* 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 (Reuters) - 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 on Thursday.
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 PwC.
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 & Forrester LLP.
"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.
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 shares.
"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 before 2013.