any unscheduled
change in auditor? (An unscheduled change would be one that does not
occur as a direct result of an audit firm rotation requirement.) N=198;
1. Significant likelihood of retaining the "red flag" signal: 60%;
2. Some likelihood of retaining the "red flag" signal: 18%;
3. No change in the "red flag" signal: 14%;
4. Some likelihood of eliminating the "red flag" signal: 8%;
5. Significant likelihood of eliminating the "red flag" signal: 0%
6. No Answer.
E. Audit Tenure and The Risk of Audit Failure:
The following questions concern issues related to audit tenure and
audit failure. Audit tenure refers to the number of continuous years a
particular public accounting firm serves as a public company's auditor
of record. An audit failure occurs when audited financial statements
filed with the SEC contained material misstatements whether due to
errors or fraud and reasonable third parties with knowledge of the
relevant facts and circumstances would have concluded that the audit
was not conducted in accordance with GAAS.
Audit Tenure:
55. In light of your public company's past experience with changes in
your auditor of record, how would mandatory audit firm rotation likely
change the average tenure for firms that serve as your company's
auditor of record in the future? N=196;
1. Average audit tenure would likely increase - Skip to question 62:
1%;
2. Average audit tenure would likely stay the same - Skip to question
62: 2%;
3. Average audit tenure would likely decrease: 97%;
4. No Answer.
56. If you believe that the average audit tenure period is likely to
decrease under mandatory audit firm rotation, do you have any concern
that a reduced audit tenure period may negatively affect the public
accounting firm's existing incentives to invest the resources needed
to understand the client's operations and financial reporting
practices in order to devise effective audit tools and procedures?
N=189;
1. Very concerned: 25%;
2. Somewhat concerned: 42%;
3. Neither concerned nor unconcerned: 15%;
4. Somewhat unconcerned: 3%;
5. Not concerned: 14%;
6. No basis to evaluate: 1%;
7. No Answer.
57. Do you have any concern that mandatory audit firm rotation may
lead public accounting firms, as the end of a set audit tenure
approaches, to move its most knowledgeable and experienced audit
personnel from the current audit engagement to other efforts or
engagements to enhance the firm's ability to attract and retain other
clients? N=190;
1. Very concerned: 27%;
2. Somewhat concerned: 50%;
3. Neither concerned nor unconcerned: 12%;
4. Somewhat unconcerned: 3%;
5. Not concerned: 5%;
6. No basis to evaluate: 3%;
7. No Answer.
Risk of Audit Failure:
58. If, under mandatory audit firm rotation, public accounting firms
move their most knowledgeable and experienced audit personnel from the
current audit engagement to other efforts to enhance the public
accounting firm's ability to attract and/or retain clients in the
future, how do you think this would affect the risk of audit failure
on the current audit engagement? N=190;
1. Significant increased risk: 22%;
2. Somewhat increased risk: 70%;
3. No change in risk: 6%;
4. Somewhat decreased risk: 0%;
5. Significant decreased risk: 0%;
6. No basis to evaluate: 2%;
7. No Answer.
For the following four statements, please indicate the extent to which
you agree or disagree.
59. The risk of an audit failure is higher in the early years of an
audit tenure period as the new public accounting firm is more likely
to have not fully developed and applied an in depth understanding of
the new client's operations and financial reporting practices. N=190;
1. Strongly agree: 24%;
2. Generally agree: 55%;
3. Neither agree nor disagree: 16%;
4. Generally disagree: 4%;
5. Strongly disagree: 1%;
6. No Answer.
60. The risk of an audit failure is higher in the early years of an
audit tenure period because the new public accounting firm is more
likely to place heavy reliance on information provided by client
management. N=190;
1. Strongly agree: 6%;
2. Generally agree: 29%;
3. Neither agree nor disagree: 35%;
4. Generally disagree: 26%;
5. Strongly disagree: 4%;
6. No Answer.
61. The risk of an audit failure is likely to increase as the audit
tenure period increases due to the "comfort level" (familiarity with
client management and the desire to retain the client over many years)
provided by the public accounting firm's long-term relationship with
client management. N=189;
1. Strongly agree: 2%;
2. Generally agree: 7%;
3. Neither agree nor disagree: 18%;
4. Generally disagree: 53%;
5. Strongly disagree: 20%;
6. No Answer.
62. The risk of an audit failure is likely to increase as the audit
tenure period increases due to the management of public company
clients becoming too familiar with the auditor's approach and
procedures. N=199;
1. Strongly agree: 0%;
2. Generally agree: 3%;
3. Neither agree nor disagree: 21%;
4. Generally disagree: 46%;
5. Strongly disagree: 30%;
6. No Answer.
F. Costs and Benefits of Mandatory Audit Firm Rotation:
63. Some have argued that mandatory audit firm rotation would benefit
auditor independence and audit quality by providing a new auditor
focus ("fresh look") on the public company's operations and financial
reporting practices. Others have argued that under mandatory audit
firm rotation (1) the new auditor's lower level of client-specific
knowledge and experience may negatively affect audit quality, and (2)
would increase the cost that public companies pay for financial
statement audits because of higher initial audit fees and/or
additional costs associated with selecting and supporting a new audit
firm. Which of the following statements best expresses your public
company's views on the potential costs and benefits that may result
under mandatory audit firm rotation. N=198;
1. Costs are likely to significantly exceed the benefits: 70%;
2. Costs are likely to moderately exceed the benefits: 22%;
3. Costs and benefits are likely to be about equal: 3%;
4. Benefits are likely to moderately exceed the costs: 3%;
5. Benefits are likely to significantly exceed the costs: 1%;
6. No basis to evaluate: 1%;
7. No Answer.
64. With respect to the costs and benefits that may result from
mandatory audit firm rotation, do you believe the likely costs and
benefits of mandatory audit firm rotation will vary based on the
nature and size of the public company being audited? N=198;
1. Yes: 66%;
2. No - Skip to question 66: 20%;
3. No basis to evaluate - Skip to question 66: 14%;
4. No Answer.
65. For each of the following categories of public companies, please
provide your opinion on the potential costs and benefits that may
result if mandatory audit firm rotation were to be required.
Multinational or Foreign Company with Revenue of $5 billion or more:
N=124;
Costs Are Likely To Significantly Exceed Benefits: 70%;
Costs Are Likely To Moderately Exceed Benefits: 16%;
Costs and Benefits Are Likely To Be About Equal: 1%;
Benefits Are Likely To Moderately Exceed Costs: 4%;
Benefits Are Likely To Significantly Exceed Costs: 1%;
No Basis To Judge: 8%.
Domestic Company with Revenue of $5 billion or more: N=123;
Costs Are Likely To Significantly Exceed Benefits: 56%;
Costs Are Likely To Moderately Exceed Benefits: 31%;
Costs and Benefits Are Likely To Be About Equal: 4%;
Benefits Are Likely To Moderately Exceed Costs: 4%;
Benefits Are Likely To Significantly Exceed Costs: 1%;
No Basis To Judge: 4%.
Multinational or Foreign Company with Revenue of $100 million but less
than $5 billion: N=126;
Costs Are Likely To Significantly Exceed Benefits: 52%;
Costs Are Likely To Moderately Exceed Benefits: 32%;
Costs and Benefits Are Likely To Be About Equal: 3%;
Benefits Are Likely To Moderately Exceed Costs: 4%;
Benefits Are Likely To Significantly Exceed Costs: 0%;
No Basis To Judge: 9%.
Domestic Company with Revenue of $100 million but less than $5
billion: N=123;
Costs Are Likely To Significantly Exceed Benefits: 48%;
Costs Are Likely To Moderately Exceed Benefits: 39%;
Costs and Benefits Are Likely To Be About Equal: 6%;
Benefits Are Likely To Moderately Exceed Costs: 1%;
Benefits Are Likely To Significantly Exceed Costs: 1%;
No Basis To Judge: 5%.
Multinational or Foreign Company with Revenue of less than $100
million: N=122;
Costs Are Likely To Significantly Exceed Benefits: 31%;
Costs Are Likely To Moderately Exceed Benefits: 43%;
Costs and Benefits Are Likely To Be About Equal: 12%;
Benefits Are Likely To Moderately Exceed Costs: 2%;
Benefits Are Likely To Significantly Exceed Costs: 1%;
No Basis To Judge: 11%.
Domestic Company with Revenue of less than $100 million N=122;
Costs Are Likely To Significantly Exceed Benefits: 23%;
Costs Are Likely To Moderately Exceed Benefits: 45%;
Costs and Benefits Are Likely To Be About Equal: 22%;
Benefits Are Likely To Moderately Exceed Costs: 2%;
Benefits Are Likely To Significantly Exceed Costs: 1%;
No Basis To Judge: 7%.
V. Impact Of The Sarbanes-Oxley Act:
The Act contains various reform provisions intended to enhance auditor
independence and audit quality, strengthen corporate responsibility,
and improve the oversight of audits of public companies that are
subject to the securities laws of the United States. Many of these
reforms will directly or indirectly affect audit firms and the
performance and oversight of the company audits they perform. The Act
also created the PCAOB to oversee the audits of public companies in
order to protect investors and further public interest in the
preparation of public company audit reports.
66. Section 203 of the Sarbanes-Oxley Act of 2002 as implemented by
SEC regulations requires the mandatory rotation of both lead and
reviewing engagement partners after 5 years and after 7 years for
other partners with a significant involvement in the audit engagement.
Some have argued that these new and enhanced audit partner
requirements sufficiently provide the "fresh look" and related
benefits to auditor independence and audit quality without the costs
of changing the public accounting firm associated with mandatory audit
firm rotation. Others have argued that a new public accounting firm is
necessary to effectively achieve the benefits associated with the
"fresh look" because changing lead and reviewing partners continues
the existing auditing practices and working relationship of the
incumbent public accounting firm. Please select one of the following
statements that best describes your belief as to whether mandatory
rotation of lead and reviewing partners achieves the benefits to
auditor independence and audit quality of the "fresh look" or
mandatory audit firm rotation is necessary to achieve those benefits.
N=200;
1. Mandatory rotation of lead and reviewing partners sufficiently
achieves the intended benefits of the "fresh look" and is less costly
than mandatory audit firm rotation. (Skip to question 68): 77%;
2. Mandatory rotation of lead and reviewing partners may not be as
effective as mandatory audit firm rotation in achieving the intended
benefits of the "fresh look," but is a better choice given the higher
cost of mandatory audit firm rotation: 18%;
3. Mandatory audit firm rotation is necessary to effectively achieve
the benefits of the "fresh look," although it is more costly than
mandatory rotation of lead and reviewing partners: 3%;
4. Mandatory audit firm rotation is necessary to effectively achieve
the benefits of the "fresh look," and the added costs would not
outweigh the benefits: 1%;
5. Other - Please specify any other belief below: 1%;
6. No Answer.
Other (please state any other belief you may have):
67. Considering (1) the audit partner rotation requirements of Section
203 of the Sarbanes-Oxley Act of 2002 as implemented by SEC
regulations, (2) the Act's other auditor independence requirements
(Section 201) prohibiting certain nonaudit services; Section 202,
audit committee pre-approval of audit and non-audit services not
otherwise prohibited and related public disclosures; Section 204,
certain auditor reporting requirements to the audit committee; Section
206, time restrictions before certain auditors could be employed by
the client, (3) the Act's Section 301 audit committee
responsibilities, and (4) the Act's Section 101 establishing the PCAOB
as an independent entity overseeing registered public accounting
firms, which of the following statements best describes your belief as
to whether the specific provisions of the Act noted above, would
likely achieve the intended benefits, both with respect to audit
quality and auditor independence, that might otherwise be expected to
result from implementing a mandatory audit firm rotation requirement.
The Act's above requirements, when fully implemented, can be expected
to: N=46:
1. Fully achieve the intended benefits of mandatory audit firm
rotation: 11%;
2. Substantially achieve the intended benefits of mandatory audit firm
rotation: 65%;
3. Somewhat achieve the intended benefits of mandatory audit firm
rotation: 20%;
4. Minimally achieve the intended benefits of mandatory audit firm
rotation: 0%;
5. Not achieve the intended benefits of mandatory audit firm rotation:
4%;
6. No Answer.
VI. Other Practices For Enhancing Audit Quality:
Authors of studies concerned with audit quality, regulators of the
public accounting profession, or other parties who are knowledgeable
of the accounting profession have identified various other practices
that are intended to enhance audit quality. For each of the following
practices, please provide your belief as to the likely benefit on
auditor independence and audit quality in the absence of a requirement
for audit firm rotation.
68. Practice One: The audit committee would be required to
periodically hold an open competition for audit services in which the
incumbent public accounting firm could also submit a bid for audit
services. N=200;
1. Significant benefit: 1%;
2. Less than significant but a very positive benefit: 10%;
3. Limited benefit: 26%;
4. Little benefit: 27%;
5. No benefit: 36%;
6. No Answer.
69. Practice Two: Supplement the Sarbanes-Oxley Act of 2002 mandatory
audit partner rotation requirement with a requirement to periodically
require rotation of audit managers after some specified period as
audit manager on the audit engagement. N=201;
1. Significant benefit: 4%;
2. Less than significant but a very positive benefit: 21%;
3. Limited benefit: 25%;
4. Little benefit: 22%;
5. No benefit: 28%;
6. No Answer.
70. Practice Three: Require another public accounting firm at the
direction of the audit committee to periodically assist the audit
committee in its responsibilities of overseeing the financial
statement audit. N=200;
1. Significant benefit: 1%;
2. Less than significant but a very positive benefit: 9%;
3. Limited benefit: 17%;
4. Little benefit: 25%;
5. No benefit: 48%;
6. No Answer.
71. Practice Four Require another public accounting firm at the
direction of the audit committee to periodically conduct a forensic
audit in areas of the public company's financial reporting process
that present a risk of fraudulent financial reporting that could
result in materially misstated financial statements. N=201;
1. Significant benefit: 2%;
2. Less than significant but a very positive benefit: 12%;
3. Limited benefit: 21%;
4. Little benefit: 28%;
5. No benefit: 37%;
6. No Answer.
72. Practice Five: Require that the public company's audit committee
hire the auditor of record on a non-cancelable multi-year basis (for
example 3, 5, or 7 years). The incumbent firm could terminate the
relationship for cause during the contract period. In addition, the
incumbent firm would be eligible to compete for the subsequent audit
contract period. N=200;
1. Significant benefit: 2%;
2. Less than significant but very positive benefit: 2%;
3. Moderate benefit: 9%;
4. Little benefit: 26%;
5. No benefit: 61%;
6. No Answer.
VII. Views On Implementing Mandatory Audit Firm Rotation:
The following questions address several fundamental factors that would
have to be decided in structuring mandatory rotation of public
accounting firms, if such a practice were to be required. Regardless
of whether or not you would support mandatory rotation of public
accounting firms, please select one choice for each of the following
questions.
73. If mandatory rotation of public accounting firms were required,
what should be the limit on the incumbent firm's audit tenure period?
N=199;
1. Three or four years: 3%;
2. Five to seven years: 36%;
3. Eight to ten years: 42%;
4. Greater than ten years: 19%;
5. No Answer.
74. If mandatory rotation of public accounting firms were required,
after what period of time should the incumbent firm be permitted to
once again compete for audit services? N=197;
1. Three or four years: 62%;
2. Five to seven years: 25%;
3. Eight to ten years: 11%;
4. Greater than ten years: 2%;
5. No Answer.
75. If mandatory rotation of public accounting firms were required,
under what circumstances, if any, should the audit committee be
permitted to terminate (fire) the firm providing audit services? N=200;
1. The audit committee should be permitted to terminate the firm at
any time if it is dissatisfied with the firm's performance or working
relationship: 96%;
2. The audit committee could not terminate the firm except for failure
to follow professional standards set by the PCAOB, violations of
securities laws, or similar unprofessional actions that may adversely
affect auditor independence and/or audit quality: 3%;
3. The audit committee could not terminate the firm unless the PCAOB
deregistered the firm: 0%;
4. Other - Please specify other circumstances below: 1%;
5. No Answer.
Other (please specify):
76. If mandatory rotation of public accounting firms were required,
under what circumstances should the firm be able to terminate its
relationship with the audit committee/public company as the auditor of
record? N=194;
1. The firm should be able to terminate its relationship with the
audit committee/public company at any time if the firm is dissatisfied
with the working relationship: 77%;
2. A firm should be able to terminate its relationship with a company
if dissatisfied with audit committee, directors, or management efforts
to address matters likely to involve fraud or materially affect
financial statements: 21%;
3. Other - please specify other circumstances below: 2%
4. No Answer.
Other (please specify):
77. If mandatory rotation of public accounting firms were required, it
should be implemented over a period of years (staggered) on a
reasonable basis to avoid a significant number of public companies
changing auditors simultaneously. N=200;
1. Strongly agree: 73%;
2. Agree: 19%;
3. Neither agree nor disagree: 5%;
4. Disagree: 1%;
5. Strongly disagree: 1%;
6. No opinion: 1%;
7. No Answer.
78. If mandatory rotation of public accounting firms were required, do
you believe such a requirement should be applied uniformly for audits
of all public companies regardless of the nature or size of the public
company? N=198;
1. Yes: 81%;
2. No: 19%;
3. No Answer.
79. Please explain why you believe such a requirement should, or
should not, be applied uniformly to all public companies: If you
believe that such a requirement should be applied uniformly, please
skip to question 81.
80. If you answered 2 to question 78, please select from the following
categories of public companies those to which you believe such a
requirement should apply? Please select all that apply. N=38;
1. Multinational or foreign public company with revenue of $5 billion
or more: N=14;
2. Domestic public company with revenue of $5 billion or more: N=15;
3. Multinational or foreign public company with revenue of $100
million but less than $5 billion: N=8;
4. Domestic public company with revenue of $100 million but less than
$5 billion: N=10;
5. Multinational or foreign public company with revenue of less than
$100 million: N=8;
6. Domestic public company with revenue of less than $100 million:
N=12;
7. None of the above.
VIII. Overall Opinion On Requiring Mandatory Audit Firm Rotation:
This final section of the questionnaire asks for your current overall
opinion on whether or not you would support requiring mandatory
rotation of registered public accounting firms.
81. Regarding your public company's overall current opinion on whether
or not your company supports requiring mandatory rotation of
registered public accounting firms, please select one of the following
choices. N=187;
1. The company supports requiring mandatory rotation of public
accounting firms at this time provided that the period of time for
rotation is reasonable. (Please provide the principal reason for
supporting mandatory rotation below): 4%;
2. The company supports the concept of requiring mandatory rotation,
but believes more time is needed to evaluate the effectiveness of the
various requirements of the Sarbanes-Oxley Act of 2002 for enhancing
audit quality: 8%;
3. The company does not support requiring mandatory rotation of public
accounting firms. (Please provide the principal reason for not
supporting mandatory rotation below): 88%;
4. No Answer.
(If you answered either 1 or 3 above, please provide the principal
reason for either supporting or not supporting mandatory firm rotation
below.)
82. Please provide any additional comments you may have on the effects
of mandatory rotation of public accounting firms.
[End of section]
Appendix III: Survey of Public Companies' Audit Committees on the
Effects of Mandatory Audit Firm Rotation:
United States General Accounting Office:
Survey Of Public Companies' Audit Committees:
Effects Of Mandatory Audit Firm Rotation:
Introduction:
To provide a thorough, fair and balanced report to Congress on the
potential effects of mandatory audit firm rotation, it is essential
that we obtain the experiences and views on this subject from the
senior financial executive and the Audit Committee Chair (or head of
an equivalent body) of a representative sample of public companies.
Your company has been selected from the universe of public companies
identified as issuers registered with the SEC.
To obtain the views of your company's senior financial executive and
Audit Committee Chair, we are providing two separate surveys.
* The survey for the senior financial executive may be completed on-
line at GAO's Website or completed by hand using this survey
instrument and returned to GAO via the enclosed pre-addressed, postage-
paid envelope. However, we encourage the use of the on-line version,
as it will significantly reduce the effort needed to tabulate and
summarize your public company's responses.
* The survey for your company's Audit Committee Chair (or head of an
equivalent body or group), which is contained in a separately
addressed envelope, has been included in the survey materials sent to
your public company's senior financial executive. We are asking the
senior financial executive to ensure that the survey for the Audit
Committee Chair is delivered to the Audit Committee Chair because the
names and addresses of the Chairs of public company Audit Committees
were not readily available in a form that would facilitate a separate
mailing directly to them.
In addition to providing responses to the questions in each survey,
respondents will have the opportunity to provide any additional
comments they may have on the subject of mandatory audit firm rotation
at the end of each survey.
The results of the survey will be compiled and presented in summary
form only as part of our report, and GAO will not release individually
identifiable data from this survey, unless compelled by law or
required to do so by Congress. Proprietary business information is
protected by a federal law (18 U.S.C. 1905, the "Trade Secrets Act")
that makes unauthorized disclosure a crime.
Survey Glossary:
For the purpose of this survey,
* "public company" refers to issuers of securities subject to the
financial reporting requirements of the Securities Exchange Act of
1934, the Investment Company Act of 1940, and registered with the SEC.
For purposes of this survey, mutual funds and investment trusts that
meet the statutory definition of issuer of securities are considered
public companies.
- "multinational or foreign public company" is a public company with
significant operations (10 percent or more of total revenue) in one or
more countries outside the United States.
- "domestic public company" is a public company with no significant
operations (10 percent or more of total revenue) from outside the
United States.
* "auditor," "auditor of record," or "public accounting firm" refers
to an independent public accounting firm registered with the SEC that
performs audits and reviews of public company financial statements and
prepares attestation reports filed with the SEC. In the future, these
public accounting firms must be registered with the Public Company
Accounting Oversight Board (PCAOB) as required by the Sarbanes-Oxley
Act of 2002.
* "mandatory audit firm rotation" refers to the imposition of a limit
on the number of consecutive years in which a particular registered
public accounting firm may be the auditor of record for a public
company (an "issuer").
* "audit quality" refers to the auditor conducting the audit in
accordance with Generally Accepted Auditing Standards (GAAS) to
provide reasonable assurance that the audited financial statements and
related disclosures are (1) presented in accordance with Generally
Accepted Accounting Principles (GAAP) and (2) are not materially
misstated whether due to errors or fraud. This definition assumes that
reasonable third parties with knowledge of the relevant facts and
circumstances would have concluded that the audit was conducted in
accordance with GAAS and, that within the requirements of GAAS, the
auditor appropriately detected and then dealt with known material
misstatements by (1) ensuring that appropriate adjustments, related
disclosures, and other changes were made to the financial statements
to prevent them from being materially misstated, (2) modifying the
auditor's opinion on the financial statements if appropriate changes
or other adjustments were not made, or (3) if warranted, resigning as
the public company's auditor of record and reporting the reason for
the resignation to the SEC.
* "audit failure" refers to audits for which audited financial
statements filed with the SEC contained material misstatements whether
due to errors or fraud, and reasonable third parties with knowledge of
the relevant facts and circumstances would have concluded that the
audit was not conducted in accordance with GAAS, and therefore, the
auditor failed to appropriately detect and/or deal with known material
misstatements by (1) ensuring that appropriate adjustments, related
disclosures, and other changes were made to the financial statements
to prevent them from being materially misstated, (2) modifying the
auditor's opinion on the financial statements if appropriate changes
were not made, or (3) if warranted, resigning as the public company's
auditor of record and reporting the reason for the resignation to the
SEC.
* "nonaudit services" refers to any professional services provided to
an issuer by a public accounting firm registered with the PCAOB that
serves as auditor of record for the issuer, other than those provided
to the issuer in connection with an audit, review, and/or attestation
report of the financial statements of an issuer.
* "audit committee" refers to a committee (or equivalent body)
established by and amongst the board of directors of an issuer for the
purpose of overseeing the accounting and financial reporting processes
of the issuer and audit, review, and attestation engagements
associated with the financial statements of the issuer performed by
public accounting firms.
Background On Responding Audit Committee:
1. Please provide the number of years you have served as the Chair of
the Audit Committee or head of an equivalent body.
Number of years serving as Chair: N=177;
Range of responses=0-1: N=32: 18%;
Range of responses=2-3: N=67: 38%;
Range of response=4-5: N=31: 17%;
Range of responses=5+: N=47: 27%.
2. Does your audit committee or your company have a policy that
requires the periodic rotation of your company's auditor of record?
N=191;
No: 100%;
Yes: 0%;
If yes, Year established?
Maximum audit tenure period permitted:
If you answered Yes to question 2, please go to question 4.
3. Is your company's audit committee or the company currently
considering a policy that would require some form of periodic rotation
of your auditor of record? N=183;
Yes: 6%;
No: 94%.
Mandatory Audit Firm Rotation Costs And Benefits:
Some have argued that mandatory audit firm rotation would benefit
auditor independence and audit quality by providing a new auditor
focus ("fresh look") on the public company's operations and financial
reporting practices. Others have argued that under mandatory audit
firm rotation (1) the new auditor's lower level of client-specific
knowledge and experience may negatively affect audit quality and
increase the risk of audit failure, and (2) would increase the cost
that public companies pay for financial statement audits because of
high initial audit fees and/or additional costs associated with
selecting and supporting a new audit firm.
4. Which of the following statements best expresses your view on the
potential costs and benefits that may result under mandatory audit
firm rotation. N=189;
1. Costs are likely to significantly exceed the benefits: 65%;
2. Costs are likely to moderately exceed the benefits: 24%;
3. Costs and benefits are likely to be about equal: 4%;
4. Benefits are likely to moderately exceed costs: 1%;
5. Benefits are likely to significantly exceed the costs: 1%;
6. No basis to evaluate: 5%.
5. Please tell us the primary reasons for your view on the potential
costs and benefits that may result under mandatory audit firm rotation.
Availability Of Public Accounting Firms:
If your public company's auditor of record is currently not one of the
Big 4 public accounting firms (PricewaterhouseCoopers, Deloitte &
Touche, KPMG, or Ernst & Young), please skip to question 9.
6. Would your audit committee realistically consider using a non-Big 4
firm as the public company's auditor of record? N=175;
1. Yes: 6%;
2. No: 94%.
If you answered yes to question 6, please go to question 9.
7. Please check one box in each row. To what extent are the following
reasons important in explaining why your audit committee would only
consider using one of the Big-4 public accounting firms? Please check
one box in each row.
Reasons for limiting consideration to only Big 4 firms:
Expectations of the Capital Markets: N=163;
Very Great Importance: 48%;
Great Importance: 34%;
Moderate Importance: 14%;
Some Importance: 1%;
Little or No Importance: 3%;
Don't Know: 0%.
Public Company geographic/global operations: N=164;
Very Great Importance: 53%;
Great Importance: 27%;
Moderate Importance: 10%;
Some Importance: 4%;
Little or No Importance: 6%;
Don't Know: 0%.
Public Company operations require specialized industry
skills/knowledge: N=164;
Very Great Importance: 39%;
Great Importance: 36%;
Moderate Importance: 18%;
Some Importance: 6%;
Little or No Importance: 1%;
Don't Know: 0%.
Public Company contractual obligation (e.g. with banks or lenders):
N=163;
Very Great Importance: 15%;
Great Importance: 28%;
Moderate Importance: 24%;
Some Importance: 6%;
Little or No Importance: 20%;
Don't Know: 7%.
Requirement of the Public Company's Board of Directors: N=162;
Very Great Importance: 23%;
Great Importance: 35%;
Moderate Importance: 19%;
Some Importance: 7%;
Little or No Importance: 13%;
Don't Know: 3%.
Sufficiency of audit firm resources: N=164;
Very Great Importance: 68%;
Great Importance: 26%;
Moderate Importance: 4%;
Some Importance: 2%;
Little or No Importance: 0%;
Don't Know: 0%.
Audit Firm's name and reputation: N=164;
Very Great Importance: 35%;
Great Importance: 41%;
Moderate Importance: 18%;
Some Importance: 4%;
Little or No Importance: 2%;
Don't Know: 0%.
OtherPlease describe: N=6;
Very Great Importance: N=3;
Great Importance: N=3;
Moderate Importance: N=0;
Some Importance: N=0;
Little or No Importance: N=0;
Don't Know: N=0.
8. If your audit committee would only consider using one of the Big 4
public accounting firms, to what extent does the limited number of
acceptable firms affect your views on mandatory audit firm rotation.
N=160;
1. Support mandatory audit firm rotation and the limited number of
acceptable firms would not affect my view: 4%;
2. Support mandatory audit firm rotation but the limited number of
acceptable firms would likely result in costs exceeding benefits: 8%;
3. Would not support mandatory audit firm rotation due to the limited
number of acceptable firms: 20%;
4. Do not support mandatory audit firm rotation regardless of the
number of acceptable firms: 68%.
Impact Of The Sarbanes-Oxley Act Of 2002:
Section 203 of the Sarbanes-Oxley Act of 2002 (the Act) as implemented
by Securities and Exchange Commission (SEC) regulations requires the
mandatory rotation of both lead and reviewing engagement partners
after 5 years and after 7 years for other partners with a significant
involvement in the audit engagement. Some have argued that these new
and enhanced audit partner requirements sufficiently provide the
"fresh look" and related benefits to auditor independence and audit
quality without the costs of changing the public accounting firm
associated with mandatory audit firm rotation (e.g. selection
costs, additional support costs). Others have argued that a new public
accounting firm is necessary to effectively achieve the benefits
associated with the "fresh look" because changing lead and reviewing
partners continues the existing auditing practices and working
relationship of the incumbent public accounting firm.
9. Considering the above arguments, please select one of the following
statements that best describes your belief. N=185;
1. Mandatory rotation of lead and reviewing partners sufficiently
achieves the intended benefits of the "fresh look" and is less costly
than mandatory audit firm rotation: 76%;
2. Mandatory rotation of lead and reviewing partners may not be as
effective as mandatory audit firm rotation in achieving the intended
benefits of the "fresh look," but is a better choice given the higher
cost of mandatory audit firm rotation: 20%;
3. Mandatory audit firm rotation is necessary to effectively achieve
the benefits of the "fresh look," although it is more costly than
mandatory rotation of lead and reviewing partners: 1%;
4. Mandatory audit firm rotation is necessary to effectively achieve
the benefits of the "fresh look," and the added costs would not
outweigh the benefits: 2%;
5. Other (please state any other belief you may have): 1%.
If you answered 1 to question 9, please go to question 11.
10. Considering the Act's requirements concerning audit partner
rotation as implemented by SEC regulations, prohibited nonaudit
services, audit committee pre-approval of audit and nonaudit services
not otherwise prohibited and related public disclosures, auditor
reporting requirements to the audit committee, time restrictions
before auditors could become client employees, audit committee
responsibilities for hiring, compensating, and overseeing the external
auditors, and establishing the Public Company Accounting Oversight
Board (PCAOB) as an independent agency overseeing registered public
accounting firms, which of the following statements best describes
your belief as to whether the provisions of the Act noted above, would
likely achieve the intended benefits, both with respect to audit quality
and auditor independence, that might otherwise be expected to result
from implementing a mandatory audit firm rotation requirement.
The Act's above requirements, when fully implemented, can be expected
to: N=43;
1. Fully achieve the intended benefits of mandatory audit firm
rotation: 14%;
2. Substantially achieve the intended benefits of mandatory audit firm
rotation: 58%;
3. Somewhat achieve the intended benefits of mandatory audit firm
rotation: 18%;
4. Minimally achieve the intended benefits of mandatory audit firm
rotation: 5%;
5. Not achieve the intended benefits of mandatory audit firm rotation:
5%.
Other Practices For Enhancing Audit Quality:
Authors of studies concerned with audit quality, regulators of the
public accounting profession, or other parties who are knowledgeable
of the accounting profession have identified various practices other
than mandatory audit firm rotation intended to enhance audit quality.
For each of the following practices, please provide your belief as to
the likely benefit on auditor independence and audit quality in the
absence of a requirement for audit firm rotation.
11. Practice One: The audit committee would be required to
periodically hold an open competition for audit services in which the
incumbent public accounting firm could also submit a bid for audit
services. N=189;
1. Significant benefit: 6%;
2 Less than significant but a very positive benefit: 17%;
3. Limited benefit: 28%;
4. Little benefit: 25%;
5. No benefit: 24%.
12. Practice Two: Supplement the Sarbanes-Oxley Act of 2002 mandatory
audit partner rotation requirement with a requirement to periodically
require rotation of audit managers after some specified period as
audit manager on the audit engagement. N=189;
1. Significant benefit: 13%;
2 Less than significant but a very positive benefit: 28%;
3. limited benefit: 34%;
4. little benefit: 13%;
5. No benefit: 12%.
13. Practice Three: Require another public accounting firm at the
direction of the audit committee to periodically assist the audit
committee in its responsibilities of overseeing the financial
statement audit. N=189;
1. Significant benefit: 4%;
2 Less than significant but a very positive benefit: 9%;
3. limited benefit: 30%;
4. little benefit: 29%;
5. No benefit: 28%.
14. Practice Four: Require another public accounting firm at the
direction of the audit committee to periodically conduct a forensic
audit in areas of the public company's financial reporting process
that present a risk of fraudulent financial reporting that could
result in materially misstated financial statements. N=188;
1. Significant benefit: 3%;
2 Less than significant but a very positive benefit: 16%;
3. limited benefit: 30%;
4. little benefit: 31%;
5. No benefit: 20%.
15. Practice Five: Require that the audit committee hire the auditor
of record on a non-cancelable multi-year basis (for example 3, 5, or 7
years). The incumbent firm could terminate the relationship for cause
during the contract period. In addition, the incumbent firm would be
eligible to compete for the subsequent audit contract period. N=187;
1. Significant benefit: 1%;
2 Less than significant but a very positive benefit: 5%;
3. limited benefit: 13%;
4. little benefit: 24%;
5. No benefit: 57%.
Views On Implementing Mandatory Audit Firm Rotation:
The following questions address several fundamental factors that would
have to be decided in structuring mandatory rotation of public
accounting firms, if such a practice were to be required. Regardless
of whether or not you would support mandatory rotation of public
accounting firms, please select one choice for each of the following
questions.
16. If mandatory rotation of public accounting firms were required,
what should be the limit on the incumbent firm's audit tenure period?
N=187;
1. Three or four years: 3%;
2. Five to seven years: 37%;
3. Eight to ten years: 38%;
4. Greater than ten years: 22%.
17. If mandatory rotation of public accounting firms were required,
after what period of time should the incumbent firm be permitted to
once again compete for audit services? N=190;
1. Three or four years: 58%;
2. Five to seven years: 28%;
3. Eight to ten years: 11%;
4. Greater than ten years: 3%.
18. If mandatory rotation of public accounting firms were required,
under what circumstances, if any, should the audit committee be
permitted to terminate (fire) the firm providing audit services?
N=188;
1. The audit committee should be permitted to terminate the firm at
any time if it is dissatisfied with the firm's performance or working
relationship: 98%;
2. The audit committee could not terminate the firm except for failure
to follow professional standards set by the PCAOB, violations of
securities laws, or similar unprofessional actions that may adversely
affect auditor independence and/or audit quality: 2%;
3. The audit committee could not terminate the firm unless the PCAOB
deregistered the firm: 0%;
4. Other (Please specify): 0%.
19. If mandatory rotation of public accounting firms were required,
under what circumstances should the firm be able to terminate its
relationship with the audit committee/public company as the auditor of
record? N=190;
1. The firm should be able to terminate its relationship with the
audit committee/public company at any time if the firm is dissatisfied
with the working relationship: 74%;
2. The firm should be able to terminate its relationship with the
audit committee/public company if the firm is dissatisfied with the
public company's management and/or board of directors and/or the audit
committee's performance in addressing matters involving likely fraud
and/or matters that may likely materially affect the fair presentation
of the financial statements in accordance with generally accepted
accounting principles: 25%;
3. Other (Please specify): 1%.
20. If mandatory rotation of public accounting firms were required, it
should be implemented over a period of years (staggered) on a
reasonable basis to avoid a significant number of public companies
changing auditors simultaneously. N=189;
1. Strongly agree: 72%;
2. Agree: 18%;
3. Neither agree nor disagree: 2%;
4. Disagree: 2%;
5. Strongly disagree: 1%;
6. No opinion: 5%.
21. If mandatory rotation of public accounting firms were required, do
you believe such a requirement should be applied uniformly for audits
of all public companies regardless of the nature or size of the public
company? N=188;
Yes: 65%;
No: 35%.
22. Please explain why you believe such a requirement should, or
should not, be applied uniformly to all public companies:
If you answered yes to question 21, please go to question 24.
23. If you answered no to question 21, please select from the
following categories of public companies to which you believe such a
requirement should apply? Please select all that apply. N=65;
1. Multinational or foreign public company (a public company with
significant operations [10 percent or more of total revenue] in one or
more countries outside the United States) with revenue of $5 billion
or more: N=43;
2. Domestic public company (a public company with no significant
operations [10 percent or more of total revenue] outside the United
States) with revenue of $5 billion or more: N=40;
3. Multinational or foreign public company with revenue of $100
million but less than $5 billion: N=21;
4. Domestic public company with revenue of $100 million but less than
$5 billion: N=16;
5. Multinational or foreign public company with revenue of less than
$100 million: N=8;
6. Domestic public company with revenue of less than $100 million: N=7.
Your Overall Opinion On Requiring Mandatory Audit Firm Rotation:
This final section of the questionnaire asks for your current overall
opinion on whether or not you would support requiring mandatory
rotation of registered public accounting firms. Please select one of
the following choices.
24. Regarding your overall current opinion on whether or not you
support requiring mandatory rotation of registered public accounting
firms, please select one of the following choices. N=166;
1. I support requiring mandatory rotation of public accounting firms
at this time provided that the period of time for rotation is
reasonable. (Please provide the principal reason supporting your
view): 2%;
2. I support the concept of requiring mandatory rotation of public
accounting firms, but believe more time is needed to evaluate the
effectiveness of the various requirements of the Sarbanes-Oxley Act of
2002 for enhancing audit quality: 7%;
3. I do not support requiring mandatory rotation of public accounting
firms. (Please generally state your overall reasons): 90%.
4. Other (Please describe): 1%.
Space For Additional Comments:
25. Please provide any additional comments you may have on whether
mandatory rotation of public accounting firms should or should not be
required and the related costs and benefits.
[End of section]
Appendix IV: Selected Written Comments from Tier I Public Accounting
Firms:
Public accounting firms surveyed were invited to add written comments
to a number of questions to further explain their answers or to add
additional answers. The survey of public accounting firms, annotated
with summary responses for each question, is in appendix I. Of the 74
Tier I respondents that responded to the survey, 55 volunteered written
answers to at least one of the 17 open-ended comment questions in our
survey, which we have summarized into the following subject areas:
* auditor's ability to detect financial reporting issues,
* additional audit procedures for new auditor of record,
* client-specific knowledge and experience,
* auditor independence,
* audit quality and audit failure,
* audit-related costs and audit fees,
* audit procedures for PCAOB consideration,
* competition for audit services,
* implementing mandatory audit firm rotation, and:
* overall views on requiring mandatory audit firm rotation.
The following tables display selected comments from respondents to
these questions to reflect the range of views that were provided by
respondents. Some of the quotes illustrate typical comments made by
several public accounting firms, while others represent a unique
viewpoint of only that public accounting firm. While these specific
comments provide valuable insights, the number of comments of a
particular type reproduced here is not necessarily proportional to the
number of other similar responses, and, therefore, the comments are not
meant to be representative of the views that might be found in the
population of Tier I public accounting firms as a whole.
Auditor's Ability to Detect Financial Reporting Issues:
We asked respondents to describe factors other than those already
listed in the survey that would likely affect the auditor's ability to
detect financial reporting issues that may indicate material
misstatements in a public company's financial statements. A number of
respondents mentioned the importance of an active oversight role of the
audit committee, management's attributes, auditor assessments and
independence, fee and time pressures placed on auditors, and other
factors such as the frequency of auditor contact with key client
management affecting the auditor's ability to detect financial
reporting issues.
Table 1 shows selected responses to question 10 - "Please describe any
relevant factors not listed above [in question 9][Footnote 5] that you
believe would likely affect the auditor's ability to detect financial
reporting issues that may indicate material misstatements in a public
company's financial statements and, in your response, please specify
the level of its importance using the same categories as above."
Table 1: Other Factors Affecting the Auditor's Ability to Detect
Financial Reporting Issues:
General category of factors: Role of audit committee;
* Comment: "Very Great Importance-Active oversight role of the audit
committee and its understanding of the company's financial reporting."
* Comment: "... willingness of audit committees ...to fund activities
beyond audit requirements, such as forensic efforts and deeper
internal controls work."
General category of factors: Management attributes;
* Comment: "Very Great Importance--Quality of the internal control
environment--Management's ethical behavior and tone at the top-
Strength of the internal audit function."
* Comment: "...integrity, honesty, and cooperation of management is
[are] of very great importance in the auditor's ability to detect
financial reporting issues. Also, accuracy and completeness of the
information provided to the auditor is of very great importance."
* Comment: "...willingness of ... management to fund activities beyond
audit requirements, such as forensic efforts and deeper internal
controls work."
* Comment: "Management attitude-very great importance."
* Comment: "Open lines of communication with all client personnel."
General category of factors: Auditor assessments and independence;
* Comment: "Appropriate assessment of management's competence and
integrity."
* Comment: "Appropriate level of [auditor] skepticism."
* Comment: Pressures on auditors: "Appropriate independence of
personnel on the [audit] engagement."
General category of factors: Pressures on auditors;
* Comment: "Fee pressure or time pressure, resulting in application of
less than appropriate audit procedures. (Great Importance.)".
* Comment: "Economic pressures from clients to keep fees to a minimum
and pressure from other firms whose fees are lower, but provide
substandard levels of service and technical ability."
General category of factors: Auditor-client contact;
* Comment: "Frequency of [auditor] contact (telephonically and
physical presence) with key management of the client - great
importance."
Source: GAO analysis of survey data.
[End of table]
Additional Audit Procedures for New Auditor of Record:
We asked respondents to describe additional and/or enhanced audit
procedures other than those already listed in the survey that would be
of added value to the new auditor of record in reducing the risk of not
detecting material misstatements in a public company's financial
statements. Respondents mentioned the importance of an additional level
of review of audit work by qualified individuals; participating in the
last examination of, or performing a joint audit with, the outgoing
auditor; performing comparisons of the company's operating results with
industry standards; performing additional procedures to gain more
knowledge of the client and its industry; having more contact with
management; and continuous auditing as procedures that would be of
added value to the new auditor of record. Respondents also offered
suggestions such as extending the various SEC filing deadlines in the
year of audit firm change to reduce the risk of not detecting material
misstatements.
Table 2 shows selected responses to question 16 --"Please describe
other additional and/or enhanced audit procedures not listed above [in
question 15][Footnote 6] that you believe would be of added value to
the new auditor of record in reducing the risk of not detecting
material misstatements in a public company's financial statements and,
in your response, please indicate the level of its value using the same
categories as above [question 15]."
Table 2: Other Audit Procedures of Value to New Auditor of Record in
Reducing the Risk of Not Detecting Material Misstatements:
General category of audit procedure: Additional level of review;
* Comment: "Our firm performs procedures in addition to those required
by generally accepted auditing standards on first-year audits. The
chief purpose of these procedures is to lower the risk of an incorrect
opinion. The procedures are directed at the audit work performed, not
at obtaining additional familiarity with the client and its systems
and procedures. We require an additional level of review of audit work
by professionals who are recognized within the firm for their
technical accomplishments and highly qualified by virtue of their
experience. A tax partner reviews and signs off the tax review
memorandum, and a highly experienced and technically prepared partner
(an 'SEC Reviewing Partner') performs an 'in depth' review of ...audit
work papers. These procedures are also required on our second-year
audits."
General category of audit procedure: Perform joint audit;
* Comment: "Require the successor and predecessor auditor to perform a
joint audit in the final year of the mandatory rotation period. Great
Value."
General category of audit procedure: More client and industry
knowledge;
* Comment: "Analysis of company operating results compared to industry
standard would be of value as additional procedure."
* Comment: "Additional procedures in orientation of new firm to
client's business and if necessary, to client's industry."
* Comment: "Additional time spent learning about the client's systems,
risks, controls, etc. in great depth."
General category of audit procedure: More contact with management;
* Comment: "More frequent contact with key members of management -
moderate value."
General category of audit procedure: Continuous auditing;
* Comment: "[Perform] a continuous audit engagement."
General category of audit procedure: Other;
* Comment: "Allowing issuers to revert to the 90 day Form 10-K filing
deadline in the year of audit firm change may be of value to the new
auditor and reduce the risk of not detecting material misstatements.
Extending the Form 10-K filing deadline would provide the audit firm
with additional time to complete the audit."
Source: GAO analysis of survey data.
[End of table]
Client-Specific Knowledge and Experience:
We asked respondents to volunteer any additional comments on the
issues concerning mandatory audit firm rotation as related to the
auditor's client-specific knowledge. A number of respondents raised
concerns that mandatory audit firm rotation would decrease the
cumulative and specialized knowledge of an audit firm and therefore
reduce audit effectiveness, create monopolies or dominance in the
market by a few large firms, and substantially increase costs for both
public companies and audit firms.
Table 3 shows selected responses to question 19 - "Do you have any
additional comments on the issues covered in this section or comments
concerning mandatory audit firm rotation as related to the auditor's
client-specific knowledge and experience (including any other issues
not covered)?"
Table 3: Comments on Auditor's Client-Specific Knowledge and Mandatory
Audit Firm Rotation:
General category of comment: Audit effectiveness;
* Comment: "Effective auditing in today's complex business environment
requires industry experience and depends on an auditor's ability to
develop a detailed understanding of the client's operations. Knowledge
is cumulative and is built up over a number of years. [Our firm]
believes mandatory audit firm rotation would decrease the cumulative
knowledge of an audit firm and reduce audit effectiveness. [Our firm]
is supportive of the new requirements on audit partner rotation and
agrees with the SEC's statement that 'the final rules balance the need
for a fresh look with the need to always have a competent team of
auditors.' We believe that mandatory audit firm rotation, on the other
hand, would not strike an appropriate balance and thus would be
detrimental to audit quality."
* Comment: "We believe mandatory firm rotation will erode depth of
knowledge. Today's business environment is complex (e.g., derivatives,
mark to market valuations, and related party transactions). Depth of
knowledge about the client's systems, as well as the inherent business
and audit risks, is essential to performing an effective audit and
making sound judgment calls regarding difficult accounting and
reporting issues. Each time an audit firm is rotated, that depth of
knowledge with respect to each client is lost and must be rebuilt by
the new firm. An auditor's ability to detect issues is often impeded
by the lack of integrity of management. Unfortunately, integrity
cannot be legislated. Mandatory firm rotation will not stop
unscrupulous management, especially when members of management receive
compensation incentives based on earnings results. Requiring mandatory
rotation will not change the values of management. In fact, mandatory
rotation would allow unscrupulous management to use required mandatory
rotation to its advantage. In the first year of an audit relationship,
it is difficult for auditors to have fully developed and applied an in-
depth knowledge of a client; as a result, it would be easier for
unscrupulous management to perpetrate fraud without it being
discovered by the auditors."
* Comment: "...there is a risk of less effective audits in the first
and second years of an auditor's tenure. The question of auditor
knowledge and experience under mandatory rotation cannot be separated
from its effect on audit quality. It is not lack of diligence or
information gathering or any failure to comply with generally accepted
auditing standards that creates the potential weaknesses in
familiarity with the client in first-and second-year audits. In given
circumstances, knowledge can be less effective and apprehension less
immediate because related experience has not been acquired. Thus, on-
the-job experience with the client can lower the risk of audit
failure, and there is no direct equivalent to that experience. This
point is put in perspective by examining the notion that more work is
performed in the first and second years of the audit to understand the
client. What really takes place is that procedures performed in the
first year to develop and document an understanding of the client's
operations and systems need only be updated in succeeding years. Thus
in an important sense, fewer procedures to develop an understanding
are performed in succeeding years, but greater knowledge is brought to
bear and the risk of an incorrect audit opinion declines. This can be
explained only.
* Comment: by the greater context in which the same knowledge is
applied, context obtained from direct experience with the client. Our
firm does perform procedures on first- and second-year audits that are
in addition to those required to obtain an understanding of the client
and the client's systems. Other firms presumably do as well.
Nevertheless, there is an apparent paradox. Familiarity appears
weakest in the year most of the work to obtain it is performed. The
missing ingredient is direct experience with the client and its
systems and controls, which can be obtained only over time."
* Comment: "Most 'audit failures' in my opinion are caused by one or a
combination of the following which aren't going to be corrected by
mandatory firm rotation: management integrity, experience level of
staff by audit firm on specific client, fee pressures from clients due
to competition, complexity of accounting rules and ability to
interpret them which can be challenged in hindsight (versus principles
based approach)."
* Comment: "A large drawback in any auditor rotation scenario is the
time it takes the new auditor to understand the company's business
and, more specifically, what motivates management. Any additional
procedures proposed should enhance the new auditor's understanding of
these areas versus prescribing specific audit tests."
General category of comment: Industry specialization and dominance;
* Comment: "Mandatory rotation would kill firms that have industry
specialization, as they would be faced with a loss of all their
clients in the industry they handle. Thus they would lose their
specialized knowledge and would have a very difficult time re-
establishing a presence in that industry ('who else do you audit in
our industry?' 'no one, we had to rotate off all of them')."
* Comment: "I would be concerned about the Federal Trade Commission
issues when only 2 or 3 of the large international accounting firms
represent 90% of the market value in some industries. The profession
needs to be concerned about monopoly issues."
* Comment: "In the mutual fund industry there are only a few existing
CPA firms other than the Big 4 that have this area of expertise."
* Comment: "Some other form of regulation should be imposed in order
to ensure compensation to the losing firm. For example, each firm that
gives up a client should 'receive' a client from another firm.
Otherwise, a few firms could dominate and 'corner' the market."
General category of comment: Cost;
* Comment: "Based on past experience with smaller clients, the first
year time incurred in an audit is normally 40 to 50 percent more than
the second and subsequent years. For most small clients, this
investment on an ongoing basis is cost prohibitive."
* Comment: "Start-up with new clients requires investments of time and
dollars. Rotation every 5 years would seem to (1) cause increases in
overall audit services costs and fees to registrants and (2)
potentially limit the ability for the auditor to reasonably recoup the
investment time over a multi-year engagement."
* Comment: "Mandatory firm rotation simply fails the cost-benefit
model. It does provide a fresh look and interpretation of accounting
policies, but it makes it much more difficult to find a concealed
fraud at a much higher cost."
* Comment: "The problem is not that new audit firms can't do
sufficient procedures. The problem is the fee caps set by the client.
If clients understand that an audit by a new firm will cost an
additional 50% in year 1, 30% in year 2 and 10% in year 3, the new
auditors could do sufficient procedures to reduce the risk."
* Comment: "Mandatory rotation will not be effective (or possible) in
this [mutual fund] industry without involvement of the Big 4. This
will cause substantial increases in audit cost for the over 2,000
small funds in the industry."
Source: GAO analysis of survey data.
[End of table]
Auditor Independence:
We asked respondents to volunteer any additional comments concerning
mandatory audit firm rotation related to auditor independence. The
comments addressed several issues including the limited supply of
firms, red flag signal, inability to legislate ethics, attracting
talent to the profession, large versus small firms, and opinion
shopping. In addition, several respondents commented that mandatory
audit firm rotation would have little or no benefit to auditor
independence.
Table 4 shows selected responses to question 29 - "Do you have any
additional comments on the issues covered in this section or comments
concerning mandatory audit firm rotation as related to the auditor's
independence (including any other issues not covered)?"
Table 4: Comments Concerning Auditor Independence and Mandatory Audit
Firm Rotation:
General category of comment: Limited supply of firms;
* Comment: "As a result of the independence standards, it would be
difficult for many issuers to implement mandatory firm rotation due to
the limitations imposed on the services audit firms can provide. For
example, of the top tier firms, if Firm A provides internal audit
services, Firm B provides another prohibited nonaudit service, and
Firm C is the audit firm - the only other firm that could serve as the
auditor of the issuer would be Firm D. So an issuer, rather than
choosing among the three other top tier firms to rotate, would have
only one realistic firm to rotate in as its audit firm, unless it
considered next tier firms. To further highlight this potential
issue - it is possible that Firm D may not have the industry expertise
desired by the issuer. As a result, the issuer - in order to comply
with mandatory firm rotation - could be forced to choose an audit firm
that does not have the optimum level of industry expertise."
General category of comment: Red flag signal;
* Comment: "We feel that the red-flag signal has been a good signal
for the capital markets to investigate potential accounting related
issues. Mandatory rotation would reduce the current concern raised by
the markets when a change in auditor occurs."
* Comment: "Any time there is a change in auditor not related to the
year end audit there is certainly the possibility that the 'RED FLAG'
signal would be retained."
* Comment: "Changes in auditors for public companies, both large and
small, have become common occurrences over the past several years due
to firm mergers, company mergers, the demise of Andersen, fee disputes
and the desire to minimize fees paid, need for more specific industry-
focused resources, etc. In this day and age, a company changing
auditors may not be raising a red flag at all."
General category of comment: Cannot legislate ethics;
* Comment: "I do not believe you can legislate or regulate the
'ethics' that are required to evaluate one's independence. Generally,
I believe firms, especially ours, does a very good job evaluating
independence and, just as important, doing what is right in the
circumstances."
* Comment: "I believe that the issues that result in audit failures
and the drive for auditor rotation are caused by individuals or firm
cultures. No amount of regulation is going to control human behavior
or address unethical acts."
* Comment: "The pressure to do a professional job and maintain or
enhance our reputation would be a factor in whether or not we
appropriately deal with financial reporting issues that may materially
affect the public company client's financial statements."
General category of comment: Attracting talent to the profession;
* Comment: "Professionals would have to sell holdings incompatible
with the independence rules more frequently, because their respective
firm's portfolio of clients would change more frequently. Those
considering a career in auditing are likely to be influenced by the
prospect of being inconvenienced more consistently, always with a loss
of time and on occasions with economic sacrifice, by the rules
intended to ensure independence. The added burden would likely affect
the supply of talent, and thereby the quality of auditing."
General category of comment: Large versus small firms;
* Comment: "Government should not be taking this role to put small
firms out of business. Mandatory rotation will put small firms out of
business, but it will have no effect on independence."
* Comment: "Unfortunately, for small firms (under $75,000,000 in
revenue) the concept ignores the efficiency involved in changing firms
from both the client and firm prospective. The difference and bigger
issue relates to the fact that for large firms, the audit client is
most likely the only client the engagement partner has."
* Comment: "Clearly, in a large firm, where annual fees exceed
$1,000,000, mandatory rotation would improve the independence of the
auditor where that audit partner has so much at stake with a single
client."
* Comment: "The significance of auditor rotation is directly related
to the size of client as it impacts an office or a firm. We do not
have a client large enough to influence a decision. I believe a firm
or office with a large client that makes up a significant portion of
that firm's or office's revenues has a different risk profile."
General category of comment: Opinion shopping;
* Comment: "Mandatory firm rotation would increase the likelihood that
a client would be 'opinion shopping' when selecting an auditor."
General category of comment: Little or no benefit to independence;
* Comment: "Independence should not be impacted by rotation. An
independent mindset from day 1 is necessary to perform a quality
audit."
* Comment: "Where rotation has occurred in governmental type audits at
the direction or encouragement of agencies, I have not seen any
benefit to the independence of firms or partners."
* Comment: "I believe the mandatory rotation would be very dangerous
and risky with little upside benefit. In addition we have experienced
no difference in how we handle difficult accounting issues in the
first year of a new engagement or the last year we will perform the
audit in the contract period. What we also find is that we spend
considerable hours on the front end and during the first year
engagement trying to understand the competencies of the client staff,
organization and operation. I do not see any positive impact from
mandatory rotation of auditors on independence."
* Comment: "Disadvantages of mandatory audit firm rotation (lack of
knowledge and experience with the client, which reduced the likelihood
of detecting material misstatements) outweigh the perceived advantage
of improved independence. There are other more effective and less
radical ways of reducing the familiarity, intimidation and self-
interest threats to independence than requiring audit firm rotation
(for example, independent consultation on significant issues, and
independent review of significant issues)."
* Comment: "If the auditors do the job as expected and required,
mandatory rotation of firms seems unnecessary."
Source: GAO analysis of survey data.
[End of table]
Audit Quality and Audit Failure:
We asked respondents to volunteer any additional comments concerning
mandatory audit firm rotation related to audit quality and audit
failures. Several comments were offered regarding the effect of this
requirement on audit tenure, audit risk and quality, industry
specialization, audit resources, and independence rules.
Table 5 shows selected responses to question 40 - "Do you have any
additional comments on the issues covered in this section or comments
concerning mandatory audit firm rotation as related to audit quality
and audit failures (including any other issues not covered)?"
Table 5: Comments Related to Audit Quality and Audit Failure:
General category of comment: Audit tenure;
* Comment: "We know of no correlation between audit failings and
significant tenure at a client. Partner rotation, concurring partner
reviews and other quality measures mitigate the risk of becoming too
cozy."
General category of comment: Increased audit risk/lower audit quality;
* Comment: "Increasing the frequency of rotation may adversely impact
the quality of audits. While it is not unusual to have rotation of
firms in the current environment, implementing mandatory audit firm
rotation would likely increase the frequency of rotation.... there is
the potential for increased risk and decreased audit quality. With
regard to question #37 which asks whether the risk of an audit failure
is higher in the early years of an audit tenure period because the new
public accounting firm is more likely to place heavy reliance on
information provided by client management - it is important to point
out that to some extent all accounting firms (new and seasoned) place
reliance on information provided by management. Still, professional
standards require that auditors obtain sufficient, competent
evidential matter. Therefore, to suggest that a new accounting firm is
more likely to place 'heavy reliance' on information provided by
management and, therefore, the risk of audit failure is higher is not
consistent with the professional standards auditors are required to
follow."
* Comment: "The more you understand a client, its pressures from both
an industry and operational standpoint, tendencies, prior reaction to
events, weaknesses, and numerous other characteristics, the risk of
audit failure reduces for small companies. Small registrant audits
don't have the audit issues that larger audits do which allow
management to predict where audit procedures will be performed such as
auditing divisions every three years, inventory observation rotation,
etc."
* Comment: "I would agree that the risk of audit failure might
increase, but only in cases where management is fraudulent, not in all
cases."
General category of comment: Industry specialization;
* Comment: "... it would be difficult for companies operating in very
specialized industries to meet mandatory rotation requirements thus
potentially impeding audit quality. In some industries, major audit
firms may possess differing levels of expertise to effectively serve a
particular company. If one of those firms provides internal audit
services and another provides prohibited non-audit services, the only
way for the company to meet the rotation requirement would be to
choose a firm that lacks the depth of industry expertise, which could
increase risks and potentially harm the company as well as its
shareholders."
General category of comment: Strain on firms' resources;
* Comment: "If mandatory rotation were adopted in the U.S., the
frequency of auditor changes would increase, putting a strain on
firm's resources of expertise. It would be harder to keep a pool of
experienced, expert auditors that matched the portfolio of audit
clients, because the portfolio would be in far greater flux. Thus the
findings above about audit quality in the U.S. are a conservative
indicator of what would take place under mandatory rotation in this
way: They do not reflect the added difficulty in matching personnel to
engagements and its effect on audit quality. The likely strain on
resources of expertise and its effect on audit quality is particularly
obvious in the case of smaller offices, with fewer professionals and
therefore fewer professionals highly experienced and knowledgeable
about accounting and auditing needs specific to individual industries.
The strain is even greater in the case of firms in foreign countries.
Personnel in foreign locations must have sufficient facility with U.S.
GAAS and GAAP as well as the language skills and cultural awareness to
work with the rest of the audit team. Relocations of suitable
personnel for engagement purposes would be expensive and might not be
possible due to local licensing and similar requirements. For these
reasons, mandatory rotation of audit firms, by increasing the
frequency that new teams must be assembled for new audits, would make
it harder to align expertise in overseas offices to the needs of
audits of multinational U.S. companies."
General category of comment: Independence rules;
* Comment: "The new SEC auditor independence rules, particularly the
audit partner rotation rules, address many of the issues above in
terms of having a new partner give the audit a fresh look, including
changes in auditing procedures, while maintaining that firm's overall
knowledge of the company's business."
Source: GAO analysis of survey data.
[End of table]
Audit-Related Costs and Audit Fees:
A large majority (81 percent) of survey respondents indicated that
mandatory audit firm rotation would likely lead to higher audit fees
over time largely because of the audit firms' need or desire to recoup
their costs over a shorter period.
Table 6 shows selected responses to question 54 - "If you believe that
the increased competition likely to occur under mandatory audit firm
rotation will lead to higher audit fees over the long-term, please
indicate why you think audit fees would be higher?"
Table 6: Comments on Why Audit Fees Would Be Higher under Mandatory
Audit Firm Rotation:
General category of reason: Recoup investment;
* Comment: "The need to recover start-up costs over shorter period and
the tendency not to reduce the initial year base amount."
* Comment: "Less time to recoup first year audit and proposal costs."
* Comment: "More work will be required with a shorter time to absorb
start-up costs."
* Comment: "The primary reasons for higher audit fees would be
coverage of first year familiarization costs and coverage of
additional bidding and marketing costs, knowing that the client would
only be around for the short term."
* Comment: "The fact that rotation will occur will cause 'first year'
costs to be allocated to the engagement period vs. absorbed as an
investment which will cause fees to increase."
* Comment: "Firms will be more sensitive to make certain they get
their investment returned more promptly, the result of a heightened
awareness of costs."
* Comment: "A shorter period over which to amortize the initial
investment, means higher cost per year. I would expect firms to charge
more for first-year audits rather than eat and amortize the cost."
* Comment: "The increase [in fees] will result from the inability of
accounting firms to recover the high early year costs associated with
learning the business and financial reporting systems of new clients
over an extended period of service to those clients."
* Comment: "...firms will cease absorbing initial year orientation
costs."
* Comment: "All firms will be more likely to pass on additional first
year costs to prospective audit clients. Therefore, all firms will
likely propose higher fees to prospective new clients resulting in
overall higher fees."
General category of reason: Increased audit effort;
* Comment: "Less use of analytical procedures, increased sample sizes
to compensate for greater risk in the early years."
* Comment: "Learning curve in understanding business and systems."
* Comment: "Need to spend time understanding the client's business.
Building a permanent file of contracts, etc."
* Comment: "Increased expense resulting from higher level staff
required to become familiar with the client and to gain sufficient
understanding of client systems and operations."
* Comment: "Increased hours to document new client systems, controls,
risk factors, etc."
General category of reason: Increase in firms' costs;
* Comment: "Mandatory rotation of firms would increase costs for
marketing and for relocations and training, because it would be harder
to match personnel to engagements with a less predictable group of
clients."
* Comment: "In addition to recovering initial year costs associated
with becoming familiar with a client and recovering increased
marketing costs associated with the lower tenure of clients, firms
would have to build into their fees the costs of the volatility
associated with managing an accounting practice knowing that the
average tenure of public clients would be substantially reduced under
mandatory rotation."
* Comment: "Marketing costs will increase, cost of audit personnel
will increase due to specialized area, audit procedures will be
greatly expanded."
* Comment: "The increased work required in the early years of an audit
will create an increased demand for audit personnel, therefore higher
rates."
* Comment: "Marginal profit on jobs will decrease due to lack of
efficiencies gained over time and will have to be replaced by higher
fees."
General category of reason: Less competition;
* Comment: "Fewer firms will be competing at the appropriate levels of
competition. Fees will naturally rise because of the scarcity of
competing firms."
* Comment: "Requiring rotation will by definition decrease the number
of competitors who would propose on the audit since the incumbent
would have to decline to propose. Also, other firms (especially at the
Big 4 level) may have conflicts of interest due to providing
prohibited services, auditing competitors, financial relationships,
etc. As the number of audit firms competing declines, audit fees would
be expected to increase."
* Comment: "Because there are so few firms that have the national and
international resources to provide audit services to large public
companies, I believe there will be an increase in fees by those
firms."
* Comment: "Increased competition will only occur at the large firms.
Mandatory rotation will likely force the smaller firms out."
* Comment: "I don't believe that there will be enough qualified
auditors willing to do public company audit work, due to the new
regulations, restrictions, etc."
Source: GAO analysis of survey data.
[End of table]
Only 6 percent of survey respondents indicated that mandatory audit
firm rotation would likely lead to lower audit fees over time, citing
increased opportunities and competition and possibly the performance
of less audit work. Table 7 shows selected responses to question 52
--"If you believe that the lower audit fees that may result from
increased opportunities to compete are likely to occur for reasons
other than increased audit efficiencies/related lower audit costs or
reduced firm profitability, please describe why you think audit fees
would be lower?"
Table 7: Comments on Why Audit Fees Would Be Lower under Mandatory
Audit Firm Rotation:
General category of reason: Increased opportunities and competition;
* Comment: "Mandatory rotation will provide opportunities for certain
firms other than the Big 4 to grow their public company practice
especially for larger public companies. This increased level of
service to the public company market segment will enhance competition
for talent and for the opportunity to serve these larger entities
requiring services throughout the year."
General category of reason: Less audit work;
* Comment: "Less work may be done, due to clients demanding lower fees
rather than a thorough audit."
* Comment: "Once competition is 'increased' there will be market
pressures as to cost of services - basic 'supply and demand' theory.
The increased competition in the industry over the last 15-20 years
has caused numerous opportunities for 'low balling' of fees, resulting
in the firms trying to find a more 'efficient' way to audit. I believe
this situation could actually lead to continued audit failures in the
future, especially since the environment has and will continue to
become more demanding."
Source: GAO analysis of survey data.
[End of table]
Table 8 shows selected responses to question 61 --"Do you have any
additional comments on the issues covered in this section or comments
concerning mandatory audit firm rotation as it relates to audit costs
and audit fees (including any other issues not covered)?"
Table 8: Comments Concerning Audit Costs and Audit Fees:
General category of comment: Costs to auditors;
* Comment: "Mandatory audit firm rotation would have a significant
impact on accounting firms not only in terms of costs associated with
rotation, but also in terms of personnel related costs. (1) Mandatory
firm rotation would force accounting firms to place greater attention
on proposal opportunities occurring each year. As a result, accounting
firms will incur significant additional costs (including opportunity
costs) in marketing and selling audit services to potentially new
clients and, as a result, may find it necessary to divert resources
from performing and completing quality audits. (2) Offices in smaller
geographic areas will suffer from the greater volatility in clientele
and demand in staff. As a result of this volatility, employees will be
forced to become more mobile; employees could routinely be asked to
move to other locations, disrupting the lives and careers of the
employees, their spouses, and their families. Rather than uprooting
their spouses and children, employees may be more likely to become
associated with the firm that has won the audit work. So, although the
audit firm has rotated, the same people may end up serving the client.
(3) With mandatory firm rotation, the costs of maintaining an office
in smaller geographic areas will be higher. It may not make economic
sense for big firms to have a presence in a geographic area that may
only have one or two public companies since, by virtue of regulation,
that firm may be forced out of the audit business in that area in a
short period of time. (4) It will be more difficult for smaller CPA
firms to absorb the costs associated with mandatory audit firm
rotation. Such costs include: additional resources associated with
actively pursuing new clients, maintaining an audit practice, and
inefficiencies as a result of continuously starting up new audits.
Indeed, smaller firms will be more likely to experience greater
volatility in clients and their own need for staff. This operational
volatility may cause small CPA firms to abandon audit services for
public companies."
* Comment: "Mandatory auditor rotation increases the cost of auditing
for individual clients and eventually for the economy, because
incoming auditors must incur the start-up and learning time necessary
to become familiar with the company and its operations. In addition,
more numerous proposal opportunities will pile up new costs. Auditors
cannot lose engagements and ignore opportunities to obtain new ones,
so proposals will become a bigger and more important part of the
business side of auditing. There is no certainty that the increased
costs would be recovered by proportional increases in fees. A failure
to consistently recover increased costs would undermine the financial
viability of some firms, a clear risk under mandatory rotation."
* Comment: "Any firm specializing in an industry would be especially
hard hit from rotation, as their specialized industry knowledge/
personnel/forms would quickly become unneeded, and then it would be
hard to re-establish oneself in the industry."
General category of comment: Costs to companies;
* Comment: "With regard to issuers, mandatory firm rotation would also
impose additional costs and create unintended consequences. (1)
Mandatory firm rotation would increase internal costs and distraction.
Each time rotation occurs management would be faced with a disruptive,
time consuming, and expensive process of selecting and then
introducing the new auditors to the company's operations, procedures
and controls, systems, and industry environment. The first year of an
audit requires an inordinate commitment at all levels of company
management and staff as the new audit firm develops and documents its
initial understanding of the control environment, accounting systems
and the terminology and culture that is unique to each company. (2)
For companies in smaller geographic areas where only two or three
firms are located, it will be difficult for companies to rotate
between firms. For example, if only three firms have a presence in a
particular geographic area and one firm provides internal audit
services and another provides another non-audit service that prevents
the firm from acting as the auditor - there would be only one firm
left in the geographic area to act as the audit firm. It would be
possible to bring in another firm from outside the geographic area,
but doing so would increase costs significantly. (3) Mandatory firm
rotation would disproportionately hurt small registrants. Small
registrants may not be able to absorb the costs associated with
rotating auditors. They may not have the resources necessary to both
effectively manage their business and perform the additional work
involved with rotating auditors. In addition, small registrants
typically depend more on their auditors for expertise in dealing with
the intricacies of GAAP and SEC requirements, as they are more likely
not to have the requisite in-house expertise; as a result, the
rotation process would be even more disruptive. (4) Mandatory firm
rotation could be disruptive to mergers and acquisitions and to
raising capital. Example 1: Company A and Company B sign a letter of
intent to merge in November. Company A is required to rotate auditors
in January; however, the merger will not be finalized until May.
Company A would be required to hire new auditors to perform the last
audit which would be problematic or at least very disruptive to the
merger process. Further, firms may not choose to be considered for
appointment if the anticipated merger would quickly cause loss of the
new client. Example 2: If a company is required to switch auditors in
the middle of a financing, at a minimum it will slow down the
company's ability to get to the market; the new auditors will need
additional time to gain the necessary knowledge about the client and
to perform the required procedures. At worst, it may.
* Comment: cause a black out period in which the company will simply
be unable to get to the market; the new auditors may be unwilling to
be involved with such financing until an audit has been completed,
which could cause a black out period anywhere from three months to a
year. Further, it may be more difficult to obtain the requisite
involvement from the predecessor accountants. Additionally, it is
during a financing that company's management has the greatest
incentive to look its best financially. Unscrupulous management may
purposely plan a financing just after hiring new auditors and
intentionally create fraudulent financial statements in order to raise
money in the market."
Source: GAO analysis of survey data.
[End of table]
Audit Procedures for PCAOB Consideration:
Under existing generally accepted auditing standards, 95 percent of
respondents indicated that their firm had sufficient flexibility to
implement additional audit procedures without the PCAOB requiring the
procedures. However, respondents identified the need for enhanced
access to the previous auditor, extending the filing deadline, and
requiring the predecessor and successor auditor to perform a joint
audit as items the PCAOB should consider requiring under mandatory
audit firm rotation to further reduce their firm's risk of not
detecting material misstatements.
Table 9 shows selected responses to question 18 - "Please identify
which audit procedures listed above [in question 15][Footnote 7] the
PCAOB should consider requiring under mandatory audit firm rotation to
further reduce your firm's risk of not detecting material
misstatements to an acceptable level."
Table 9: Audit Procedures the PCAOB Should Consider under Mandatory
Audit Firm Rotation:
General category of audit procedure: Enhanced access to previous
auditor;
* Comment: "Enhanced access to key members of previous firm's audit
engagement team."
* Comment: "...it still would help to have more access to [workpapers]
of 4 largest firms. They often do not share with smaller firms,
although they do share with each other."
* Comment: "Enhanced access to personnel and audit files."
General category of audit procedure: Extend filing deadline;
* Comment: "Allowing issuers to revert to the 90 day Form 10-K filing
deadline in the year of audit firm change . . ."
General category of audit procedure: Require joint audit;
* Comment: "Require joint audit in final year of mandatory rotation
period."
Source: GAO analysis of survey data.
[End of table]
Competition for Audit Services:
The majority of respondents (72 percent) indicated that mandatory audit
firm rotation would likely decrease the number of firms willing and
able to compete and would contribute to higher audit fees. For those
respondents who indicated that mandatory audit firm rotation would
likely change the number of public accounting firms willing and able to
compete for audits of public companies, we requested explanatory
comments. Table 10 shows selected responses to question 68 --"Please
provide a brief explanation for why the likely change in the number of
firms would impact audit fees as noted in your responses to the above
question [question 67]."
Table 10: Comments on Why the Likely Change in the Number of Firms
Would Impact Audit Fees:
Range of options: Decrease number of firms/higher audit fees;
* Comment: "The decrease in SEC practicing firms will allow those firms
continuing to practice in this area to charge higher fees to recover
increased insurance, training and preparation costs.
* Comment: "The remaining fewer firms that are still willing to stay in
the market will tend to be the larger firms only. Smaller, specialty
firms who provide services to smaller and start-up SEC companies will
tend to not be willing to spend the additional time and dollars on
clients who will be short lived without an increase in price.
* Comment: "Less competition will allow prices to be driven upwards.
* Comment: "Fewer firms would be willing to audit small companies.
Remaining firms would charge higher fees.
* Comment: "Public companies will have less choices and firms will
likely increase fees due to reduced competition.
* Comment: "If small firms realize that they would be required to
rotate off of engagements after a period of time, they will be less
likely to serve those clients and put time and effort in to them. As a
result, fewer firms will be interested in serving these firms unless
they see an increased opportunity to obtain replacement clients in the
future. However, the ability of smaller firms to attract public
companies is difficult. As a result of fewer firms providing these
services, costs are likely to increase, particularly for the smaller
public company (under $100 million).
* Comment: "In a competitive market, it will be difficult for a non Big
4 firm to pass on additional cost to a client and still provide quality
service.
* Comment: "..many small public accounting firms audit only one or two
public companies in their market area. If rotation were mandatory, it
is likely that such firms would complete their rotation on the one or
two public companies they audited, then cease auditing public companies
altogether due to the costs associated with auditing public companies,
such as PCAOB compliance.
* Comment: "The costs of investing resources in a possibly short-term
client relationship will be a deterrent to many firms, and the willing
firms will require increased revenues to perform the services at a
realistic profit.
* Comment: Decrease number of firms/lower audit fees: "Public company
auditing is becoming less attractive to mid-size firms in general. This
will be one more step in convincing audit firms to get out of the
business.
Range of options: Decrease number of firms/lower audit fees;
* Comment: "Price would become a greater factor in the auditor
selection decision, not quality.
Range of options: Increase number of firms/higher audit fees;
* Comment: "Audit costs will increase because there will be more audit
time spent per year on average with mandatory auditor rotation. Higher
fees will invite more firms to participate. More firms won't lower fees
because of the high cost of entry into this market niche.
* Comment: "More firms would have the ability to propose on engagements
because of the need for change. These firms would most likely have to
spend additional hours in preparation for a new engagement and in
additional start up expenses.
* Comment: Increase number of firms/lower audit fees: "I think more
smaller firms may compete for audits of public companies. The charge-
out rates in smaller firms is lower than in larger firms but this will
be offset by increased time for the smaller firms to do the audits.
Range of options: Increase number of firms/lower audit fees;
* Comment: "Presently a large segment of the public company universe
never comes up for new auditor consideration. More opportunities to get
new work will lead to increased competition and to fees lower than they
would otherwise be if the opportunities were reduced.
* Comment: "I think the competition will cause the bigger firms to be
more competitive with their audit fees, thus driving them down.
Source: GAO analysis of survey data.
[End of table]
Table 11 shows selected responses to question 72 --"Do you have any
additional comments on the issues covered in this section or comments
concerning mandatory audit firm rotation as it relates to competition
for audit services (including any other issues not covered)?"
Table 11: Comments Related to Competition for Audit Services:
General category of comments: Additional barrier to entry;
* Comment: ". . . mandatory firm rotation would not solve the
significant barriers to entry, such as high litigation risks, that
exist for entering the practice of serving issuers and would actually
create an additional barrier to entry.
General category of comments: Increase in consolidation;
* Comment: "Strong competition currently exists among the top tier
firms and among each of the different tiers of firms. As such, to
implement measures such as mandatory firm rotation as a way to increase
competition among audit firms is not needed.
* Comment: "Advantages of concentration in an industry would become
greater for the 4 largest firms, to the detriment of the other firms.
* Comment: "Small firms who do public work frequently have as a source
of referral a relatively few sources. As those sources are forced to
rotate auditors, some of the small auditors will go out of business.
The large firms will simply rotate the large clients with relatively
low impact to overall client base.
Source: GAO analysis of survey data.
[End of table]
Implementing Mandatory Audit Firm Rotation:
The majority of respondents (72 percent) indicated that a requirement
for audit firm rotation should not be applied uniformly for audits of
all public companies. Table 12 presents responses to question 86 --
"Please explain why you believe such a requirement should, or should
not, be applied uniformly to all public companies.
Table 12: Comments on Whether Mandatory Audit Firm Rotation Should Be
Applied Uniformly for Audits of All Public Companies:
Apply requirement uniformly: Yes;
* Comment: "If mandatory rotation of public accounting firms is deemed
necessary to protect investors, then it should be implemented
consistently across all public companies regardless of the nature or
size of the public company.
* Comment: "...we believe that if the policy is required, it should be
applied uniformly to all public companies. Any other policy would be in
conflict with the motive that would undoubtedly be put forward for the
requirement, namely, to improve the quality of audits. There is no
evidence we are aware of that fraudulent financial reporting is less
frequent among smaller companies, and they are the likely candidates
for a less stringent version of the requirement. In addition, the audit
report of an independent CPA should mean the same thing to those who
rely on it. If different requirements are set for audits of different
companies, unqualified audit reports would not have the same meaning to
those aware that the requirements differed by the size or nature of the
audited company.
* Comment: "There should be no difference in applying the mandatory
rotation requirement if the perceived benefit is a better audit.
Apply requirement uniformly: No;
* Comment: "...large multinational issuers should have a longer
rotation period for audit firms, while perhaps small issuers should be
exempt from rotating audit firms.
* Comment: "Smaller companies rely more on the expertise of the
auditor. They would find it more difficult to transition to a new
auditor. Also, large multinational companies would have greater
difficulty in ensuring service coverage in all areas of the world.
* Comment: "Smaller public companies have less resources to deal with
the incremental costs and staffing requirements.
* Comment: "A different set of rules should apply to the very small
start-up companies with revenues of less than $10-20 million. The vast
majority of our SEC audits have revenues of less than one million
dollars. These companies cannot afford the very large CPA firms yet the
proposed rules would take the small CPA firms out of the market.
* Comment: "Smaller public companies (< $50 million) would have minimal
benefits of mandatory auditor rotation, but more costs because total
audit time would increase over the long term. So this provision is
detrimental to smaller public companies and should not apply to them.
* Comment: "Smaller companies (for example S-B filers or non-
accelerated filers) don't present the same risk of loss to the
marketplace (in terms of dollars or confidence), and the cost of the
change is, on a relative basis, much more significant.
* Comment: "Generally, the burden placed on small companies is
significantly higher on a relative basis, when having to follow the
same rules as large companies that have the infrastructure and
financial ability to implement the requirements.
* Comment: "Small specialized public companies have few qualified firms
willing to perform their attest function within their budget.
* Comment: "Smaller companies generally have limited internal financial
skills and rely on the expertise of their outside auditor to assure
compliance. Rotating firms would add a complexity to their operations
with little benefit to the shareholders. It would also discourage
smaller CPA firms from making the necessary investment to maintain a
high skill level if they could not maintain clients for long periods of
time.
* Comment: "Smaller domestic companies are generally in a geographic
area where there may only be one accounting firm.
* Comment: "The risk associated with small public companies is
different than large public companies. Large companies like Enron
impact many more people, and are significantly more complex than many
small public companies. From a risk-based perspective, small public
firms and their auditors are bearing the same costs without the
benefits. The corrective action necessary to the market place from
large public company audit failures should not be unduly placed at the
door of small public companies and their auditors.
Source: GAO analysis of survey data.
[End of table]
Overall Views on Requiring Mandatory Audit Firm Rotation:
The majority of respondents (76 percent) indicated that their firms do
not support requiring mandatory rotation of public accounting firms.
The nature of comments received from many of these respondents as to
why their firm does not support requiring mandatory audit firm rotation
include: new regulations; lower audit quality/risk of audit failure;
increased costs; and new role of audit committees. Table 13 shows
selected comments explaining why the respondent's firm does not support
requiring mandatory rotation of public accounting firms (question 89).
Table 13: Reasons for Not Supporting Mandatory Audit Firm Rotation:
General category of explanation: New regulations;
* Comment: "The Sarbanes Oxley Act of 2002 ("the Act") and the recently
issued SEC rules on Strengthening Auditor Independence, along with
vigilant audit committees, are major steps in restoring the investor's
trust and confidence in the capital markets. These positive actions
must be given time to work and rebuild investors' confidence.
* Comment: Lower audit quality/risk of audit failure: "New rules have
been adopted by the SEC which require the lead and concurring review
partner to rotate after five years, and other audit partners (for
example - lead audit partners on significant subsidiaries) to rotate
after seven years. These rules should be given a chance to work.
General category of explanation: Lower audit quality/risk of audit
failure;
* Comment: "The auditor must understand the client's business to audit
effectively. Given the complexity of today's global business
environment in various industries, it is imperative that the auditor be
very knowledgeable of the client's business and industry. Knowledge is
cumulative and is built up over a number of years and must be leveraged
for the benefit of the investor.
* Comment: "We believe mandatory audit firm rotation increases the risk
of audit failure, and, as a result, may further erode public confidence
in our capital markets. Studies demonstrate that there are increased
risks of failure during the first and second years of an audit
relationship
increasing the frequency of rotation will erode depth of
knowledge about clients and may adversely impact the quality of
audits.
* Comment: "The primary reason we oppose requiring mandatory rotation
of auditing firms is that it would lower audit quality and thereby
injure the public interest. Research has shown, and various authorities
have accepted, that first-and second-year engagements entail higher
risks of audit failure. The benefits of a 'fresh look' often cited in
favor of mandatory rotation of audit firms would be more than offset by
the risk of lower audit quality and its effect on the public interest.
Moreover, the benefits of a 'fresh look' are available without the risk
to audit quality from intra-firm rotation that already takes place. The
risks to audit quality in first-and second-year audits cannot be wholly
offset by additional auditing procedures, because the risk is caused by
lack of experience with the client. Gaining familiarity with a client's
business means more than gaining knowledge of its operations, systems,
procedures, and controls. It also means gaining familiarity with how
designed procedures and organizational arrangements operate in
different circumstances. There is no direct substitute for this kind of
experience.
* Comment: "Mandatory rotation would result in increased audit failures
because it takes many years for an audit firm to build the knowledge
base of the clients' system, particularly in complex multinational
companies.
* Comment: "The elimination of auditors' carry-forward knowledge of
public companies is a substantial risk factor.
General category of explanation: Increased costs;
* Comment: "Mandatory rotation of audit firms increases the company's
costs, disrupts its operations, and is overall inefficient which in
turn costs the investors money.
* Comment: "Mandatory firm rotation would have a significant impact on
accounting firms not only in terms of costs associated with rotation,
but also in terms of personnel related costs. First, mandatory firm
rotation would force accounting firms to place greater attention on
proposal opportunities occurring each year rather than focusing on
quality audits. Second, employees who work at firms with offices in
smaller geographic areas may be forced to become more mobile uprooting
their families or rotate employment between firms in the area. Third,
mandatory firm rotation may actually force big firms to close offices
in smaller geographic areas due to the high costs. Lastly, smaller
audit firms could potentially suffer disproportionately as it will be
more difficult to absorb costs associated with rotation and may
actually cause them to exit the practice of auditing issuers.
* Comment: "..it increases the risk of audit failures and makes
auditing a less desirable career option for new students thus
increasing the cost of performing audits and the overall profitability
of auditing.
General category of explanation: New role of audit committees;
* Comment: "Strengthened role of audit committees should mitigate
risk.
* Comment: "Audit committees and firms should decide in the open market
when it is appropriate to change auditors.
Source: GAO analysis of survey data.
[End of table]
Table 14 shows selected responses to question 92 - "Please provide any
additional comments or observations you may have on the potential
effects of mandatory audit firm rotation of public accounting firms
registered with the PCAOB.
Table 14: Additional Comments on the Potential Effects of Mandatory
Audit Firm Rotation:
General category of comment: Financial institutions;
* Comment: "Many of our public clients are financial institutions.
Faced with the loss of these due to rotation, we may very well decide
it is no longer worthwhile to audit the public companies we would have
remaining or to try to 'build back up' the financial institution
clients in 5 years (only to lose them all 5 years after that). Thus,
the effect on firms auditing a special industry might be to drive them
out of the public company audit sphere.
General category of comment: Overall;
* Comment: "Every year approximately 3,000 firms would be changing
firms causing staffing problems.
* Comment: "Mandatory rotation has never been proved to improve audit
quality and will not solve the issues related to audit failure.
Limitation on other services is a greater benefit with little or no
cost to the public company and little or no cost to small firms who
have never provided these types of services to public companies.
Source: GAO analysis of survey data.
[End of table]
[End of section]
Appendix V: Selected Written Comments from Fortune 1000 Public Company:
Chief Financial Officers:
Chief financial officers surveyed were invited to add written comments
to a number of questions to further explain their answers or to add
additional answers. The survey of public company chief financial
officers, annotated with summary responses for each question, is in
appendix II. Of the 201 chief financial officers who responded to the
survey, 199 provided written answers to at least one of the following
open-ended comment questions in our survey:
* competition for audit services,
* audit-related costs and audit fees,
* auditor's ability to detect financial reporting issues,
* impact of the Sarbanes-Oxley Act on achieving the benefits of a
"fresh look,
* implementing mandatory audit firm rotation,
* overall views on requiring mandatory audit firm rotation, and,
* additional comments on the effects of mandatory audit firm rotation.
The following tables display selected comments from respondents to
these questions to reflect the range of views that were provided by
respondents. Some of the quotes illustrate typical comments made by
several other companies, while others represent a unique viewpoint of
only that company. While these specific comments provide valuable
insights, the number of comments of a particular type reproduced here
is not necessarily proportional to the number of other similar
responses, and, therefore, the comments are not meant to be
representative of the views that might be found in the population of
Fortune 1000 public company chief financial officers as a whole.
Competition for Audit Services:
A majority (88 percent) of respondents indicated that they believe
mandatory audit firm rotation would likely change the number of
capable public accounting firms interested in serving as their auditor
of record and would impact audit fees. The largest number of
respondents said mandatory audit firm rotation would likely result in
higher audit fees and a decrease in the number of capable firms. Table
15 shows selected responses to question 27--"Please provide a brief
explanation for why the likely change in the number of interested and
capable firms would affect audit fees in the manner noted in your
response to question 26.
Table 15: Impact on Audit Fees from Potential Change in Number of Audit
Firms Available:
Direction of audit fees and number of firms available: Higher fees and
less competition;
* Comment: "Incumbent would be disqualified [by mandatory audit firm
rotation] - very limited competition would result in higher fees.
* Comment: "Only 3-4 have global capability and one [the incumbent
firm] would be taken out of the mix. Also, with only 3 eligible and
with the education required for a new auditor, fees would likely go
up.
* Comment: "Less competition implies higher fees [and] firms would
begin to pass the cost of their learning curve to client.
* Comment: "Shorter duration to recover initial costs and increased
marketing costs - increased risk of audit failure because firm does not
know our business.
* Comment: Higher fees and more competition: "Mandatory rotation would
reduce a company's ability to negotiate lower 'start-up' costs as well
as result in higher fees due to reduced competition - all firms will
get their share. Also, the company's expenses and personnel demands
will increase due to the constant change and training of firms.
Direction of audit fees and number of firms available: Higher fees and
more competition;
* Comment: "Second tier firms would compete but with shorter time to
serve as auditor, costs [would be] higher due to learning curve to
familiarize to company and industry.
* Comment: "Mandatory rotation would mean that all of the Big 4 would
rotate off clients equally so firms that we would not use today, due to
competitive reasons, would be free to bid on our account. The process
will cause costs to increase. It is unavoidable.
Direction of audit fees and number of firms available: Lower fees and
more competition;
* Comment: "Increased competition would lead to overall lower fees.
Fees are a primary attribute in the auditor selection process.
* Comment: "I believe capable regional firms would be more likely to
compete with the Big 4. I would hope that increased competition would
decrease fees.
Source: GAO analysis of survey data.
[End of table]
Audit-Related Costs and Audit Fees:
Most respondents (89 percent) said that mandatory audit firm rotation
would lead to higher audit fees over time. Table 16 shows selected
responses to question 30--"Please explain your reasons for believing
that over time audit fees would be lower, higher, or remain the same
under mandatory audit firm rotation due to increased opportunities to
compete.
Table 16: Potential Audit Fee Impact under Mandatory Audit Firm
Rotation:
Direction of audit fees and reasons: Lower fees --competition issues;
* Comment: "Increasing the number of competitive bids and consideration
of firms that might have previously been excluded from the selection
process meets the criteria that have historically brought about
reduction in fees.
* Comment: "It seems to me that if we could use more than 4 big firms,
the competition would lower overall fees.
Direction of audit fees and reasons: Higher fees --learning curve and
start-up costs;
* Comment: "Mandatory audit firm rotation would lead to higher fees
because (i) public accounting firms could seek to recover higher first
year audit costs over the period in which the firm is auditor of record
and (ii) public accounting firms would be less likely to discount audit
fees from standard rates since the firm's relationship with the public
company will be of limited duration rather than long-term.
* Comment: "More hours associated with learning curve and re-audit of
prior auditor's work.
* Comment: "Mandatory rotation will force the firms to charge higher
fees due to extra time needed on new engagements in order to become
familiar with the company's structure and processes.
* Comment: "The cost of marketing would skyrocket as would the cost of
audits due to learning curve requirements.
* Comment: "Mandatory rotation would require significantly greater
auditor time to understand fundamentals of the engagement. This would
result in higher billings depending upon the frequency of rotation.
* Comment: "Learning curve costs not recovered before forced
rotation.
* Comment: "Rotation leads to higher costs for the CPA firm. Every
rotation creates the high startup cost scenario for at least one to two
years.
* Comment: "Firm rotations are inefficient. Accounting firms have to be
paid to cover their significant start-up costs. Transition costs
related to discussions with prior auditors also have to be recovered by
both accounting firms.
Direction of audit fees and reasons: Higher fees --competition issues;
* Comment: "This has created a monopoly. The public market will only
accept certain size audit firms. Right now our fees have doubled.
* Comment: "We believe that only one of the Big 4 would be 'capable'
and 'appropriate' to audit our company; therefore, no real increase in
competition would come as a result of mandatory rotation.
* Comment: No change in fees: "It does not increase opportunities to
compete; but mandates change for the sake of change, moving the
negotiating leverage and ultimately higher fees to the auditing
firms.
Direction of audit fees and reasons: No change in fees;
* Comment: "Increased costs of audit firms in preparing to audit would
be bargained away in the bidding process every five years.
* Comment: "Assuming the number of auditing firms remains the same, as
well as public companies, fees should remain relatively the same - no
increased competition.
Source: GAO analysis of survey data.
[End of table]
Auditor's Ability to Detect Financial Reporting Issues:
Most respondents indicated that it takes a new auditor of record 2 to 5
years to become sufficiently familiar with a company's operations and
financial reporting practices to no longer require the additional audit
resources often associated with conducting an initial year audit of a
new public company client. In addition, while most respondents (90
percent) indicated the complexity of their company's operations and
financial reporting practices influences the amount of time it would
likely take a new auditor of record to become familiar with their
company's operations and financial reporting practices, 33 percent of
the respondents in a follow-up question said that there are other
factors that influenced their response regarding the number of years it
takes an auditor to become familiar with their company's operations and
financial reporting practices. In the follow-up question, many
respondents identified the learning curve to the new auditor and
industry expertise as the main reasons for their response. Table 17
shows selected responses to question 41--"Are there factors other than
the nature and complexity of your company's operations and financial
reporting practices that influenced your answer to the preceding
question [on the number of years it takes for an auditor to become
familiar with your company's operations and financial reporting
practices].
Table 17: Auditor Knowledge and Experience with a Company's Operations
and Financial Reporting Practices:
Factor impacting audit risk: Industry expertise and learning curve;
* Comment: "Industry expertise - we have six segments, all in
specialized industries, headquartered in four different cities, doing
business worldwide, making it very difficult to find or retrain new
auditors.
* Comment: "Understanding of the industry. Familiarity with who to
contact to follow up on issues. Experienced based understanding of key
issues and competence of personnel.
* Comment: "Audit staff turnover, prior years work papers, and
knowledge transfer impacts the auditor's efficiency in periods beyond
the first year.
* Comment: "It takes time for an auditor to understand even the
simplest company's operation and financial reporting structure.
* Comment: "With the accelerated reporting dates recently established,
it will be very difficult for a public accounting firm to gain a
complete understanding of a client's business during one audit cycle.
* Comment: "The evolving nature of GAAP as well as changes in the
economic environment often have implications for areas within the
organization that were not previously considered overly important.
* Comment: Geographic locations: "Changes due to acquisitions,
divestitures, and restructurings. As well as new management and changes
to information systems. New SEC and FASB regulations that require
interpretation by accounting firms and the Company.
Factor impacting audit risk: Geographic locations;
* Comment: "As a multi-national company, we have operations in 27
countries. Each would require a change.
* Comment: "Number of geographic locations and statutory requirements.
Source: GAO analysis of survey data.
[End of table]
Impact of the Sarbanes-Oxley Act on Achieving the Benefits of a "Fresh
Look":
While 77 percent of the respondents indicated that mandatory rotation
of lead and reviewing partners sufficiently achieves the intended
benefits of the "fresh look" and is less costly than mandatory audit
firm rotation, another 18 percent of the respondents said the mandatory
rotation of lead and reviewing partners may not be as effective as
mandatory audit firm rotation in achieving the intended benefits of the
"fresh look" but is a better choice given the high cost of mandatory
audit firm rotation, and 4 percent answered that mandatory audit firm
rotation is necessary to effectively achieve the intended benefits of a
"fresh look." The remaining 1 percent indicated that checks and
balances are already in place. One respondent provided comments to
question 66 about the checks and balances already in place. See table
18.
Table 18: Comment Received: Checks and Balances Are Already in Place
for the Auditors to Achieve the Benefits of a "Fresh Look":
General category of comment: Checks and balances already in place;
* Comment: "I also believe that in the current environment, everyone is
fully aware of the need for independent evaluation and it is highly
unlikely that audit failures will occur as a result of 'too' much
familiarity with a client. The firms have put in the necessary checks
and balances to ensure against this and chief financial officers and
chief executive officers are signing-off quarterly on the accuracy of
their financial statements.
Source: GAO analysis of survey data.
[End of table]
Implementing Mandatory Audit Firm Rotation:
More than 80 percent of our respondents said that, if mandatory
rotation of public accounting firms were required, it should be applied
uniformly for audits of all public companies regardless of the nature
or size of the public company. Most respondents (135 out of 173)
indicated that the requirement should be applied uniformly because all
public companies should be treated equally and size does not matter.
However, the remaining respondents (38 out of 173) indicated that the
requirement should not be applied uniformly primarily because of issues
relating to complexity, size, risk, or cost. Table 19 shows selected
responses to question 79--"Please explain why you believe such a
requirement should, or should not, be applied uniformly to all public
companies.
Table 19: Comments on the Uniform Application of Mandatory Audit Firm
Rotation to All Public Companies:
Position: In favor of uniform application;
* Comment: "Shareholders invest in public companies of all sizes. If
mandatory rotation is aimed at improving financial statement integrity,
size should not matter. Investors are still susceptible to losses if
financial statements are misstated at any company.
* Comment: "It should be applied uniformly to ensure that all public
companies are treated equally and that the investors are protected with
the same level of controls/review applied to any public company.
* Comment: "Mandatory rotation would be implemented only after the SEC
determined that it would unquestionably improve auditor independence
and the quality of audit practices. If this were to occur, the
perceived benefits should be applicable to all public companies for the
protection of all investors and stakeholders.
* Comment: "If you believe rotation provides benefits that outweigh the
cost, the rule should be applied to everyone so that every investor
enjoys the benefits.
* Comment: "I don't believe that mandatory rotation will improve audit
quality. In fact, I believe it will increase audit risk and
significantly increase costs. If it were required, all companies,
regardless of size, should have to comply.
* Comment: "We believe audit risk is inherent in all companies
including privately held. Assuming auditor rotation reduces audit risk,
applying the requirement to only a subset of all public companies
implies audit risk occurs only within that particular subset.
* Comment: "Any non-uniform application would be arbitrary and
potentially confusing to the capital markets.
* Comment: "One set of standards is easier to administer and companies
competing in the same public markets should be subject to the same
standards.
* Comment: "Inequities in laws or regulations lead to unfair
competitive advantages.
* Comment: Vary application: "All are public with shareholders money at
risk. Size does not matter.
Position: Vary application;
* Comment: "The entire concept is a well intentioned but misguided
overreaction to the misdeeds of a few. A 'one size fits all' answer
fails to recognize real variations in industry risk, cultural issues
and other factors which have much more influence on the accuracy of the
financial statements than changing auditors. The costs of implementing
these and other changes is staggering and is another 'tax' on doing
business in the United States.
* Comment: "Cost to small companies may make it prohibitive.
* Comment: "I believe mandatory rotation does not by itself result in
better audits or less audit failures. If there is evidence that
mandatory rotation yields better results in companies with certain
characteristics, it should be applied to those companies and not every
company as it is disruptive and, I believe, can result in greater risk
of audit failure.
Source: GAO analysis of survey data.
[End of table]
Overall Views on Requiring Mandatory Audit Firm Rotation:
Most (88 percent) respondents said their overall current view was that
they do not support requiring mandatory rotation of public accounting
firms because of the higher costs, risk of audit failure, and audit
inefficiencies associated with rotating the auditor of record, among
other issues. While 4 percent of respondents supported mandatory audit
firm rotation at this time and 8 percent believed that more time was
needed to evaluate the effectiveness of the various requirements of the
Sarbanes-Oxley Act, table 20 shows selected responses to the follow-up
portion of question 81--which asked respondents to provide the
principal reasons for either supporting or not supporting mandatory
firm rotation.
Table 20: Explanations of Overall Current Views:
View: Supports mandatory audit firm rotation;
* Comment: "Mandatory rotation would provide a 'fresh look' and all its
corresponding benefits and overall would outweigh related costs.
* Comment: "It seems like it would positively impact the independence
of auditors, if handled correctly. It will certainly be costly to
implement, particularly on the company side.
* Comment: "The principal reason for supporting mandatory firm rotation
at this time is to ensure that public accounting firms perform their
responsibilities with full diligence, knowing that another firm in the
future, will replace them and will review their work papers, possibly
questioning certain positions and financial reporting.
View: Does not support mandatory audit firm rotation;
* Comment: "Mandatory rotation of external auditors might force a
company to select an audit firm whose performance and value proposition
is less than that which is provided by the preferred audit firm. This
issue will be further exacerbated by the initial increase in costs,
fees, and disruption to operations and financial reporting. More
importantly, there will likely be an initial drop in audit performance
and reduced ability to provide assurance that there are no material
misstatements in the financial reporting. This drop in performance is
in perfect contradiction to the intended result.
* Comment: "The key requirement for adequate audits is to make sure
competent personnel are on the engagement. Changing firms just
increases costs with no benefits.
* Comment: "Loss of expertise is a far more significant risk than the
theoretical benefit of a 'fresh look'.
* Comment: "We are a complex organization, with operations around the
globe. Mandatory rotation would result in a less capable audit team, at
a higher cost.
* Comment: "The cost of implementation does not provide additional
benefits to investors and may in fact increase the risk of audit
failures in large complex companies.
* Comment: "Rotation of auditors could hinder the quality of audit
opinions and attestations due to the inexperience of the auditor with
the company or the industry.
* Comment: "Auditor rotation will not reduce audit failures but will
add costs and increase risks.
* Comment: "It will reduce reliability, increase auditor training costs
and send the entire industry into a marketing frenzy while dramatically
increasing costs.
* Comment: "We, like all companies I've known, attempt to hire the most
capable firm to audit our company, in our industry and geographic
footprint. We demand strong SEC and GAAP expertise and have changed
audit firms when we didn't receive that expertise. This plan would
force us to accept inadequate counsel. That's a bad idea.
* Comment: "We believe that the 'fresh look' benefit is, in fact,
assured via partner rotation and that the costs of mandatory rotation
are not justified.
* Comment: "The incremental costs will exceed the benefits.
Additionally, more time is necessary to evaluate the effectiveness of
the numerous requirements of the Sarbanes-Oxley Act of 2002 on
enhancing audit quality.
* Comment: "'Fresh look' and independence can be achieved while not
rotating the audit firm.
* Comment: "Mandatory firm rotation should not be required. The
accuracy of the financial statements is the responsibility of
management. As such, management should be entrusted with the decision
on whether to continue with the use of a firm or not. Due to legality
reasons, firms and management have an incentive to ensure that the
financial statements are as accurate as possible.
Source: GAO analysis of survey data.
[End of table]
Additional Comments on the Effects of Mandatory Audit Firm Rotation:
We asked respondents to volunteer any additional comments on the
effects of mandatory rotation of public accounting firms. A number of
the respondents mentioned concerns about mandatory rotation being too
expensive, not being the solution, providing no benefit, and other
issues. Table 21 shows selected responses to question 82--"Please
provide any additional comments you may have on the effects of
mandatory rotation of public accounting firms.
Table 21: Additional Comments:
Type of Comment: Too costly;
* Comment: "The benefits of mandatory rotation are likely minor in
comparison to the costs.
* Comment: "Clearly a confidence crisis has developed in the area of
independent accountants. Public trust must be restored. The Sarbanes-
Oxley Act is designed to accomplish this restoration. I believe we need
to let it work, mandatory rotation punishes companies with increased
costs and we question the benefits to the investing public. We support
the restrictions on 'services' provided by the external auditors. We
believe this will significantly insure independence.
* Comment: Not the solution: "There are numerous new deterrents to
improper accounting behavior on the part of public companies and their
audit firms. The cost to implement and comply with these new procedures
is very high. Adding another requirement such as audit firm rotation
will likely compromise the other requirements already enacted. Our
audit firm already has a high degree of independence in their audit,
adding rotation requirements will add cost and risk (due to
inexperience) and do very little in terms of improving audits.
Type of Comment: Not the solution;
* Comment: "I am concerned that this will be the first step in moving
towards government audits of public companies. That would be a mistake
with a few notable exceptions, the current system has been effective
for a long time and will remain effective. Neither the Sarbanes-Oxley
actions nor the mandatory rotation of auditors will make dishonest
people become honest. More importantly, these actions will not make
honest people more honest.
Type of Comment: No benefit;
* Comment: "We have seen over the past three years the effect of what
rotation of auditor personnel on the engagement can have on the quality
and internal costs. Our audit team (external) has turned over
completely in the past 2-3 years without a rotation of audit firm. The
new members of the audit team do not know our company nor our industry.
The questions asked are shallow and demonstrate a lack of
understanding. It has taken a tremendous amount of internal time to
educate the auditors. Clearly if one lacked integrity, this would be
the time to try to get away with something to enhance financial
reporting. In our case, that would never happen due to the integrity of
management, but if one wanted to do something irresponsible we could
see how it could occur without being detected.
* Comment: "Any such change would be entirely cosmetic and political -
industry and shareholders would pay a net price.
* Comment: "Aside from the cost/benefit scenario, additional rules re:
mandatory rotation of public accounting firms, to govern the process
will only serve to further dilute the public's trust in the value of an
audit and make matters even more complex.
Type of Comment: Other Concerns;
* Comment: "It is certainly a judgment call on whether to have
mandatory rotation of accounting firms. A 'fresh look' is more likely
to find an intentional error, but less likely to find an unintentional
error.
* Comment: "The mandatory rotation is a response to a failure in a
select group of large cap companies and lack of audit committee
involvement in these companies. Just to change auditors does not
necessarily mean a 'bad' company will be good. The large 'cap'
companies have more room to maneuver then a small cap company because
our size allows the audit firm to push as usual.
* Comment: "I believe that the audit model is broken. I believe that
audit firms are conducting audits to protect themselves, not primarily
to reach a conclusion about the fairness of the financial statements. I
also believe that the 'expectation GAP' between the auditor and the
general public has grown as a result of the recent audit failures. The
auditing profession has NOT adequately addressed this GAP, only
increased the GAP through comments they have made. I do believe that
there must be more audit procedures performed to the detection of
fraud, as, from those instances that are currently in the public, there
appears to have eluded detection from the auditors in a rather
rudimentary manner. The FASB is also currently considering going from a
'Rules-based' to a 'Principles-based' approach, which in my opinion,
will potentially lead to more opportunity for incorrect financial
reporting.
* Comment: "We do not believe that mandatory rotation is necessary or
effective. The cost to implement a mandatory program will be greater
than today's already higher levels. The burden in added out-of-pocket
costs and inefficiency due to training the new auditors in the policies
and practices of the company will not; outweigh the benefit, if any,
that will come from a mandatory rotation. We believe that the proposal
to rotate the engagement partners periodically is the most effective
approach. Also, the PCAOB should establish mandatory rotation
requirements for lower level audit engagement personnel in addition to
the audit engagement partners.
Source: GAO analysis of survey data.
[End of table]
[End of section]
Appendix VI: Selected Written Comments from Fortune 1000 Public Company
Audit Committee Chairs:
Audit committee chairs surveyed were invited to add written comments to
a number of questions to further explain their answers that were
provided in the questionnaire or to add additional answers. The survey
of public company audit committee chairs, annotated with summary
responses for each question, is in appendix III. Of the 191 audit
committee chairs who responded to the survey, 183 provided written
answers to at least one of the following open-ended comment questions
in our survey:
* potential costs and benefits under mandatory audit firm rotation,
* implementing mandatory audit firm rotation,
* overall views on requiring mandatory audit firm rotation, and:
* additional overall comments on mandatory audit firm rotation.
The following tables display selected comments from respondents to
these questions to reflect the range of views that were provided by
respondents. Some of the quotes illustrate typical comments made by
several other audit committee chairs, while others represent a unique
viewpoint of only that audit committee chair. While these specific
comments provide valuable insights, the number of comments of a
particular type reproduced here is not necessarily proportional to the
number of other similar responses, and, therefore, the comments are not
meant to be representative of the views that might be found in the
population of Fortune 1000 public company audit committee chairs as a
whole.
Potential Costs and Benefits under Mandatory Audit Firm Rotation:
Under mandatory audit firm rotation, 89 percent of Fortune 1000 public
company audit committee chairs stated that costs are likely to exceed
benefits, 4 percent stated that costs and benefits would likely be
about equal, 2 percent stated that benefits would likely exceed costs,
and 5 percent stated they had no basis to answer the question. Table 22
shows selected responses to question 5--"Please tell us the primary
reasons for your view on the potential costs and benefits that may
result under mandatory audit firm rotation.
Table 22: Views on Costs and Benefits:
Costs likely to exceed benefits: Increased costs/increased audit
risk;
* Comment: "Conducting a periodic competitive bid and evaluation
process to select a new audit firm is a time-consuming and costly
process. The benefits of an arbitrary change in audit firms are unknown
and questionable. An auditor who is familiar with the firm's operations
and management can be expected to do a more thorough and informed job
as auditor.
* Comment: "[Our company] went through the audit firm rotation in 2002
by necessity, moving from Arthur Anderson to [another Big 4 firm].
While clearly getting a fresh set of eyes, it took a full year for [the
Big 4 firm] to 'get up to speed' and give the audit committee
definitive responses to our questions and concerns. The transition has
clearly required more company resources in educating [the Big 4 firm]
and increased out of pocket costs for the first annual audit by more
than $1 million. I am also concerned about the lame duck effect in the
final year of a relationship.
* Comment: "Monetary costs of changing auditors is significant, but
other costs are more important still. In addition to disruption of
financial management of operations, quality of audits during transition
is likely to be lower until new auditors become familiar with the new
client's operations and the details of its control systems and
reporting functions.
* Comment: "The learning curve on a new engagement is very steep and
time consuming. Risk of audit failure is highest in the early years of
a relationship.
* Comment: "Company effort involved in selection process leads to
higher costs. Time and effort of both audit firm and client staff
invested during start-up period lead to higher audit fees and overhead
costs. Time required by audit engagement team to become familiar with
company structure and industry may lead to lower-quality audits.
* Comment: "Mandatory audit firm rotation doesn't make sense. Once the
audit firm had figured out the intricacies of the company it is
auditing, it would have to quit and the learning process started all
over again with a new firm.
* Comment: "Knowledge of business and familiarity with employees
(strength/weaknesses) are important components of audit quality.
Rotation implies less in-depth business knowledge and superficial
relationships that could, in fact, reduce audit quality and increase
the risk of overlooking an issue or being 'manipulated' by
management.
* Comment: "Start-up costs are likely to be significant, and audit
firms are likely to take a shorter-term view of their potential
engagement. Thus, they will want to recapture these costs in higher
fees more quickly. Benefits are highly uncertain. Firms will have less
incentive to specialize their practices, perhaps [with] the result that
quality declines.
* Comment: "The perceived benefits of a 'fresh look' would be more than
offset by the loss of continuity of the team. For example, many issues
impact a company's financial statements over a period of years and are
event based; therefore, continued knowledge of the transactions history
is needed. Mandatory rotation would eliminate relationship pricing from
the firms, thereby increasing costs. Additionally, the time and efforts
on the part of management would increase to get the new firm up to
speed on issues as well as the relationship with the audit committee.
* Comment: "We had a set rotation policy between [a public accounting
firm] and [a Big 4 firm] (switched every 5 years). We found that for
the first 2 years of the audit the new firm was learning and had little
in the way of suggestions for improvement. They got better after 2
years, so we had a poor audit for the first 2 years. Thus, we stopped
the rotation.
Costs likely to exceed benefits: Benefits hard to see;
* Comment: "There is no assurance that rotation will eliminate
potential conflicts; it could potentially reduce competition among the
Big 4 and make it worse.
* Comment: "I think the benefits are imaginary and the costs,
especially the disruption costs, are significant.
Costs likely to exceed benefits: Existing requirements;
* Comment: "The current policy of rotating lead audit and reviewing
partners every five years is a good, balanced approach in that it
provides for continuity of certain members of audit team and a fresh
look.
* Comment: "Most of the intended benefit of accounting firm rotation
will be achieved through other requirements of the Sarbanes-Oxley Act
and related corporate governance initiatives (such as rotation of audit
partners involved in the engagement, the increased responsibilities of
the independent audit committee, pre-approval requirements, etc.)
without the significant costs of firm rotation.
* Comment: "Until the accounting profession stabilizes post-Sarbanes-
Oxley, I would strongly oppose any mandatory rotation of auditing
firms.
* Comment: "The primary areas of concern--absence of a 'fresh look'
potential for making the same mistake repeatedly--are well addressed by
partner rotation and the strengthened oversight process within the
firms themselves. The loss of continuity, or institutional memory,
would be a negative aspect of firm rotation that could be damaging to
audit quality.
* Comment: "The Sarbanes-Oxley Act, and increased awareness generally,
have produced many positive changes at audit firms and in the
management practices and audit committees of public companies. It is
not clear that mandatory rotation would add significant additional
benefit. Public companies would bear the additional internal cost of
transitioning to a new firm and absorb, through fees, the audit firm
start-up costs.
Costs likely to exceed benefits: Few qualified firms;
* Comment: "With only 3 other firms qualified to do our audit,
mandating a change would only reduce the quality and drive up the costs
of the audit.
* Comment: "If we rotated within Big 4 [firms], we would quickly run
out of preferred firms.
* Comment: "With only 4 large audit firms, more use of other firms for
non-audit services will reduce our flexibility in choosing a new firm.
Industry-specific specialization is also important.
* Comment: "Continuity and broad familiarity and knowledge of the
company's highly complex worldwide operations are extremely valuable
and necessary to conducting effective independent audits. Few
independent audit firms possess the worldwide capabilities to audit
large U.S. operations as well as operations in 28 countries outside the
USA. Nevertheless, individual lead auditors within the audit firm must
be rotated every 4 to 5 years.
Costs likely to exceed benefits: Counterproductive timing of change;
* Comment: "Mandatory audit rotation could result in a change of
auditors at a time that would be counterproductive for the audit firm
and the company.
* Comment: "Financial/economic cost to change auditors; mandatory
change of auditors in midst of strategic shifts/mergers or acquisitions
could impair business; overly burdensome to smaller public companies.
* Comment: "Since the timing of the change would not be under the
control of the audit committee, it could come at a time when the
expense of a change would be inordinately high, such as during a major
acquisition, recapitalization, or restructuring.
Costs likely to exceed benefits: Responsibility of the audit committee;
* Comment: "The audit committee should rigorously evaluate the work of
the independent auditors on an on-going basis. Changes should be made
to strengthen the independent audit team, as needed, or to change audit
firms based on the performance of the independent auditors and the
needs of the company --not on a mandatory rotation schedule.
* Comment: "Rotation for the pure purpose of regulating change does not
substitute for watchful review by audit committees. The committee can
decide if auditors are complacent, [are] too close to management, or
are no longer effective.
* Comment: "I do not believe that mandatory actions and legislation can
substitute for honesty, integrity, judgment, and quality work.
Mandatory changes would take something away from responsibility that
should be on directors and management's shoulders to bring judgment to
bear on when change might be called for. In my experience, companies
with good governance periodically open the audit up for bid anyway and
evaluate who will do the best job for the company and shareholders.
Costs and benefits likely to be about equal: Increased cost offset by
increased benefits;
* Comment: "Costs are likely to moderate slightly because there would
be more turnover and more competition. Quality would benefit from a
fresh set of eyes and suffer from lack of familiarity. Overall no
significant change in quality.
* Comment: "The increase in costs would be offset by increased
benefits. Increased costs would be moderate due to auditing firms'
competitive nature and desire to be associated with a prestigious
client; benefits would include unique or different perspective,
suggestions for improvements, and additional resources within our
industry available to us.
* Comment: "Costs will be competitive, and the benefit of a fresh look
at financials would not be expensive.
Costs and benefits likely to be about equal: Few qualified firms;
* Comment: "In a smaller community there is probably only one large
firm who knows the industry well. A change means going out of town
entailing start-up costs and additional travel.
Benefits likely to exceed costs: Enhanced audit committee
responsibilities;
* Comment: "A fresh look at company procedures would enhance and
improve audit committee responsibilities.
Benefits likely to exceed costs: Reduced pressure;
* Comment: "Pressure to 'go along' would be significantly reduced if
audit had a finite period.
Costs likely to exceed benefits: Multiple firm use mitigates costs;
* Comment: "Mandatory audit firm rotation represents the only truly
effective way to achieve the 'fresh look' contemplated by the Sarbanes-
Oxley Act. While additional costs would be incurred, I feel that these
can be substantially mitigated in today's environment where most
registrants are using multiple firms to provide important non-audit
services. In my opinion, this involvement would reduce the start-up
time traditionally associated with auditor changes.
No basis to answer question: Lower audit quality;
* Comment: "While rotation of audit firms would increase probability of
arms-length relationships, it would decrease significantly the
understanding of the audited companies' circumstances and thus the
quality of the audit.
* Comment: "Benefits are likely to reduce because of loss of continuity
and familiarity with operations. Costs may reduce because of the
bidding process to obtain a new client. This in turn may cause corner
cutting with resultant lower quality audit.
No basis to answer question: Costs/benefits not clear;
* Comment: "Not enough sound information to know the costs, benefits,
and risks.
* Comment: "I expect an increase in costs but until there is more
experience with such rotation, the cost/benefit is difficult to
assess.
Source: GAO analysis of survey data.
[End of table]
Implementing Mandatory Audit Firm Rotation:
About 65 percent of Fortune 1000 public company audit committee chairs
indicated that mandatory audit firm rotation, if required, should be
applied uniformly for audits of all public companies regardless of the
nature or size of the company and 35 percent stated mandatory audit
firm rotation should not be applied uniformly to all audits of public
companies. Many of the audit committee chairs provided an explanation
for their response to question 22, as shown in table 23.
Table 23: Comments on Whether Mandatory Audit Firm Rotation Should Be
Applied Uniformly for Audits of All Public Companies:
Should be uniformly applied: Size is not a determining criterion;
* Comment: "If a practice/policy change is sufficiently valuable,
important to apply to some, it should apply to all. Applying the rule
to some rather than all would seriously undermine the premise that the
change to the new policy is appreciably adding to the quality of
audits.
* Comment: "The requirement should be uniform since size of company
does not guarantee that problems that may arise in large companies may
not arise in small companies and vice versa.
* Comment: "If there is any point to rotation, it should apply to all
public companies, small or large. In fact, a smaller company might be
in more need for rotation than a large company, particularly if it is
not audited by the Big 4 CPA firms.
* Comment: "Size is not the issue--integrity is. Companies change size
or profile rapidly. Whatever criteria are set, a company may move in or
out of the requirements over time. While I do not support mandatory
rotation, if implemented, it should be implemented for all public
companies. Otherwise some firms will be at a cost disadvantage.
* Comment: "All reporting companies should be subject to the same
requirements and rules. Large companies should not have an advantage or
be disadvantaged. Small companies, if regulated and not able to comply
with requirements, can elect a number of remedies to become non-
regulated and non-public.
* Comment: "A uniform application of mandatory rotation would result in
a more uniform cost structure as it relates to audit fees. That is, I
would expect a two-tier fee schedule to develop, otherwise, whereby
those companies facing mandatory rotation requirements would pay higher
fees than a potential competitor might pay if the competitor were not
required to engage in mandatory rotation.
* Comment: "If mandatory rotation increases audit quality, it makes
sense to do it for all companies. All companies should be treated
equally.
* Comment: "If someone wants to try to bend or break the rules, the
size or nature of the company won't be a deterrent. As much as I
dislike a 'one size fits all' approach, in this case the requirement
should be universal.
* Comment: "Why would one class of public company be considered more or
less honest?"
* Comment: "Risks are not correlated to the size of a company. Early
start-up/growth companies often have complex systems and relatively
inexperienced management.
* Comment: "As long as there is market risk and reward, size should not
be the determining factor.
* Comment: "Rotation cost is relative to size and would not put a
greater relative burden on small companies than large.
* Comment: "If the concept were adopted, the requirement should be
uniformly applied. Not to do so would create a tiered structure which
might suggest that smaller companies were not subjected to the same
high standards as larger companies.
* Comment: All security holders should be protected: "All public
companies should be held to identical requirements. Shareholders are
the same for big and small and should be entitled to the same
safeguards.
Should be uniformly applied: All security holders should be protected;
* Comment: "If one believes that mandatory rotation would give better
protection to public (investors, lenders, employees, etc.), then all
parties should be protected regardless of size.
* Comment: "The objective of financial statement integrity is absolute.
If a company wants the capital market benefits associated with being a
SEC registrant, it needs to meet a common standard. It is not apparent
why the risk of problems is not the same across all companies, and all
securities holders should be equally protected.
* Comment: "The primary purpose of the new process would be to protect
investors in public companies. The standards of protection should be
the same for all investors; accordingly, such processes should be
applicable to all public companies.
Should not be uniformly applied: Too few qualified firms;
* Comment: "There would not be enough firms to go around.
* Comment: "
(1) For some industries there are only a limited number of
public accounting firms with the skill set to audit a particular firm.
(2) The cost to smaller public companies will be high, thus affecting
shareholder value. (3) Location of firms (physically) may increase
unique problems due to where the skill set on the part of the service
provider is inconvenient to timely meet the needs of the company.
* Comment: Public company diversity: "Some industries have very
specialized issues with limited qualified firms, such as registered
investment companies.
Should not be uniformly applied: Public company diversity;
* Comment: "Such diversity exists among public companies in terms of
line of business, size, etc., that I believe that a uniform standard
will work to the detriment of many companies.
* Comment: "The size and complexity of public companies varies greatly.
Therefore, the disruption associated with initial implementation of
mandatory rotation should be mitigated by 'rolling out' the initiative
in an orderly manner.
* Comment: "There are too many variations in companies to provide a
blanket policy. Small companies should be treated differently than
large companies with multiple operations. Those operating abroad should
be treated differently than those that are domestic only.
Should not be uniformly applied: Too costly for small companies;
* Comment: "The process is far too expensive for smaller firms and,
therefore, should be applied according to some sales and/or asset
figures.
* Comment: "Smaller companies could have a longer rotation cycle
because the costs to change auditors is more significant and the risks
to investors and capital markets is less.
* Comment: "The cost to smaller companies could be prohibitively
expensive relative to their sales or earnings and would be more likely
to result in a detriment to the interests of stockholders rather than a
benefit. The disruption of financial management of operations would
likely be disproportionately greater for smaller firms.
* Comment: "In smaller companies, costs will outweigh the benefit to
the company and investors. Mandatory rotation for all companies should
include such factors as size, nature of industry, and location.
Mandatory rotation should be required for companies retaining the same
audit firm for 15 years or more.
* Comment: "Some threshold of annual revenues should be set for
imposing mandatory rotation. Often such companies have simpler business
models and fewer business segments.
Should not be uniformly applied: Difficulties for large complex
companies;
* Comment: "Mandatory accounting firm rotation will involve significant
costs, particularly for large multinational companies
that have
complex and geographically dispersed operations. These significant
costs, as well as the increased risk of audit failure, do not justify
the minimal, if any, benefit of such mandatory rotation.
* Comment: "Mandatory rotation poses a substantially greater difficulty
for very large complex international companies than it does for smaller
companies with limited product lines in very few countries.
* Comment: Apply to large, complex, or multinational companies: "Issues
related to staffing audit work on large global companies will be more
complex and difficult.
Should not be uniformly applied: Apply to large, complex, or
multinational companies;
* Comment: "[Mandatory rotation] should apply initially to large,
complex national or multinational companies.
* Comment: "Start with largest companies first and those who have had
qualified opinions in the past.
* Comment: "If there were mandatory rotation, I believe there should be
a size hurdle on the companies to which it applies. Two reasons: first,
the financial and administrative burden of rehiring and retraining
auditors would weigh more heavily on smaller companies than on larger
ones. Also, the global impact of an Enron type problem is much more
serious when it involves a very large company as opposed to a very
small one. An accounting mishap or even fraud at a small company would
impact a much smaller universe than would the same event at a large
company.
Source: GAO analysis of survey data.
[End of table]
Overall Views on Requiring Mandatory Audit Firm Rotation:
About 90 percent of Fortune 1000 public company audit committee chairs
stated they do not support requiring mandatory rotation of public
accounting firms registered with the PCAOB, 2 percent stated they did
support such mandatory rotation, about 7 percent of Fortune 1000 public
company audit committee chairs supported the concept of requiring
mandatory audit firm rotation of registered public accounting firms but
believed that more time was needed to evaluate the effectiveness of the
various requirements of the Sarbanes-Oxley Act of 2002, and 1 percent
stated other opinions. These respondents were also given the
opportunity to provide an explanation for their opinions expressed in
question 24, which are summarized in table 24.
Table 24: Explanation for Overall Opinion on Requiring Mandatory Audit
Firm Rotation:
Does not support mandatory audit firm rotation: Increased risk not
outweighed by benefits;
* Comment: "Expensive both externally and internally and does not
guarantee a quality audit. Actually risk in quality occurs in the early
years of a new firm performing an audit before totally understanding
the company being audited.
* Comment: "I do not believe the 'fresh look' benefits outweigh the
loss of company-specific knowledge and knowledge of the quality and
integrity of the key financial and control personnel.
* Comment: "Not enough benefit would result from the costs incurred.
Strong and consistent accounting standards should provide the same
effect. The limited (and shrinking) number of large accounting firms
provides minimal benefit to rotation, as does the learning curve that
is necessarily present for a new audit.
* Comment: "Effective audits of large, diverse, and worldwide
organizations require significant knowledge and experience of the
individual company.not just the industry. This knowledge can only be
obtained through direct and hands-on experience. It takes 2-3 years
working directly with the company to obtain the knowledge. [Knowledge]
accumulated over many years that is extremely valuable to an audit firm
responsible for a financially complex multinational corporation.
Mandatory rotation of audit firms is contrary to this belief and,
therefore, is not supportable. Audit effectiveness and audit
reliability would be negative.
* Comment: "Using a five year model, the new auditor would require as
much as two years to become familiar with the 'rhythm' of a new client
as well as its risks and vulnerabilities. The years following would
likely produce a sound auditing service. The final year would take on
the stigma of a 'lame duck' assignment.
* Comment: "It has not been determined that mandatory rotation will
result in better, more efficient independent and more valuable
audits.
* Comment: "Not enough work has been done to properly evaluate the
costs and benefits associated with mandatory rotation. We also need to
understand potential risks with this concept.
Does not support mandatory audit firm rotation: Few qualified firms;
* Comment: "The Big 4 [firms] provide too little choice for companies
that need them; I think partner rotation provides most of the
benefits.
Does not support mandatory audit firm rotation: Audit committee/board
responsibilities;
* Comment: "The audit committee and board should be able to continually
monitor the audit process and retain the proper firm for the company.
* Comment: "Our audit committee takes its role very seriously in
protecting the shareholders and other stakeholders. We feel comfortable
with our current public accounting firm. We are in the best position to
judge if a change is needed.
* Comment: "The audit committee of the firms should be exercising
strong attentiveness and responsibility in conjunction with the
rotation of partners and managers of a new accounting firm.
* Comment: "The audit committee is ultimately responsible for audit
quality. I do not think mandatory rotations changes that. The audit
committee needs to do its job and have complete flexibility with
respect to hiring or firing the auditors.
* Comment: "Selection and retention of the independent auditors should
be conscious decisions of the audit committee based on facts relating
to the independent auditors and the company and should not be based on
a predetermined rotation schedule.
* Comment: "The issue is not about auditor rotation but corporate
values and auditor effectiveness. Rotation doesn't solve or address the
issues. Boards and audit committees need to determine corporate values
and auditor effectiveness, not some arbitrary rule.
* Comment: "A public company should periodically assess the suitability
of the incumbent public accounting firm relative to all facts and
circumstances including the consideration of the qualifications of
other firms. Regulation of requirements substituting for judgment is
not appropriate.
* Comment: "Although rotation is beneficial, the decision is one that
should be made by the board and not by law.
Does not support mandatory audit firm rotation: Cost/benefit;
* Comment: "The increase in audit fees to public companies will be
significant with benefits that would likely be achieved through other
means (i.e., partner rotation).
* Comment: "The costs far outweigh the benefits. Any gain in confidence
that might occur is offset by the increase in audit costs. You need
honest people to oversee the audit and changing auditors will not make
honest people out of people that are not trustworthy.
* Comment: "I do not believe mandatory rotation would add significantly
to the reliability and accuracy of financial statements. I believe the
cost would be exorbitant, and there would likely be other unintended
consequences of such a dramatic change that have not been thought
through.
Does not support mandatory audit firm rotation: Existing requirements;
* Comment: "Problems have arisen because of cozy relationships among
persons (coupled with personal compensation considerations determined
by the engagement relationship), not among institutions. Hence,
rotation of appropriate personnel, coupled with a strong audit
committee, should suffice.
* Comment: "Partner rotation accomplishes benefit with less cost and
disruption.
* Comment: "With Sarbanes-Oxley, etc., I believe companies will apply
good business judgment to change audit firms when appropriate--
sometimes even for public appearance sake.
* Comment: "Rotation is an incredible overreach which penalizes honest
companies, those in the vast majority. The Justice Department, the SEC,
and quality board members are the appropriate remedy.
Does not support mandatory audit firm rotation: Integrity;
* Comment: "It's about integrity--of audit committee members, of
financial officers, of chief executive officers, and of audit firm that
makes the difference. Rotation of audit firms will never replace
integrity.
More time is needed to evaluate the effectiveness of the Sarbanes-Oxley
Act:
* Comment: "Various requirements of the Sarbanes-Oxley Act of 2002 are
designed to enhance audit quality. More time is needed to evaluate the
effectiveness of these requirements.
* Comment: "The costs and risks are significant, and I would prefer to
see the effects of the Sarbanes-Oxley Act and other governance
initiatives first before moving to mandatory rotation.
Source: GAO analysis of survey data.
[End of table]
Additional Overall Comments on Mandatory Audit Firm Rotation:
We asked Fortune 1000 public company audit committee chairs to
volunteer any additional comments on the issues in the survey. A number
of the audit committee chairs mentioned that existing requirements
would likely achieve the intended benefits of mandatory audit firm
rotation or the requirements should be given time to determine their
effectiveness; mandatory audit firm rotation was a bad idea, not cost-
effective, and could adversely affect audit quality; and Fortune 1000
public company management, boards of directors, and their audit
committee chairs should be held accountable. Table 25 provides selected
additional comments of audit committee chairs to question 25.
Table 25: Additional Overall Comments:
General category of comment: Existing requirements/Sarbanes-Oxley Act
experience;
* Comment: "If audit committees and public accounting firms follow
already existing regulatory and other guides to professional
performance, rotation is not necessary. In addition, I believe that
less rather than more restrictions on the degrees of freedom of boards
and management are desirable, despite the abuses of the last few
years.
* Comment: "The impact on the auditing firm economies should be
studied. The Sarbanes-Oxley Act has done a good job in repositioning
the importance of the auditor in our capital markets system. It also
empowered and clarified responsibilities of board and audit committees
in a way that impacts auditor performance in a positive way. These
initiatives should be allowed to work.
* Comment: "The restrictions placed on auditors under the Sarbanes-
Oxley Act sufficiently protect the public and all users of financial
statements and provide for auditor independence. This, together with
officer certifications and the renewed reliance and responsibilities of
the audit committee and directors in general sufficiently meet the
desired objectives. Rotating the auditor potentially creates a window
in the early years of engagement, that could expose the public to the
easier perpetration of fraud.
General category of comment: Accountability;
* Comment: "Our company has been run with the utmost scrutiny and
respect for proper and truthful accounting procedures. Those companies
that have reported untruthfully and illegally and unethically should be
prosecuted to the full extent of the law. The rest of us should not be
considered 'guilty until proven innocent'.
* Comment: "Well-run companies with good boards do not need anything
being suggested here and my answers come from that perspective. For
those pushing the limits, or worse, perhaps there is a case for
rotation and new conditions which go with it. I think, in the 'new
world of corporate governance,' there is a big positive change overall
and now is not the time to 'over' regulate. Everybody who 'pushed the
envelope' certainly should now have the message they had better get it
'right'.
* Comment: "Accounting and reporting abuses are best minimized by
investors, regulators, and other authorities holding managements, audit
committees, and accounting firms to high professional standards and
codes of conduct. In the absence of such standards and codes, mandatory
rotation of accounting firms will not help.
* Comment: "Most of the Sarbanes-Oxley Act requirements solidify the
assured integrity of the entire financial reporting process. The
proposed rotation is a reactionary action that is unfounded and without
logic. Any further attention should be directed toward improving our
criminal justice system to increase probability of successfully
prosecuting wrongdoers!".
General category of comment: Cost effectiveness/increased risk;
* Comment: "The costs in effectiveness of audits cannot be over
emphasized, in addition to the monetary costs. Even an experienced and
effective audit team will likely take one to two years to become fully
'up to speed' in even a moderately complex large corporation. The
ability to know what to look for, where to look, and whom to talk to
definitely improves with time.
* Comment: "Mandatory rotation will impose a higher burden (cost) on
shareholders and will not result in a better work product. A focus on
better auditing standards and training (including ethics) is of greater
importance.
* Comment: "It seems difficult to justify the costs, disruptions, and
learning-time consequences of mandatory rotation for all corporations.
But it does seem that it would be beneficial for some. It seems worth
serious consideration about criteria and approaches that might strike a
better balance than blanket rotation.
* Comment: "One negative of changing auditors is that the new firm,
usually in an effort to impress the new client, has become overly
aggressive in some of its advise. This is a risk which must be guarded
against.
* Comment: "Companies with operations in smaller cities would probably
find considerable difficulties in switching audit firms as would
companies with operations in non-U.S. parts of the world. Applying this
approach to foreign firms with operations here would provide another
unneeded point of argument with foreign countries.
Source: GAO analysis of survey data.
[End of table]
[End of section]
Appendix VII: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Jeanette M. Franzel, (202) 512-9471 William E. Boutboul, (202) 512-
6924:
Acknowledgments:
In addition to those individuals named above, Cheryl E. Clark, Robert
W. Gramling, Michael C. Hrapsky, Charles E. Norfleet, and John J.
Reilly, Jr. made key contributions to this report.
[End of section]
Footnotes:
[1] U.S. General Accounting Office, Public Accounting Firms: Required
Study on the Potential Effects of Mandatory Audit Firm Rotation,
[hyperlink, http://www.gao.gov/products/GAO-04-216] (Washington, D.C.:
Nov. 21, 2003).
[2] Mandatory rotation is defined in the Sarbanes-Oxley Act as the
imposition of a limit on the period of years in which a particular
public accounting firm registered with the Public Company Accounting
Oversight Board may be the auditor of record for a particular public
company. For purposes of this report, the auditor of record is the
public accounting firm issuing an audit opinion of the public company's
financial statements.
[3] Pub. L. No. 107-204, 116 Stat. 745.
[4] [hyperlink, http://www.gao.gov/products/GAO-04-216].
[5] Factors listed in question 9 include: appropriate staff education,
training, and experience; appropriate knowledge of Generally Accepted
Accounting Principles; appropriate knowledge of Generally Accepted
Auditing Standards; appropriate audit team staffing level; appropriate
access to the firm's technical resources (whether locally or
nationally); appropriate firm experience within the public company's
industry; appropriate risk assessment process for the client acceptance
process; and appropriate knowledge of the client's operations, systems,
and financial reporting practices.
[6] Question 15 provides the following additional or enhanced audit
procedures: additional procedures in areas material to the financial
statements over what would likely be applied if the firm was more
client experienced; additional verification of client-supplied
statements and data likely to be material to the financial statements;
enhanced access to key members of the previous firm's audit engagement
team; and enhanced access to audit documentation of the previous firm's
audit engagement team.
[7] Question 15 provides the following additional or enhanced audit
procedures: additional procedures in areas material to the financial
statements over what would likely be applied if the firm was more
client experienced; additional verification of client-supplied
statements and data likely to be material to the financial statements;
enhanced access to key members of the previous firm's audit engagement
team; and enhanced access to audit documentation of the previous firm's
audit engagement team.
[End of section]
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