* Former SEC chair backs audit firm rotation
* Experts differ on rotation's impact on fraud
* Watchdog urged to resist pressure
By Dena Aubin
June 28 Making U.S. companies switch or rotate
auditors every few years would not end audit failures, and
regulators should consider additional measures to protect
investors, former securities regulators and legal experts said
The auditing profession has become a comfortable oligopoly
and its basic product has become suspect, said Harold Williams,
former chairman of the U.S. Securities and Exchange Commission,
at a forum in San Francisco.
"I support mandatory rotation but I am not sanguine that it
will produce the desired result."
Williams was speaking at the second in a series of meetings
being held across the country by the Public Company Accounting
Oversight Board, which polices audit firms.
The board is getting feedback on whether mandatory rotation
of audit firms would foster more independence and skepticism. It
floated the rotation idea last year as a possible way to break
up cozy ties between companies and their auditors.
About 35 percent of companies in the Standard & Poor's 500
index have had the same auditor for 25 years or more. Several
have stuck with the same auditor for over a century, according
to data from Audit Analytics, a research firm.
Though rotation alone will not cure the audit profession's
ills, it might encourage mid-sized audit firms to compete for
larger clients, Williams said.
"This in turn, if successful, would enlarge and destabilize
the oligopoly," he said, referring to the Big Four firms -
Deloitte, Ernst & Young KPMG and
PCAOB URGED TO STAND FIRM
Rotation has drawn fire from the U.S. Chamber of Commerce,
the nation's largest lobbying group for corporations, and some
members of Congress who have accused the PCAOB of regulatory
overreach for its activist agenda.
On Thursday, Williams urged the board to resist outside
pressure. "To the extent that progress is going to be made, it's
going to be made by you," he said.
Mandatory rotation would be a good step but it does not
address auditors' lack of incentives to act in the public
interest, said Steven Thomas, an attorney at Thomas Alexander &
"You can't just put another fox in the hen house," he said.
Auditors too often rely on corporate management's judgment
and representations, and that needs to be fixed, he said.
"Auditors and management get too cozy; we see it in our
cases all the time," said Thomas, who often represents
plaintiffs in lawsuits against auditors.
Auditors should be required to tell board audit committees
in writing when they use management representations and what
they did to test them, he said.
And they should be required to disgorge audit fees when the
PCAOB finds an audit failure linked to lack of auditor
skepticism, he said.
FRAUD IMPACTS DEBATED
Not everyone thought major change was needed.
Conrad Hewitt, former chief accountant at the SEC, said
regulators should shore up audit committees of corporate boards
instead. He said rotation would not have prevented the frauds at
Enron, WorldCom, HealthSouth and other companies.
The post-Enron Sarbanes-Oxley audit and corporate governance
reforms act of 2002 gave audit committees more power over audit
firms. "They should exercise more authority," he said.
Brian Fox, an accounting fraud expert, said rotation would
increase the chance that a fraud would be uncovered.
"A fraudster would be wholeheartedly against it," said Fox,
founder of Confirmation.com, a company that offers audit
confirmation services. "Fraudsters have to know where the
auditors are going to look, what auditor procedures they are
going to perform."
Recent frauds uncovered by "short-sellers" such as Muddy
Waters Research illustrate problems with the audit profession,
he said. Muddy Waters gained prominence last year from finding
accounting problems at Chinese companies and shorting their
"We need to look at how and why external auditors, with much
greater insight and access to the company, management and
detailed financial information, can miss frauds that short
sellers are able to identify using only publicly available
information," he said.
The PCAOB has said it plans to continue the debate over
rotation through this year, and any rule proposal would not come