27 Oct Auditor Rotation: Time to Revisit

The Sarbanes-Oxley Act of 2002, primarily a response to the fraud perpetrated by energy giant Enron and not detected by their then accountants, brought some good. However, in my view it was mostly an overreaction to a very limited issue, and thankfully its impact on smaller companies has been somewhat ameliorated by subsequent SEC and Congressional action.

One solution Sarbox brought: auditing firms must change the lead partner on an audit client at least every 5 years. The theory was the entrenchment some lead partners felt made them either not cautious enough or worse, in cahoots with a shady client. But companies don’t like having to change who is in charge with their audit. The partners don’t like taking over someone else’s client. And there’s no evidence that it has done anything to reduce fraud.

Last week the SEC brought an action against a Florida auditing firm for failing to do the rotation properly. I think it’s time for Congress to take a look at this 12 years after Sarbox and remove this awkward partner dance that leads to uncertainty and too many auditor changes. But that’s just me.