These remarks regarding audit committee oversight from SEC Chief Accountant Wesley Bricker in his recent speech (Baruch College Financial Reporting Conference) - which otherwise largely highlighted common key financial reporting themes - were particularly noteworthy for their emphasis on fact-based rather than assumption-based decision-making as respects the upsides/downsides of auditor tenure/rotation, as well as other matters:
As relevant information for the audit committees' oversight, I believe it is also essential for the committee members to familiarize themselves with relevant research evidence. For example, existing academic research has not been conclusive on the relationship between an auditor's tenure and either audit quality or auditor independence. Some studies document that mandated rotation may worsen an auditor's efforts to be skeptical and may mask company "opinion shopping." There is also some evidence suggesting that professional skepticism can, in some cases, benefit from a long-term auditor-client relationship.
Bricker's remarks also emphasized some key aspects of audit committee effectiveness - i.e., audit committee member independence, dedication of time, quality of information and communications with management and the auditors, and member training and experience - and reiterated his call for more voluntary audit committee disclosure.
See also Jim Hamilton’s World of Securities Regulation: "Chief Accountant Bricker discusses past and future of financial reporting," and additional information & resources on our Audit Committees and Financial Reporting pages. This post first appeared in the weekly Society Alert!