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A new solution to auditor rotation

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The debate over mandatory auditor rotation has intensified ferociously.

Advocates argue such a rule would lessen the auditor's incentive to get overly cozy with management and keep the current auditor on its toes, out of fear that subsequent auditors will expose shoddy work. Critics say the costs would be overly onerous and create poorer-quality audits.

As a mediating position, Robert Pozen, chairman emeritus of MFS Investment Management, has come forward with an intriguing compromise: Why not require firms to periodically issue a formal RFP for audits while allowing the current auditor to bid?

"This proposal would reap most of the benefits of auditor rotation without imposing many of the costs. Even if the existing auditor usually wins the RFP, the bidding process raises the probability that the audit committee would appoint a new auditor. This would encourage the existing auditor to maintain its professional skepticism more vigilantly…. Yet an RFP requirement would not impose large costs on a public company from switching its auditor every five or 10 years. The existing auditor would be replaced only if the audit committee decided that this change met a cost/benefit test in the context of that particular company. Most importantly, an RFP process would reinforce the critical role of the independent audit committee in the eyes of the external auditor, especially one with a longstanding relationship to the same company."

This is interesting, to say the least. You do get the feeling that a hard-and-firm term limit rule is not going to ever be passed -- at least not in the current political climate. Some sort of compromise maybe the best that advocates of audit reform can hope for.

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