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Report to the Senate Committee on Banking, Housing, and Urban Affairs 
and the House Committee on Financial Services:

February 2004:

MANDATORY AUDIT FIRM ROTATION STUDY:

Study Questionnaires, Responses, and Summary of Respondents' Comments:

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-217]: 

GAO Highlights:

Highlights of GAO-04-217, a report to the Senate Committee on Banking, 
Housing, and Urban Affairs and House Committee on Financial Services 

Why GAO Did This Study:

The Sarbanes-Oxley Act of 2002 required GAO to study the potential 
effects of requiring public companies registered with the Securities 
and Exchange Commission (SEC) to periodically rotate the public 
accounting firms that audit their financial statements. On November 
21, 2003, GAO issued its report entitled Public Accounting Firms: 
Required Study on the Potential Effects of Mandatory Audit Firm 
Rotation (GAO-04-216). This supplemental report contains a copy of 
each questionnaire used in our study, annotated to show summary 
responses for each question and selected comments from respondents. 
GAO is issuing this supplemental report to provide additional detail 
on the responses to our surveys on the potential effects of mandatory 
audit firm rotation and to facilitate future research efforts in 
performing studies related to these matters.

What GAO Found:

In its November 2003 report, Public Accounting Firms: Required Study 
on the Potential Effects of Mandatory Audit Firm Rotation (GAO-04-
216), GAO reported that, considering the costs and benefits of 
mandatory audit firm rotation and the recent reforms being implemented 
as a result of the Sarbanes-Oxley Act of 2002, several years’ 
experience will be needed to evaluate the effects of the act. GAO 
concluded that the most prudent course of action at this time is for 
the SEC and the Public Company Accounting Oversight Board (PCAOB) to 
monitor and evaluate the effectiveness of the Sarbanes-Oxley Act’s 
requirements for enhancing auditor independence and audit quality. In 
that respect, GAO reported that audit committees, with their increased 
responsibilities under the act, can play a very important role in 
enhancing auditor independence and audit quality. For example, if 
audit committees regularly evaluate whether audit firm rotation would 
be beneficial, given the facts and circumstances of their companies’ 
situation, and are actively involved in helping to ensure auditor 
independence and audit quality, many of the intended benefits of audit 
firm rotation could be realized at the initiative of the audit 
committee rather than through a mandatory requirement.

As part of the study cited above, GAO surveyed the 97 public 
accounting firms that reported having 10 or more SEC clients and drew 
a random sample of 330 of the Fortune 1000 public companies’ chief 
financial officers and their audit committee chairs. This report 
contains summary survey responses to each question received from 74 of 
the public accounting firms, 201 chief financial officers, and 191 
audit committee chairs.

A number of the survey questions also provided an opportunity for 
respondents to explain their answers to certain questions, write in 
other answers to the questions rather than the choices provided, and 
to provide any other comments on the issues presented in the surveys. 
Selected comments to some of the open-ended questions included in the 
surveys reflect the range of views that were provided by the 
respondents. While they provide valuable insights, the number of 
comments reproduced in this report is not necessarily proportional to 
the number of similar responses, and, therefore, the comments are not 
meant to be representative of the views that might be found in each of 
the populations as a whole. 

www.gao.gov/cgi-bin/getrpt?GAO-04-217.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Jeanette M. Franzel 
at 202-512-9471 or franzelj@gao.gov.

[End of section]

Contents:

Letter: 

Appendixes:

Appendix I: Public Accounting Firm Survey on Mandatory Audit Firm 
Rotation: 

Appendix II: Public Company Survey on Mandatory Audit Firm Rotation: 

Appendix III: Survey of Public Companies' Audit Committees on the 
Effects of Mandatory Audit Firm Rotation: 

Appendix IV: Selected Written Comments from Tier I Public Accounting 
Firms: 

Auditor's Ability to Detect Financial Reporting Issues: 

Additional Audit Procedures for New Auditor of Record: 

Client-Specific Knowledge and Experience: 

Auditor Independence: 

Audit Quality and Audit Failure: 

Audit-Related Costs and Audit Fees: 

Audit Procedures for PCAOB Consideration: 

Competition for Audit Services: 

Implementing Mandatory Audit Firm Rotation: 

Overall Views on Requiring Mandatory Audit Firm Rotation: 

Appendix V: Selected Written Comments from Fortune 1000 Public Company 
Chief Financial Officers: 

Competition for Audit Services: 

Audit-Related Costs and Audit Fees: 

Auditor's Ability to Detect Financial Reporting Issues: 

Impact of the Sarbanes-Oxley Act on Achieving the Benefits of a "Fresh 
Look": 

Implementing Mandatory Audit Firm Rotation: 

Overall Views on Requiring Mandatory Audit Firm Rotation: 

Additional Comments on the Effects of Mandatory Audit Firm Rotation: 

Appendix VI: Selected Written Comments from Fortune 1000 Public Company 
Audit Committee Chairs: 

Potential Costs and Benefits under Mandatory Audit Firm Rotation: 

Implementing Mandatory Audit Firm Rotation: 

Overall Views on Requiring Mandatory Audit Firm Rotation: 

Additional Overall Comments on Mandatory Audit Firm Rotation: 

Appendix VII: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Acknowledgments: 

Tables: 

Table 1: Other Factors Affecting the Auditor's Ability to Detect 
Financial Reporting Issues: 

Table 2: Other Audit Procedures of Value to New Auditor of Record in 
Reducing the Risk of Not Detecting Material Misstatements: 

Table 3: Comments on Auditor's Client-Specific Knowledge and Mandatory 
Audit Firm Rotation: 

Table 4: Comments Concerning Auditor Independence and Mandatory Audit 
Firm Rotation: 

Table 5: Comments Related to Audit Quality and Audit Failure: 

Table 6: Comments on Why Audit Fees Would Be Higher under Mandatory 
Audit Firm Rotation: 

Table 7: Comments on Why Audit Fees Would Be Lower under Mandatory 
Audit Firm Rotation: 

Table 8: Comments Concerning Audit Costs and Audit Fees: 

Table 9: Audit Procedures the PCAOB Should Consider under Mandatory 
Audit Firm Rotation: 

Table 10: Comments on Why the Likely Change in the Number of Firms 
Would Impact Audit Fees: 

Table 11: Comments Related to Competition for Audit Services: 

Table 12: Comments on Whether Mandatory Audit Firm Rotation Should Be 
Applied Uniformly for Audits of All Public Companies: 

Table 13: Reasons for Not Supporting Mandatory Audit Firm Rotation: 

Table 14: Additional Comments on the Potential Effects of Mandatory 
Audit Firm Rotation: 

Table 15: Impact on Audit Fees from Potential Change in Number of Audit 
Firms Available: 

Table 16: Potential Audit Fee Impact under Mandatory Audit Firm 
Rotation: 

Table 17: Auditor Knowledge and Experience with a Company's Operations 
and Financial Reporting Practices: 

Table 18: Comment Received: Checks and Balances Are Already in Place 
for the Auditors to Achieve the Benefits of a "Fresh Look": 

Table 19: Comments on the Uniform Application of Mandatory Audit Firm 
Rotation to All Public Companies: 

Table 20: Explanations of Overall Current Views: 

Table 21: Additional Comments: 

Table 22: Views on Costs and Benefits: 

Table 23: Comments on Whether Mandatory Audit Firm Rotation Should Be 
Applied Uniformly for Audits of All Public Companies: 

Table 24: Explanation for Overall Opinion on Requiring Mandatory Audit 
Firm Rotation: 

Table 25: Additional Overall Comments: 

Letter February 27, 2004:

The Honorable Richard C. Shelby: 
Chairman: 
The Honorable Paul S. Sarbanes: 
Ranking Minority Member: 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate:

The Honorable Michael G. Oxley: 
Chairman: 
The Honorable Barney Frank: 
Ranking Minority Member: 
Committee on Financial Services: 
House of Representatives:

On November 21, 2003, we reported[Footnote 1] on mandatory audit firm 
rotation[Footnote 2] as required by Section 207 of the Sarbanes-Oxley 
Act of 2002.[Footnote 3] GAO reported that, considering the costs and 
benefits of mandatory audit firm rotation and the recent reforms being 
implemented as a result of the Sarbanes-Oxley Act of 2002, several 
years' experience will be needed to evaluate the effects of the act. We 
concluded that the most prudent course of action at this time is for 
the Securities and Exchange Commission (SEC) and the Public Company 
Accounting Oversight Board (PCAOB) to monitor and evaluate the 
effectiveness of the Sarbanes-Oxley Act's requirements for enhancing 
auditor independence and audit quality. In that respect, we reported 
that audit committees, with their increased responsibilities under the 
act, can play a very important role in enhancing auditor independence 
and audit quality. For example, if audit committees regularly evaluate 
whether audit firm rotation would be beneficial, given the facts and 
circumstances of their companies' situation, and are actively involved 
in helping to ensure auditor independence and audit quality, many of 
the intended benefits of audit firm rotation could be realized at the 
initiative of the audit committee rather than through a mandatory 
requirement. Our November 21, 2003, report contains the views of the 
larger public accounting firms (referred to in the report as Tier 1 
firms) and Fortune 1000 public companies' chief financial officers and 
their audit committee chairs, population estimates of these views, and 
disclosures of sampling errors as well as nonsampling errors generally 
found in surveys. Nearly all of the respondents opposed mandatory audit 
firm rotation for public accounting firms registered with the PCAOB.

Our study methodology included developing detailed questionnaires to 
obtain the views of public accounting firms and public company chief 
financial officers and their audit committee chairs on the issues 
associated with mandatory audit firm rotation. This supplemental report 
contains a copy of each questionnaire, annotated to show summary survey 
responses to each question for the Tier 1 firms and the Fortune 1000 
public companies' chief financial officers and their audit committee 
chairs, and selected narrative comments to some of the open-ended 
questions included in the surveys. We are issuing this supplemental 
report to provide additional detail on the responses to our surveys on 
the potential effects of mandatory audit firm rotation and to 
facilitate future research efforts in performing studies related to 
these matters.

Appendixes I, II, and III of this report contain the questionnaires 
administered to the Tier 1 firms and the Fortune 1000 public companies' 
chief financial officers and their audit committee chairs, 
respectively, annotated with summary responses for each question. Our 
questionnaires were developed after extensive research of studies and 
other documents that addressed issues concerning auditor independence 
and audit quality associated with the length of a public accounting 
firm's tenure and the costs and benefits of mandatory audit firm 
rotation. We used the issues identified to develop detailed 
questionnaires that were pretested with public accounting firms and 
public companies prior to administering the surveys. Appendixes IV, V, 
and VI of this report present selected comments to some of the open-
ended questions included in the questionnaires for the Tier 1 firms and 
the Fortune 1000 public companies' chief financial officers and their 
audit committee chairs, respectively. The number of comments of a 
particular type is not necessarily proportional to the number of other 
similar responses, and therefore, the comments are not meant to be 
representative of the views that might be found in each of the 
populations as a whole.

Our survey population of Tier 1 firms included 92 public accounting 
firms that were members of the American Institute of Certified Public 
Accountants' (AICPA) self-regulatory program for audit quality that 
reported having 10 of more SEC clients in 2001 and 5 public accounting 
firms that were not members of the AICPA's self-regulatory program but 
had 10 or more public company clients registered with the SEC in 2001. 
We requested that the Tier 1 firms' chief executive officers or 
managing partners, or their designated representatives, complete the 
survey. We received responses from 74 of the 97 Tier 1 firms, or 76.3 
percent.

After removing 40 private companies from the Fortune 1000 list, we drew 
a random sample of 330 public companies and asked their chief financial 
officers and audit committee chairs to complete separate 
questionnaires. Of the 330 Fortune 1000 public companies sampled, we 
received responses from 201 (60.9 percent) of their chief financial 
officers and 191 (57.9 percent) of their audit committee chairs.

As discussed in our November 21, 2003,[Footnote 4] report, a 
significant part of our study included comprehensive research and 
discussions regarding the development and administration of the survey 
instruments to gather experienced-based views on the potential costs 
and benefits of mandatory audit firm rotation, and the compilation and 
analysis of survey data. Our work for the November 21, 2003, report was 
conducted in Washington, D.C., between November 2002 and November 2003 
in accordance with U.S. generally accepted government auditing 
standards. This supplemental report is based on the survey work 
performed for the November 21, 2003, report. For additional information 
on the scope and methodology for our study, including further details 
about the samples, response rates, and a discussion of sampling and 
nonsampling errors and efforts to follow up with nonrespondents to our 
surveys, see appendix I to our November 2003 report [Hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-04-216].

We are sending copies of this report to the Chairman and Ranking 
Minority Member of the House Committee on Energy and Commerce. We are 
also sending copies of this report to the Chairman of the Securities 
and Exchange Commission, the Chairman of the Public Company Accounting 
Oversight Board, and other interested parties. This report will also be 
available at no charge on GAO's Web site at [Hyperlink, http://
www.gao.gov].

If you or your offices have any questions concerning this report, 
please contact me at (202) 512-9471 or William E. Boutboul, Assistant 
Director, at (202) 512-6924. Key contributors are acknowledged in 
appendix VII.

Signed by:

Jeanette M. Franzel: 
Director: 
Financial Management and Assurance:

[End of section]

Appendixes: 

Appendix I: Public Accounting Firm Survey on Mandatory Audit Firm 
Rotation:

[See PDF for image]

[End of figure] 

[End of section]

Appendix II: Public Company Survey on Mandatory Audit Firm Rotation:

[See PDF for image]

[End of figure] 

[End of section]

Appendix III: Survey of Public Companies' Audit Committees on the 
Effects of Mandatory Audit Firm Rotation:

[See PDF for image]

[End of figure] 

[End of section]

Appendix IV: Selected Written Comments from Tier I Public Accounting 
Firms:

Public accounting firms surveyed were invited to add written comments 
to a number of questions to further explain their answers or to add 
additional answers. The survey of public accounting firms, annotated 
with summary responses for each question, is in appendix I. Of the 74 
Tier I respondents that responded to the survey, 55 volunteered written 
answers to at least one of the 17 open-ended comment questions in our 
survey, which we have summarized into the following subject areas:

* auditor's ability to detect financial reporting issues,

* additional audit procedures for new auditor of record,

* client-specific knowledge and experience,

* auditor independence,

* audit quality and audit failure,

* audit-related costs and audit fees,

* audit procedures for PCAOB consideration,

* competition for audit services,

* implementing mandatory audit firm rotation, and:

* overall views on requiring mandatory audit firm rotation.

The following tables display selected comments from respondents to 
these questions to reflect the range of views that were provided by 
respondents. Some of the quotes illustrate typical comments made by 
several public accounting firms, while others represent a unique 
viewpoint of only that public accounting firm. While these specific 
comments provide valuable insights, the number of comments of a 
particular type reproduced here is not necessarily proportional to the 
number of other similar responses, and, therefore, the comments are not 
meant to be representative of the views that might be found in the 
population of Tier I public accounting firms as a whole.

Auditor's Ability to Detect Financial Reporting Issues:

We asked respondents to describe factors other than those already 
listed in the survey that would likely affect the auditor's ability to 
detect financial reporting issues that may indicate material 
misstatements in a public company's financial statements. A number of 
respondents mentioned the importance of an active oversight role of the 
audit committee, management's attributes, auditor assessments and 
independence, fee and time pressures placed on auditors, and other 
factors such as the frequency of auditor contact with key client 
management affecting the auditor's ability to detect financial 
reporting issues.

Table 1 shows selected responses to question 10 - "Please describe any 
relevant factors not listed above [in question 9][Footnote 5] that you 
believe would likely affect the auditor's ability to detect financial 
reporting issues that may indicate material misstatements in a public 
company's financial statements and, in your response, please specify 
the level of its importance using the same categories as above.":

Table 1: Other Factors Affecting the Auditor's Ability to Detect 
Financial Reporting Issues:

General category of factors: Role of audit committee; 

* Comment: "Very Great Importance-Active oversight role of the audit 
committee and its understanding of the company's financial reporting."
* Comment: "... willingness of audit committees ...to fund activities 
beyond audit requirements, such as forensic efforts and deeper 
internal controls work."

General category of factors: Management attributes; 

* Comment: "Very Great Importance-Quality of the internal control 
environment -Management's ethical behavior and tone at the top-
Strength of the internal audit function."
* Comment: "...integrity, honesty, and cooperation of management is 
[are] of very great importance in the auditor's ability to detect 
financial reporting issues. Also, accuracy and completeness of the 
information provided to the auditor is of very great importance."
* Comment: "...willingness of ... management to fund activities beyond 
audit requirements, such as forensic efforts and deeper internal 
controls work."
* Comment: "Management attitude-very great importance."
* Comment: "Open lines of communication with all client personnel."

General category of factors: Auditor assessments and independence; 

* Comment: "Appropriate assessment of management's competence and 
integrity."
* Comment: "Appropriate level of [auditor] skepticism."
* Comment: Pressures on auditors: "Appropriate independence of 
personnel on the [audit] engagement."

General category of factors: Pressures on auditors; 

* Comment: "Fee pressure or time pressure, resulting in application of 
less than appropriate audit procedures. (Great Importance.)".
* Comment: "Economic pressures from clients to keep fees to a minimum 
and pressure from other firms whose fees are lower, but provide 
substandard levels of service and technical ability."

General category of factors: Auditor-client contact; 

* Comment: "Frequency of [auditor] contact (telephonically and 
physical presence) with key management of the client - great 
importance." 

Source: GAO analysis of survey data.

[End of table]

Additional Audit Procedures for New Auditor of Record:

We asked respondents to describe additional and/or enhanced audit 
procedures other than those already listed in the survey that would be 
of added value to the new auditor of record in reducing the risk of not 
detecting material misstatements in a public company's financial 
statements. Respondents mentioned the importance of an additional level 
of review of audit work by qualified individuals; participating in the 
last examination of, or performing a joint audit with, the outgoing 
auditor; performing comparisons of the company's operating results with 
industry standards; performing additional procedures to gain more 
knowledge of the client and its industry; having more contact with 
management; and continuous auditing as procedures that would be of 
added value to the new auditor of record. Respondents also offered 
suggestions such as extending the various SEC filing deadlines in the 
year of audit firm change to reduce the risk of not detecting material 
misstatements.

Table 2 shows selected responses to question 16 --"Please describe 
other additional and/or enhanced audit procedures not listed above [in 
question 15][Footnote 6] that you believe would be of added value to 
the new auditor of record in reducing the risk of not detecting 
material misstatements in a public company's financial statements and, 
in your response, please indicate the level of its value using the same 
categories as above [question 15].":

Table 2: Other Audit Procedures of Value to New Auditor of Record in 
Reducing the Risk of Not Detecting Material Misstatements:

General category of audit procedure: Additional level of review; 

* Comment: "Our firm performs procedures in addition to those required 
by generally accepted auditing standards on first-year audits. The 
chief purpose of these procedures is to lower the risk of an incorrect 
opinion. The procedures are directed at the audit work performed, not 
at obtaining additional familiarity with the client and its systems 
and procedures. We require an additional level of review of audit work 
by professionals who are recognized within the firm for their 
technical accomplishments and highly qualified by virtue of their 
experience. A tax partner reviews and signs off the tax review 
memorandum, and a highly experienced and technically prepared partner 
(an 'SEC Reviewing Partner') performs an 'in depth' review of ...audit 
work papers. These procedures are also required on our second-year 
audits."

General category of audit procedure: Perform joint audit; 

* Comment: "Require the successor and predecessor auditor to perform a 
joint audit in the final year of the mandatory rotation period. Great 
Value."

General category of audit procedure: More client and industry 
knowledge; 

* Comment: "Analysis of company operating results compared to industry 
standard would be of value as additional procedure."
* Comment: "Additional procedures in orientation of new firm to 
client's business and if necessary, to client's industry."
* Comment: "Additional time spent learning about the client's systems, 
risks, controls, etc. in great depth."

General category of audit procedure: More contact with management; 

* Comment: "More frequent contact with key members of management - 
moderate value."

General category of audit procedure: Continuous auditing; 

* Comment: "[Perform] a continuous audit engagement."

General category of audit procedure: Other; 

* Comment: "Allowing issuers to revert to the 90 day Form 10-K filing 
deadline in the year of audit firm change may be of value to the new 
auditor and reduce the risk of not detecting material misstatements. 
Extending the Form 10-K filing deadline would provide the audit firm 
with additional time to complete the audit."

Source: GAO analysis of survey data.

[End of table]

Client-Specific Knowledge and Experience:

We asked respondents to volunteer any additional comments on the 
issues concerning mandatory audit firm rotation as related to the 
auditor's client-specific knowledge. A number of respondents raised 
concerns that mandatory audit firm rotation would decrease the 
cumulative and specialized knowledge of an audit firm and therefore 
reduce audit effectiveness, create monopolies or dominance in the 
market by a few large firms, and substantially increase costs for both 
public companies and audit firms.

Table 3 shows selected responses to question 19 - "Do you have any 
additional comments on the issues covered in this section or comments 
concerning mandatory audit firm rotation as related to the auditor's 
client-specific knowledge and experience (including any other issues 
not covered)?":

Table 3: Comments on Auditor's Client-Specific Knowledge and Mandatory 
Audit Firm Rotation:

General category of comment: Audit effectiveness; 

* Comment: "Effective auditing in today's complex business environment 
requires industry experience and depends on an auditor's ability to 
develop a detailed understanding of the client's operations. Knowledge 
is cumulative and is built up over a number of years. [Our firm] 
believes mandatory audit firm rotation would decrease the cumulative 
knowledge of an audit firm and reduce audit effectiveness. [Our firm] 
is supportive of the new requirements on audit partner rotation and 
agrees with the SEC's statement that 'the final rules balance the need 
for a fresh look with the need to always have a competent team of 
auditors.' We believe that mandatory audit firm rotation, on the other 
hand, would not strike an appropriate balance and thus would be 
detrimental to audit quality."
* Comment: "We believe mandatory firm rotation will erode depth of 
knowledge. Today's business environment is complex (e.g., derivatives, 
mark to market valuations, and related party transactions). Depth of 
knowledge about the client's systems, as well as the inherent business 
and audit risks, is essential to performing an effective audit and 
making sound judgment calls regarding difficult accounting and 
reporting issues. Each time an audit firm is rotated, that depth of 
knowledge with respect to each client is lost and must be rebuilt by 
the new firm. An auditor's ability to detect issues is often impeded 
by the lack of integrity of management. Unfortunately, integrity 
cannot be legislated. Mandatory firm rotation will not stop 
unscrupulous management, especially when members of management receive 
compensation incentives based on earnings results. Requiring mandatory 
rotation will not change the values of management. In fact, mandatory 
rotation would allow unscrupulous management to use required mandatory 
rotation to its advantage. In the first year of an audit relationship, 
it is difficult for auditors to have fully developed and applied an in-
depth knowledge of a client; as a result, it would be easier for 
unscrupulous management to perpetrate fraud without it being 
discovered by the auditors."
* Comment: "...there is a risk of less effective audits in the first 
and second years of an auditor's tenure. The question of auditor 
knowledge and experience under mandatory rotation cannot be separated 
from its effect on audit quality. It is not lack of diligence or 
information gathering or any failure to comply with generally accepted 
auditing standards that creates the potential weaknesses in 
familiarity with the client in first-and second-year audits. In given 
circumstances, knowledge can be less effective and apprehension less 
immediate because related experience has not been acquired. Thus, on-
the-job experience with the client can lower the risk of audit 
failure, and there is no direct equivalent to that experience. This 
point is put in perspective by examining the notion that more work is 
performed in the first and second years of the audit to understand the 
client. What really takes place is that procedures performed in the 
first year to develop and document an understanding of the client's 
operations and systems need only be updated in succeeding years. Thus 
in an important sense, fewer procedures to develop an understanding 
are performed in succeeding years, but greater knowledge is brought to 
bear and the risk of an incorrect audit opinion declines. This can be 
explained only.
* Comment: by the greater context in which the same knowledge is 
applied, context obtained from direct experience with the client. Our 
firm does perform procedures on first- and second-year audits that are 
in addition to those required to obtain an understanding of the client 
and the client's systems. Other firms presumably do as well. 
Nevertheless, there is an apparent paradox. Familiarity appears 
weakest in the year most of the work to obtain it is performed. The 
missing ingredient is direct experience with the client and its 
systems and controls, which can be obtained only over time."
* Comment: "Most 'audit failures' in my opinion are caused by one or a 
combination of the following which aren't going to be corrected by 
mandatory firm rotation: management integrity, experience level of 
staff by audit firm on specific client, fee pressures from clients due 
to competition, complexity of accounting rules and ability to 
interpret them which can be challenged in hindsight (versus principles 
based approach)."

* Comment: "A large drawback in any auditor rotation scenario is the 
time it takes the new auditor to understand the company's business 
and, more specifically, what motivates management. Any additional 
procedures proposed should enhance the new auditor's understanding of 
these areas versus prescribing specific audit tests."

General category of comment: Industry specialization and dominance; 

* Comment: "Mandatory rotation would kill firms that have industry 
specialization, as they would be faced with a loss of all their 
clients in the industry they handle. Thus they would lose their 
specialized knowledge and would have a very difficult time re-
establishing a presence in that industry ('who else do you audit in 
our industry?' 'no one, we had to rotate off all of them')."
* Comment: "I would be concerned about the Federal Trade Commission 
issues when only 2 or 3 of the large international accounting firms 
represent 90% of the market value in some industries. The profession 
needs to be concerned about monopoly issues."
* Comment: "In the mutual fund industry there are only a few existing 
CPA firms other than the Big 4 that have this area of expertise."
* Comment: "Some other form of regulation should be imposed in order 
to ensure compensation to the losing firm. For example, each firm that 
gives up a client should 'receive' a client from another firm. 
Otherwise, a few firms could dominate and 'corner' the market."

General category of comment: Cost; 

* Comment: "Based on past experience with smaller clients, the first 
year time incurred in an audit is normally 40 to 50 percent more than 
the second and subsequent years. For most small clients, this 
investment on an ongoing basis is cost prohibitive."
* Comment: "Start-up with new clients requires investments of time and 
dollars. Rotation every 5 years would seem to (1) cause increases in 
overall audit services costs and fees to registrants and (2) 
potentially limit the ability for the auditor to reasonably recoup the 
investment time over a multi-year engagement."
* Comment: "Mandatory firm rotation simply fails the cost-benefit 
model. It does provide a fresh look and interpretation of accounting 
policies, but it makes it much more difficult to find a concealed 
fraud at a much higher cost."
* Comment: "The problem is not that new audit firms can't do 
sufficient procedures. The problem is the fee caps set by the client. 
If clients understand that an audit by a new firm will cost an 
additional 50% in year 1, 30% in year 2 and 10% in year 3, the new 
auditors could do sufficient procedures to reduce the risk."
* Comment: "Mandatory rotation will not be effective (or possible) in 
this [mutual fund] industry without involvement of the Big 4. This 
will cause substantial increases in audit cost for the over 2,000 
small funds in the industry."

Source: GAO analysis of survey data.

[End of table]

Auditor Independence:

We asked respondents to volunteer any additional comments concerning 
mandatory audit firm rotation related to auditor independence. The 
comments addressed several issues including the limited supply of 
firms, red flag signal, inability to legislate ethics, attracting 
talent to the profession, large versus small firms, and opinion 
shopping. In addition, several respondents commented that mandatory 
audit firm rotation would have little or no benefit to auditor 
independence.

Table 4 shows selected responses to question 29 - "Do you have any 
additional comments on the issues covered in this section or comments 
concerning mandatory audit firm rotation as related to the auditor's 
independence (including any other issues not covered)?":

Table 4: Comments Concerning Auditor Independence and Mandatory Audit 
Firm Rotation:

General category of comment: Limited supply of firms; 

* Comment: "As a result of the independence standards, it would be 
difficult for many issuers to implement mandatory firm rotation due to 
the limitations imposed on the services audit firms can provide. For 
example, of the top tier firms, if Firm A provides internal audit 
services, Firm B provides another prohibited nonaudit service, and 
Firm C is the audit firm - the only other firm that could serve as the 
auditor of the issuer would be Firm D. So an issuer, rather than 
choosing among the three other top tier firms to rotate, would have 
only one realistic firm to rotate in as its audit firm, unless it 
considered next tier firms. To further highlight this potential 
issue - it is possible that Firm D may not have the industry expertise 
desired by the issuer. As a result, the issuer - in order to comply 
with mandatory firm rotation - could be forced to choose an audit firm 
that does not have the optimum level of industry expertise."

General category of comment: Red flag signal; 

* Comment: "We feel that the red-flag signal has been a good signal 
for the capital markets to investigate potential accounting related 
issues. Mandatory rotation would reduce the current concern raised by 
the markets when a change in auditor occurs."
* Comment: "Any time there is a change in auditor not related to the 
year end audit there is certainly the possibility that the 'RED FLAG' 
signal would be retained."
* Comment: "Changes in auditors for public companies, both large and 
small, have become common occurrences over the past several years due 
to firm mergers, company mergers, the demise of Andersen, fee disputes 
and the desire to minimize fees paid, need for more specific industry-
focused resources, etc. In this day and age, a company changing 
auditors may not be raising a red flag at all."

General category of comment: Cannot legislate ethics; 

* Comment: "I do not believe you can legislate or regulate the 
'ethics' that are required to evaluate one's independence. Generally, 
I believe firms, especially ours, does a very good job evaluating 
independence and, just as important, doing what is right in the 
circumstances."
* Comment: "I believe that the issues that result in audit failures 
and the drive for auditor rotation are caused by individuals or firm 
cultures. No amount of regulation is going to control human behavior 
or address unethical acts."
* Comment: "The pressure to do a professional job and maintain or 
enhance our reputation would be a factor in whether or not we 
appropriately deal with financial reporting issues that may materially 
affect the public company client's financial statements."

General category of comment: Attracting talent to the profession; 

* Comment: "Professionals would have to sell holdings incompatible 
with the independence rules more frequently, because their respective 
firm's portfolio of clients would change more frequently. Those 
considering a career in auditing are likely to be influenced by the 
prospect of being inconvenienced more consistently, always with a loss 
of time and on occasions with economic sacrifice, by the rules 
intended to ensure independence. The added burden would likely affect 
the supply of talent, and thereby the quality of auditing."

General category of comment: Large versus small firms; 

* Comment: "Government should not be taking this role to put small 
firms out of business. Mandatory rotation will put small firms out of 
business, but it will have no effect on independence."
* Comment: "Unfortunately, for small firms (under $75,000,000 in 
revenue) the concept ignores the efficiency involved in changing firms 
from both the client and firm prospective. The difference and bigger 
issue relates to the fact that for large firms, the audit client is 
most likely the only client the engagement partner has."
* Comment: "Clearly, in a large firm, where annual fees exceed 
$1,000,000, mandatory rotation would improve the independence of the 
auditor where that audit partner has so much at stake with a single 
client."
* Comment: "The significance of auditor rotation is directly related 
to the size of client as it impacts an office or a firm. We do not 
have a client large enough to influence a decision. I believe a firm 
or office with a large client that makes up a significant portion of 
that firm's or office's revenues has a different risk profile."

General category of comment: Opinion shopping; 

* Comment: "Mandatory firm rotation would increase the likelihood that 
a client would be 'opinion shopping' when selecting an auditor."

General category of comment: Little or no benefit to independence; 

* Comment: "Independence should not be impacted by rotation. An 
independent mindset from day 1 is necessary to perform a quality 
audit."
* Comment: "Where rotation has occurred in governmental type audits at 
the direction or encouragement of agencies, I have not seen any 
benefit to the independence of firms or partners."
* Comment: "I believe the mandatory rotation would be very dangerous 
and risky with little upside benefit. In addition we have experienced 
no difference in how we handle difficult accounting issues in the 
first year of a new engagement or the last year we will perform the 
audit in the contract period. What we also find is that we spend 
considerable hours on the front end and during the first year 
engagement trying to understand the competencies of the client staff, 
organization and operation. I do not see any positive impact from 
mandatory rotation of auditors on independence."
* Comment: "Disadvantages of mandatory audit firm rotation (lack of 
knowledge and experience with the client, which reduced the likelihood 
of detecting material misstatements) outweigh the perceived advantage 
of improved independence. There are other more effective and less 
radical ways of reducing the familiarity, intimidation and self-
interest threats to independence than requiring audit firm rotation 
(for example, independent consultation on significant issues, and 
independent review of significant issues)."
* Comment: "If the auditors do the job as expected and required, 
mandatory rotation of firms seems unnecessary."

Source: GAO analysis of survey data.

[End of table]

Audit Quality and Audit Failure:

We asked respondents to volunteer any additional comments concerning 
mandatory audit firm rotation related to audit quality and audit 
failures. Several comments were offered regarding the effect of this 
requirement on audit tenure, audit risk and quality, industry 
specialization, audit resources, and independence rules.

Table 5 shows selected responses to question 40 - "Do you have any 
additional comments on the issues covered in this section or comments 
concerning mandatory audit firm rotation as related to audit quality 
and audit failures (including any other issues not covered)?":

Table 5: Comments Related to Audit Quality and Audit Failure:

General category of comment: Audit tenure; 

* Comment: "We know of no correlation between audit failings and 
significant tenure at a client. Partner rotation, concurring partner 
reviews and other quality measures mitigate the risk of becoming too 
cozy."

General category of comment: Increased audit risk/lower audit quality; 

* Comment: "Increasing the frequency of rotation may adversely impact 
the quality of audits. While it is not unusual to have rotation of 
firms in the current environment, implementing mandatory audit firm 
rotation would likely increase the frequency of rotation.... there is 
the potential for increased risk and decreased audit quality. With 
regard to question #37 which asks whether the risk of an audit failure 
is higher in the early years of an audit tenure period because the new 
public accounting firm is more likely to place heavy reliance on 
information provided by client management - it is important to point 
out that to some extent all accounting firms (new and seasoned) place 
reliance on information provided by management. Still, professional 
standards require that auditors obtain sufficient, competent 
evidential matter. Therefore, to suggest that a new accounting firm is 
more likely to place 'heavy reliance' on information provided by 
management and, therefore, the risk of audit failure is higher is not 
consistent with the professional standards auditors are required to 
follow."
* Comment: "The more you understand a client, its pressures from both 
an industry and operational standpoint, tendencies, prior reaction to 
events, weaknesses, and numerous other characteristics, the risk of 
audit failure reduces for small companies. Small registrant audits 
don't have the audit issues that larger audits do which allow 
management to predict where audit procedures will be performed such as 
auditing divisions every three years, inventory observation rotation, 
etc."

* Comment: "I would agree that the risk of audit failure might 
increase, but only in cases where management is fraudulent, not in all 
cases."

General category of comment: Industry specialization; 

* Comment: "... it would be difficult for companies operating in very 
specialized industries to meet mandatory rotation requirements thus 
potentially impeding audit quality. In some industries, major audit 
firms may possess differing levels of expertise to effectively serve a 
particular company. If one of those firms provides internal audit 
services and another provides prohibited non-audit services, the only 
way for the company to meet the rotation requirement would be to 
choose a firm that lacks the depth of industry expertise, which could 
increase risks and potentially harm the company as well as its 
shareholders."

General category of comment: Strain on firms' resources; 

* Comment: "If mandatory rotation were adopted in the U.S., the 
frequency of auditor changes would increase, putting a strain on 
firm's resources of expertise. It would be harder to keep a pool of 
experienced, expert auditors that matched the portfolio of audit 
clients, because the portfolio would be in far greater flux. Thus the 
findings above about audit quality in the U.S. are a conservative 
indicator of what would take place under mandatory rotation in this 
way: They do not reflect the added difficulty in matching personnel to 
engagements and its effect on audit quality. The likely strain on 
resources of expertise and its effect on audit quality is particularly 
obvious in the case of smaller offices, with fewer professionals and 
therefore fewer professionals highly experienced and knowledgeable 
about accounting and auditing needs specific to individual industries. 
The strain is even greater in the case of firms in foreign countries. 
Personnel in foreign locations must have sufficient facility with U.S. 
GAAS and GAAP as well as the language skills and cultural awareness to 
work with the rest of the audit team. Relocations of suitable 
personnel for engagement purposes would be expensive and might not be 
possible due to local licensing and similar requirements. For these 
reasons, mandatory rotation of audit firms, by increasing the 
frequency that new teams must be assembled for new audits, would make 
it harder to align expertise in overseas offices to the needs of 
audits of multinational U.S. companies."

General category of comment: Independence rules; 

* Comment: "The new SEC auditor independence rules, particularly the 
audit partner rotation rules, address many of the issues above in 
terms of having a new partner give the audit a fresh look, including 
changes in auditing procedures, while maintaining that firm's overall 
knowledge of the company's business."

Source: GAO analysis of survey data.

[End of table]

Audit-Related Costs and Audit Fees:

A large majority (81 percent) of survey respondents indicated that 
mandatory audit firm rotation would likely lead to higher audit fees 
over time largely because of the audit firms' need or desire to recoup 
their costs over a shorter period.

Table 6 shows selected responses to question 54 - "If you believe that 
the increased competition likely to occur under mandatory audit firm 
rotation will lead to higher audit fees over the long-term, please 
indicate why you think audit fees would be higher?":

Table 6: Comments on Why Audit Fees Would Be Higher under Mandatory 
Audit Firm Rotation:

General category of reason: Recoup investment; 

* Comment: "The need to recover start-up costs over shorter period and 
the tendency not to reduce the initial year base amount."
* Comment: "Less time to recoup first year audit and proposal costs."
* Comment: "More work will be required with a shorter time to absorb 
start-up costs."
* Comment: "The primary reasons for higher audit fees would be 
coverage of first year familiarization costs and coverage of 
additional bidding and marketing costs, knowing that the client would 
only be around for the short term."
* Comment: "The fact that rotation will occur will cause 'first year' 
costs to be allocated to the engagement period vs. absorbed as an 
investment which will cause fees to increase."
* Comment: "Firms will be more sensitive to make certain they get 
their investment returned more promptly, the result of a heightened 
awareness of costs."
* Comment: "A shorter period over which to amortize the initial 
investment, means higher cost per year. I would expect firms to charge 
more for first-year audits rather than eat and amortize the cost."
* Comment: "The increase [in fees] will result from the inability of 
accounting firms to recover the high early year costs associated with 
learning the business and financial reporting systems of new clients 
over an extended period of service to those clients."
* Comment: "...firms will cease absorbing initial year orientation 
costs."
* Comment: "All firms will be more likely to pass on additional first 
year costs to prospective audit clients. Therefore, all firms will 
likely propose higher fees to prospective new clients resulting in 
overall higher fees."

General category of reason: Increased audit effort; 

* Comment: "Less use of analytical procedures, increased sample sizes 
to compensate for greater risk in the early years."
* Comment: "Learning curve in understanding business and systems."
* Comment: "Need to spend time understanding the client's business. 
Building a permanent file of contracts, etc."
* Comment: "Increased expense resulting from higher level staff 
required to become familiar with the client and to gain sufficient
understanding of client systems and operations."
* Comment: "Increased hours to document new client systems, controls, 
risk factors, etc."

General category of reason: Increase in firms' costs; 

* Comment: "Mandatory rotation of firms would increase costs for 
marketing and for relocations and training, because it would be harder 
to match personnel to engagements with a less predictable group of 
clients."
* Comment: "In addition to recovering initial year costs associated 
with becoming familiar with a client and recovering increased 
marketing costs associated with the lower tenure of clients, firms 
would have to build into their fees the costs of the volatility 
associated with managing an accounting practice knowing that the 
average tenure of public clients would be substantially reduced under 
mandatory rotation."
* Comment: "Marketing costs will increase, cost of audit personnel 
will increase due to specialized area, audit procedures will be 
greatly expanded."
* Comment: "The increased work required in the early years of an audit 
will create an increased demand for audit personnel, therefore higher 
rates."
* Comment: "Marginal profit on jobs will decrease due to lack of 
efficiencies gained over time and will have to be replaced by higher 
fees."

General category of reason: Less competition; 

* Comment: "Fewer firms will be competing at the appropriate levels of 
competition. Fees will naturally rise because of the scarcity of 
competing firms."
* Comment: "Requiring rotation will by definition decrease the number 
of competitors who would propose on the audit since the incumbent 
would have to decline to propose. Also, other firms (especially at the 
Big 4 level) may have conflicts of interest due to providing 
prohibited services, auditing competitors, financial relationships, 
etc. As the number of audit firms competing declines, audit fees would 
be expected to increase."
* Comment: "Because there are so few firms that have the national and 
international resources to provide audit services to large public 
companies, I believe there will be an increase in fees by those 
firms."
* Comment: "Increased competition will only occur at the large firms. 
Mandatory rotation will likely force the smaller firms out."
* Comment: "I don't believe that there will be enough qualified 
auditors willing to do public company audit work, due to the new 
regulations, restrictions, etc."

Source: GAO analysis of survey data.

[End of table]

Only 6 percent of survey respondents indicated that mandatory audit 
firm rotation would likely lead to lower audit fees over time, citing 
increased opportunities and competition and possibly the performance 
of less audit work. Table 7 shows selected responses to question 52 
--"If you believe that the lower audit fees that may result from 
increased opportunities to compete are likely to occur for reasons 
other than increased audit efficiencies/related lower audit costs or 
reduced firm profitability, please describe why you think audit fees 
would be lower?":

Table 7: Comments on Why Audit Fees Would Be Lower under Mandatory 
Audit Firm Rotation:

General category of reason: Increased opportunities and competition; 

* Comment: "Mandatory rotation will provide opportunities for certain 
firms other than the Big 4 to grow their public company practice 
especially for larger public companies. This increased level of 
service to the public company market segment will enhance competition 
for talent and for the opportunity to serve these larger entities 
requiring services throughout the year."

General category of reason: Less audit work; 

* Comment: "Less work may be done, due to clients demanding lower fees 
rather than a thorough audit."
* Comment: "Once competition is 'increased' there will be market 
pressures as to cost of services - basic 'supply and demand' theory. 
The increased competition in the industry over the last 15-20 years 
has caused numerous opportunities for 'low balling' of fees, resulting 
in the firms trying to find a more 'efficient' way to audit. I believe 
this situation could actually lead to continued audit failures in the 
future, especially since the environment has and will continue to 
become more demanding."

Source: GAO analysis of survey data.

[End of table]

Table 8 shows selected responses to question 61 --"Do you have any 
additional comments on the issues covered in this section or comments 
concerning mandatory audit firm rotation as it relates to audit costs 
and audit fees (including any other issues not covered)?":

Table 8: Comments Concerning Audit Costs and Audit Fees:

General category of comment: Costs to auditors; 

* Comment: "Mandatory audit firm rotation would have a significant 
impact on accounting firms not only in terms of costs associated with 
rotation, but also in terms of personnel related costs. (1) Mandatory 
firm rotation would force accounting firms to place greater attention 
on proposal opportunities occurring each year. As a result, accounting 
firms will incur significant additional costs (including opportunity 
costs) in marketing and selling audit services to potentially new 
clients and, as a result, may find it necessary to divert resources 
from performing and completing quality audits. (2) Offices in smaller 
geographic areas will suffer from the greater volatility in clientele 
and demand in staff. As a result of this volatility, employees will be 
forced to become more mobile; employees could routinely be asked to 
move to other locations, disrupting the lives and careers of the 
employees, their spouses, and their families. Rather than uprooting 
their spouses and children, employees may be more likely to become 
associated with the firm that has won the audit work. So, although the 
audit firm has rotated, the same people may end up serving the client. 
(3) With mandatory firm rotation, the costs of maintaining an office 
in smaller geographic areas will be higher. It may not make economic 
sense for big firms to have a presence in a geographic area that may 
only have one or two public companies since, by virtue of regulation, 
that firm may be forced out of the audit business in that area in a 
short period of time. (4) It will be more difficult for smaller CPA 
firms to absorb the costs associated with mandatory audit firm 
rotation. Such costs include: additional resources associated with 
actively pursuing new clients, maintaining an audit practice, and 
inefficiencies as a result of continuously starting up new audits. 
Indeed, smaller firms will be more likely to experience greater 
volatility in clients and their own need for staff. This operational 
volatility may cause small CPA firms to abandon audit services for 
public companies."
* Comment: "Mandatory auditor rotation increases the cost of auditing 
for individual clients and eventually for the economy, because 
incoming auditors must incur the start-up and learning time necessary 
to become familiar with the company and its operations. In addition, 
more numerous proposal opportunities will pile up new costs. Auditors 
cannot lose engagements and ignore opportunities to obtain new ones, 
so proposals will become a bigger and more important part of the 
business side of auditing. There is no certainty that the increased 
costs would be recovered by proportional increases in fees. A failure 
to consistently recover increased costs would undermine the financial 
viability of some firms, a clear risk under mandatory rotation."
* Comment: "Any firm specializing in an industry would be especially 
hard hit from rotation, as their specialized industry knowledge/
personnel/forms would quickly become unneeded, and then it would be 
hard to re-establish oneself in the industry."

General category of comment: Costs to companies; 

* Comment: "With regard to issuers, mandatory firm rotation would also 
impose additional costs and create unintended consequences. (1) 
Mandatory firm rotation would increase internal costs and distraction. 
Each time rotation occurs management would be faced with a disruptive, 
time consuming, and expensive process of selecting and then 
introducing the new auditors to the company's operations, procedures 
and controls, systems, and industry environment. The first year of an 
audit requires an inordinate commitment at all levels of company 
management and staff as the new audit firm develops and documents its 
initial understanding of the control environment, accounting systems 
and the terminology and culture that is unique to each company. (2) 
For companies in smaller geographic areas where only two or three 
firms are located, it will be difficult for companies to rotate 
between firms. For example, if only three firms have a presence in a 
particular geographic area and one firm provides internal audit 
services and another provides another non-audit service that prevents 
the firm from acting as the auditor - there would be only one firm 
left in the geographic area to act as the audit firm. It would be 
possible to bring in another firm from outside the geographic area, 
but doing so would increase costs significantly. (3) Mandatory firm 
rotation would disproportionately hurt small registrants. Small 
registrants may not be able to absorb the costs associated with 
rotating auditors. They may not have the resources necessary to both 
effectively manage their business and perform the additional work 
involved with rotating auditors. In addition, small registrants 
typically depend more on their auditors for expertise in dealing with 
the intricacies of GAAP and SEC requirements, as they are more likely 
not to have the requisite in-house expertise; as a result, the 
rotation process would be even more disruptive. (4) Mandatory firm 
rotation could be disruptive to mergers and acquisitions and to 
raising capital. Example 1: Company A and Company B sign a letter of 
intent to merge in November. Company A is required to rotate auditors 
in January; however, the merger will not be finalized until May. 
Company A would be required to hire new auditors to perform the last 
audit which would be problematic or at least very disruptive to the 
merger process. Further, firms may not choose to be considered for 
appointment if the anticipated merger would quickly cause loss of the 
new client. Example 2: If a company is required to switch auditors in 
the middle of a financing, at a minimum it will slow down the 
company's ability to get to the market; the new auditors will need 
additional time to gain the necessary knowledge about the client and 
to perform the required procedures. At worst, it may.
* Comment: cause a black out period in which the company will simply
 be unable to get to the market; the new auditors may be unwilling to 
be involved with such financing until an audit has been completed, 
which could cause a black out period anywhere from three months to a 
year. Further, it may be more difficult to obtain the requisite 
involvement from the predecessor accountants. Additionally, it is 
during a financing that company's management has the greatest 
incentive to look its best financially. Unscrupulous management may 
purposely plan a financing just after hiring new auditors and 
intentionally create fraudulent financial statements in order to raise 
money in the market."

Source: GAO analysis of survey data.

[End of table]

Audit Procedures for PCAOB Consideration:

Under existing generally accepted auditing standards, 95 percent of 
respondents indicated that their firm had sufficient flexibility to 
implement additional audit procedures without the PCAOB requiring the 
procedures. However, respondents identified the need for enhanced 
access to the previous auditor, extending the filing deadline, and 
requiring the predecessor and successor auditor to perform a joint 
audit as items the PCAOB should consider requiring under mandatory 
audit firm rotation to further reduce their firm's risk of not 
detecting material misstatements.

Table 9 shows selected responses to question 18 - "Please identify 
which audit procedures listed above [in question 15][Footnote 7] the 
PCAOB should consider requiring under mandatory audit firm rotation to 
further reduce your firm's risk of not detecting material 
misstatements to an acceptable level.":

Table 9: Audit Procedures the PCAOB Should Consider under Mandatory 
Audit Firm Rotation:

General category of audit procedure: Enhanced access to previous 
auditor; 

* Comment: "Enhanced access to key members of previous firm's audit 
engagement team."
* Comment: "...it still would help to have more access to [workpapers]
of 4 largest firms. They often do not share with smaller firms, 
although they do share with each other."
* Comment: "Enhanced access to personnel and audit files."

General category of audit procedure: Extend filing deadline; 

* Comment: "Allowing issuers to revert to the 90 day Form 10-K filing 
deadline in the year of audit firm change . . ."

General category of audit procedure: Require joint audit; 

* Comment: "Require joint audit in final year of mandatory rotation 
period." 

Source: GAO analysis of survey data.

[End of table]

Competition for Audit Services:

The majority of respondents (72 percent) indicated that mandatory audit 
firm rotation would likely decrease the number of firms willing and 
able to compete and would contribute to higher audit fees. For those 
respondents who indicated that mandatory audit firm rotation would 
likely change the number of public accounting firms willing and able to 
compete for audits of public companies, we requested explanatory 
comments. Table 10 shows selected responses to question 68 --"Please 
provide a brief explanation for why the likely change in the number of 
firms would impact audit fees as noted in your responses to the above 
question [question 67].":

Table 10: Comments on Why the Likely Change in the Number of Firms 
Would Impact Audit Fees:

Range of options: Decrease number of firms/higher audit fees;

* Comment: "The decrease in SEC practicing firms will allow those firms 
continuing to practice in this area to charge higher fees to recover 
increased insurance, training and preparation costs.” 
* Comment: "The remaining fewer firms that are still willing to stay in 
the market will tend to be the larger firms only. Smaller, specialty 
firms who provide services to smaller and start-up SEC companies will 
tend to not be willing to spend the additional time and dollars on 
clients who will be short lived without an increase in price.” 
* Comment: "Less competition will allow prices to be driven upwards.” 
* Comment: "Fewer firms would be willing to audit small companies. 
Remaining firms would charge higher fees.” 
* Comment: "Public companies will have less choices and firms will 
likely increase fees due to reduced competition.” 
* Comment: "If small firms realize that they would be required to 
rotate off of engagements after a period of time, they will be less 
likely to serve those clients and put time and effort in to them. As a 
result, fewer firms will be interested in serving these firms unless 
they see an increased opportunity to obtain replacement clients in the 
future. However, the ability of smaller firms to attract public 
companies is difficult. As a result of fewer firms providing these 
services, costs are likely to increase, particularly for the smaller 
public company (under $100 million).” 
* Comment: "In a competitive market, it will be difficult for a non Big 
4 firm to pass on additional cost to a client and still provide quality 
service.” 
* Comment: "..many small public accounting firms audit only one or two 
public companies in their market area. If rotation were mandatory, it 
is likely that such firms would complete their rotation on the one or 
two public companies they audited, then cease auditing public companies 
altogether due to the costs associated with auditing public companies, 
such as PCAOB compliance.” 
* Comment: "The costs of investing resources in a possibly short-term 
client relationship will be a deterrent to many firms, and the willing 
firms will require increased revenues to perform the services at a 
realistic profit.” 
* Comment: Decrease number of firms/lower audit fees: "Public company 
auditing is becoming less attractive to mid-size firms in general. This 
will be one more step in convincing audit firms to get out of the 
business.” 

Range of options: Decrease number of firms/lower audit fees;

* Comment: "Price would become a greater factor in the auditor 
selection decision, not quality.” 

Range of options: Increase number of firms/higher audit fees;

* Comment: "Audit costs will increase because there will be more audit 
time spent per year on average with mandatory auditor rotation. Higher 
fees will invite more firms to participate. More firms won't lower fees 
because of the high cost of entry into this market niche.” 
* Comment: "More firms would have the ability to propose on engagements 
because of the need for change. These firms would most likely have to 
spend additional hours in preparation for a new engagement and in 
additional start up expenses.” 
* Comment: Increase number of firms/lower audit fees: "I think more 
smaller firms may compete for audits of public companies. The charge-
out rates in smaller firms is lower than in larger firms but this will 
be offset by increased time for the smaller firms to do the audits.” 

Range of options: Increase number of firms/lower audit fees;

* Comment: "Presently a large segment of the public company universe 
never comes up for new auditor consideration. More opportunities to get 
new work will lead to increased competition and to fees lower than they 
would otherwise be if the opportunities were reduced.” 
* Comment: "I think the competition will cause the bigger firms to be 
more competitive with their audit fees, thus driving them down.” 

Source: GAO analysis of survey data.

[End of table]

Table 11 shows selected responses to question 72 --"Do you have any 
additional comments on the issues covered in this section or comments 
concerning mandatory audit firm rotation as it relates to competition 
for audit services (including any other issues not covered)?": 

Table 11: Comments Related to Competition for Audit Services: 

General category of comments: Additional barrier to entry;

* Comment: ". . . mandatory firm rotation would not solve the 
significant barriers to entry, such as high litigation risks, that 
exist for entering the practice of serving issuers and would actually 
create an additional barrier to entry.” 

General category of comments: Increase in consolidation;

* Comment: "Strong competition currently exists among the top tier 
firms and among each of the different tiers of firms. As such, to 
implement measures such as mandatory firm rotation as a way to increase 
competition among audit firms is not needed.” 
* Comment: "Advantages of concentration in an industry would become 
greater for the 4 largest firms, to the detriment of the other firms.” 
* Comment: "Small firms who do public work frequently have as a source 
of referral a relatively few sources. As those sources are forced to 
rotate auditors, some of the small auditors will go out of business. 
The large firms will simply rotate the large clients with relatively 
low impact to overall client base.” 

Source: GAO analysis of survey data.

[End of table]

Implementing Mandatory Audit Firm Rotation: 

The majority of respondents (72 percent) indicated that a requirement 
for audit firm rotation should not be applied uniformly for audits of 
all public companies. Table 12 presents responses to question 86 --
"Please explain why you believe such a requirement should, or should 
not, be applied uniformly to all public companies.” 

Table 12: Comments on Whether Mandatory Audit Firm Rotation Should Be 
Applied Uniformly for Audits of All Public Companies: 

Apply requirement uniformly: Yes;

* Comment: "If mandatory rotation of public accounting firms is deemed 
necessary to protect investors, then it should be implemented 
consistently across all public companies regardless of the nature or 
size of the public company.” 
* Comment: "...we believe that if the policy is required, it should be 
applied uniformly to all public companies. Any other policy would be in 
conflict with the motive that would undoubtedly be put forward for the 
requirement, namely, to improve the quality of audits. There is no 
evidence we are aware of that fraudulent financial reporting is less 
frequent among smaller companies, and they are the likely candidates 
for a less stringent version of the requirement. In addition, the audit 
report of an independent CPA should mean the same thing to those who 
rely on it. If different requirements are set for audits of different 
companies, unqualified audit reports would not have the same meaning to 
those aware that the requirements differed by the size or nature of the 
audited company.” 
* Comment: "There should be no difference in applying the mandatory 
rotation requirement if the perceived benefit is a better audit.” 

Apply requirement uniformly: No;

* Comment: "...large multinational issuers should have a longer 
rotation period for audit firms, while perhaps small issuers should be 
exempt from rotating audit firms.” 
* Comment: "Smaller companies rely more on the expertise of the 
auditor. They would find it more difficult to transition to a new 
auditor. Also, large multinational companies would have greater 
difficulty in ensuring service coverage in all areas of the world.” 
* Comment: "Smaller public companies have less resources to deal with 
the incremental costs and staffing requirements.” 
* Comment: "A different set of rules should apply to the very small 
start-up companies with revenues of less than $10-20 million. The vast 
majority of our SEC audits have revenues of less than one million 
dollars. These companies cannot afford the very large CPA firms yet the 
proposed rules would take the small CPA firms out of the market.” 
* Comment: "Smaller public companies (< $50 million) would have minimal 
benefits of mandatory auditor rotation, but more costs because total 
audit time would increase over the long term. So this provision is 
detrimental to smaller public companies and should not apply to them.” 
* Comment: "Smaller companies (for example S-B filers or non-
accelerated filers) don't present the same risk of loss to the 
marketplace (in terms of dollars or confidence), and the cost of the 
change is, on a relative basis, much more significant.” 
* Comment: "Generally, the burden placed on small companies is 
significantly higher on a relative basis, when having to follow the 
same rules as large companies that have the infrastructure and 
financial ability to implement the requirements.” 
* Comment: "Small specialized public companies have few qualified firms 
willing to perform their attest function within their budget.” 
* Comment: "Smaller companies generally have limited internal financial 
skills and rely on the expertise of their outside auditor to assure 
compliance. Rotating firms would add a complexity to their operations 
with little benefit to the shareholders. It would also discourage 
smaller CPA firms from making the necessary investment to maintain a 
high skill level if they could not maintain clients for long periods of 
time.” 
* Comment: "Smaller domestic companies are generally in a geographic 
area where there may only be one accounting firm.” 
* Comment: "The risk associated with small public companies is 
different than large public companies. Large companies like Enron 
impact many more people, and are significantly more complex than many 
small public companies. From a risk-based perspective, small public 
firms and their auditors are bearing the same costs without the 
benefits. The corrective action necessary to the market place from 
large public company audit failures should not be unduly placed at the 
door of small public companies and their auditors.” 

Source: GAO analysis of survey data.

[End of table]

Overall Views on Requiring Mandatory Audit Firm Rotation: 

The majority of respondents (76 percent) indicated that their firms do 
not support requiring mandatory rotation of public accounting firms. 
The nature of comments received from many of these respondents as to 
why their firm does not support requiring mandatory audit firm rotation 
include: new regulations; lower audit quality/risk of audit failure; 
increased costs; and new role of audit committees. Table 13 shows 
selected comments explaining why the respondent's firm does not support 
requiring mandatory rotation of public accounting firms (question 89).

Table 13: Reasons for Not Supporting Mandatory Audit Firm Rotation: 

General category of explanation: New regulations;

* Comment: "The Sarbanes Oxley Act of 2002 ("the Act") and the recently 
issued SEC rules on Strengthening Auditor Independence, along with 
vigilant audit committees, are major steps in restoring the investor's 
trust and confidence in the capital markets. These positive actions 
must be given time to work and rebuild investors' confidence.” 
* Comment: Lower audit quality/risk of audit failure: "New rules have 
been adopted by the SEC which require the lead and concurring review 
partner to rotate after five years, and other audit partners (for 
example - lead audit partners on significant subsidiaries) to rotate 
after seven years. These rules should be given a chance to work.” 

General category of explanation: Lower audit quality/risk of audit 
failure;

* Comment: "The auditor must understand the client's business to audit 
effectively. Given the complexity of today's global business 
environment in various industries, it is imperative that the auditor be 
very knowledgeable of the client's business and industry. Knowledge is 
cumulative and is built up over a number of years and must be leveraged 
for the benefit of the investor.” 
* Comment: "We believe mandatory audit firm rotation increases the risk 
of audit failure, and, as a result, may further erode public confidence 
in our capital markets. Studies demonstrate that there are increased 
risks of failure during the first and second years of an audit 
relationship…increasing the frequency of rotation will erode depth of 
knowledge about clients and may adversely impact the quality of 
audits.” 
* Comment: "The primary reason we oppose requiring mandatory rotation 
of auditing firms is that it would lower audit quality and thereby 
injure the public interest. Research has shown, and various authorities 
have accepted, that first-and second-year engagements entail higher 
risks of audit failure. The benefits of a 'fresh look' often cited in 
favor of mandatory rotation of audit firms would be more than offset by 
the risk of lower audit quality and its effect on the public interest. 
Moreover, the benefits of a 'fresh look' are available without the risk 
to audit quality from intra-firm rotation that already takes place. The 
risks to audit quality in first-and second-year audits cannot be wholly 
offset by additional auditing procedures, because the risk is caused by 
lack of experience with the client. Gaining familiarity with a client's 
business means more than gaining knowledge of its operations, systems, 
procedures, and controls. It also means gaining familiarity with how 
designed procedures and organizational arrangements operate in 
different circumstances. There is no direct substitute for this kind of 
experience.” 
* Comment: "Mandatory rotation would result in increased audit failures 
because it takes many years for an audit firm to build the knowledge 
base of the clients' system, particularly in complex multinational 
companies.” 
* Comment: "The elimination of auditors' carry-forward knowledge of 
public companies is a substantial risk factor.” 

General category of explanation: Increased costs;

* Comment: "Mandatory rotation of audit firms increases the company's 
costs, disrupts its operations, and is overall inefficient which in 
turn costs the investors money.” 
* Comment: "Mandatory firm rotation would have a significant impact on 
accounting firms not only in terms of costs associated with rotation, 
but also in terms of personnel related costs. First, mandatory firm 
rotation would force accounting firms to place greater attention on 
proposal opportunities occurring each year rather than focusing on 
quality audits. Second, employees who work at firms with offices in 
smaller geographic areas may be forced to become more mobile uprooting 
their families or rotate employment between firms in the area. Third, 
mandatory firm rotation may actually force big firms to close offices 
in smaller geographic areas due to the high costs. Lastly, smaller 
audit firms could potentially suffer disproportionately as it will be 
more difficult to absorb costs associated with rotation and may 
actually cause them to exit the practice of auditing issuers.” 
* Comment: "..it increases the risk of audit failures and makes 
auditing a less desirable career option for new students thus 
increasing the cost of performing audits and the overall profitability 
of auditing.” 

General category of explanation: New role of audit committees;

* Comment: "Strengthened role of audit committees should mitigate 
risk.” 
* Comment: "Audit committees and firms should decide in the open market 
when it is appropriate to change auditors.” 

Source: GAO analysis of survey data.

[End of table]

Table 14 shows selected responses to question 92 - "Please provide any 
additional comments or observations you may have on the potential 
effects of mandatory audit firm rotation of public accounting firms 
registered with the PCAOB.” 

Table 14: Additional Comments on the Potential Effects of Mandatory 
Audit Firm Rotation: 

General category of comment: Financial institutions;

* Comment: "Many of our public clients are financial institutions. 
Faced with the loss of these due to rotation, we may very well decide 
it is no longer worthwhile to audit the public companies we would have 
remaining or to try to 'build back up' the financial institution 
clients in 5 years (only to lose them all 5 years after that). Thus, 
the effect on firms auditing a special industry might be to drive them 
out of the public company audit sphere.” 

General category of comment: Overall;

* Comment: "Every year approximately 3,000 firms would be changing 
firms causing staffing problems.” 
* Comment: "Mandatory rotation has never been proved to improve audit 
quality and will not solve the issues related to audit failure. 
Limitation on other services is a greater benefit with little or no 
cost to the public company and little or no cost to small firms who 
have never provided these types of services to public companies.” 

Source: GAO analysis of survey data.

[End of table]

[End of section]

Appendix V: Selected Written Comments from Fortune 1000 Public Company: 

Chief Financial Officers: 

Chief financial officers surveyed were invited to add written comments 
to a number of questions to further explain their answers or to add 
additional answers. The survey of public company chief financial 
officers, annotated with summary responses for each question, is in 
appendix II. Of the 201 chief financial officers who responded to the 
survey, 199 provided written answers to at least one of the following 
open-ended comment questions in our survey 

* competition for audit services,
* audit-related costs and audit fees,

* auditor's ability to detect financial reporting issues,
* impact of the Sarbanes-Oxley Act on achieving the benefits of a 
"fresh look, 
* implementing mandatory audit firm rotation,
* overall views on requiring mandatory audit firm rotation, and 
* additional comments on the effects of mandatory audit firm rotation.

The following tables display selected comments from respondents to 
these questions to reflect the range of views that were provided by 
respondents. Some of the quotes illustrate typical comments made by 
several other companies, while others represent a unique viewpoint of 
only that company. While these specific comments provide valuable 
insights, the number of comments of a particular type reproduced here 
is not necessarily proportional to the number of other similar 
responses, and, therefore, the comments are not meant to be 
representative of the views that might be found in the population of 
Fortune 1000 public company chief financial officers as a whole.

Competition for Audit Services 
A majority (88 percent) of respondents indicated that they believe 
mandatory audit firm rotation would likely change the number of 
capable public accounting firms interested in serving as their auditor 
of record and would impact audit fees. The largest number of 
respondents said mandatory audit firm rotation would likely result in 
higher audit fees and a decrease in the number of capable firms. Table 
15 shows selected responses to question 27--"Please provide a brief 
explanation for why the likely change in the number of interested and 
capable firms would affect audit fees in the manner noted in your 
response to question 26.”

Table 15: Impact on Audit Fees from Potential Change in Number of Audit 
Firms Available: 

Direction of audit fees and number of firms available: Higher fees and 
less competition;

* Comment: "Incumbent would be disqualified [by mandatory audit firm 
rotation] - very limited competition would result in higher fees.” 
* Comment: "Only 3-4 have global capability and one [the incumbent 
firm] would be taken out of the mix. Also, with only 3 eligible and 
with the education required for a new auditor, fees would likely go 
up.” 
* Comment: "Less competition implies higher fees [and] firms would 
begin to pass the cost of their learning curve to client.” 
* Comment: "Shorter duration to recover initial costs and increased 
marketing costs - increased risk of audit failure because firm does not 
know our business.” 
* Comment: Higher fees and more competition: "Mandatory rotation would 
reduce a company's ability to negotiate lower 'start-up' costs as well 
as result in higher fees due to reduced competition - all firms will 
get their share. Also, the company's expenses and personnel demands 
will increase due to the constant change and training of firms.” 

Direction of audit fees and number of firms available: Higher fees and 
more competition;

* Comment: "Second tier firms would compete but with shorter time to 
serve as auditor, costs [would be] higher due to learning curve to 
familiarize to company and industry.” 
* Comment: "Mandatory rotation would mean that all of the Big 4 would 
rotate off clients equally so firms that we would not use today, due to 
competitive reasons, would be free to bid on our account. The process 
will cause costs to increase. It is unavoidable.” 

Direction of audit fees and number of firms available: Lower fees and 
more competition;

* Comment: "Increased competition would lead to overall lower fees. 
Fees are a primary attribute in the auditor selection process.” 
* Comment: "I believe capable regional firms would be more likely to 
compete with the Big 4. I would hope that increased competition would 
decrease fees.” 

Source: GAO analysis of survey data.

[End of table]

Audit-Related Costs and Audit Fees: 

Most respondents (89 percent) said that mandatory audit firm rotation 
would lead to higher audit fees over time. Table 16 shows selected 
responses to question 30--"Please explain your reasons for believing 
that over time audit fees would be lower, higher, or remain the same 
under mandatory audit firm rotation due to increased opportunities to 
compete.” 

Table 16: Potential Audit Fee Impact under Mandatory Audit Firm 
Rotation: 

Direction of audit fees and reasons: Lower fees --competition issues;

* Comment: "Increasing the number of competitive bids and consideration 
of firms that might have previously been excluded from the selection 
process meets the criteria that have historically brought about 
reduction in fees.” 
* Comment: "It seems to me that if we could use more than 4 big firms, 
the competition would lower overall fees.” 

Direction of audit fees and reasons: Higher fees --learning curve and 
start-up costs;

* Comment: "Mandatory audit firm rotation would lead to higher fees 
because (i) public accounting firms could seek to recover higher first 
year audit costs over the period in which the firm is auditor of record 
and (ii) public accounting firms would be less likely to discount audit 
fees from standard rates since the firm's relationship with the public 
company will be of limited duration rather than long-term.” 
* Comment: "More hours associated with learning curve and re-audit of 
prior auditor's work.” 
* Comment: "Mandatory rotation will force the firms to charge higher 
fees due to extra time needed on new engagements in order to become 
familiar with the company's structure and processes.” 
* Comment: "The cost of marketing would skyrocket as would the cost of 
audits due to learning curve requirements.” 
* Comment: "Mandatory rotation would require significantly greater 
auditor time to understand fundamentals of the engagement. This would 
result in higher billings depending upon the frequency of rotation.” 
* Comment: "Learning curve costs not recovered before forced 
rotation.” 
* Comment: "Rotation leads to higher costs for the CPA firm. Every 
rotation creates the high startup cost scenario for at least one to two 
years.” 
* Comment: "Firm rotations are inefficient. Accounting firms have to be 
paid to cover their significant start-up costs. Transition costs 
related to discussions with prior auditors also have to be recovered by 
both accounting firms.” 

Direction of audit fees and reasons: Higher fees --competition issues;

* Comment: "This has created a monopoly. The public market will only 
accept certain size audit firms. Right now our fees have doubled.” 
* Comment: "We believe that only one of the Big 4 would be 'capable' 
and 'appropriate' to audit our company; therefore, no real increase in 
competition would come as a result of mandatory rotation.” 
* Comment: No change in fees: "It does not increase opportunities to 
compete; but mandates change for the sake of change, moving the 
negotiating leverage and ultimately higher fees to the auditing 
firms.” 

Direction of audit fees and reasons: No change in fees;

* Comment: "Increased costs of audit firms in preparing to audit would 
be bargained away in the bidding process every five years.” 
* Comment: "Assuming the number of auditing firms remains the same, as 
well as public companies, fees should remain relatively the same - no 
increased competition.” 

Source: GAO analysis of survey data.

[End of table]

Auditor's Ability to Detect Financial Reporting Issues: 

Most respondents indicated that it takes a new auditor of record 2 to 5 
years to become sufficiently familiar with a company's operations and 
financial reporting practices to no longer require the additional audit 
resources often associated with conducting an initial year audit of a 
new public company client. In addition, while most respondents (90 
percent) indicated the complexity of their company's operations and 
financial reporting practices influences the amount of time it would 
likely take a new auditor of record to become familiar with their 
company's operations and financial reporting practices, 33 percent of 
the respondents in a follow-up question said that there are other 
factors that influenced their response regarding the number of years it 
takes an auditor to become familiar with their company's operations and 
financial reporting practices. In the follow-up question, many 
respondents identified the learning curve to the new auditor and 
industry expertise as the main reasons for their response. Table 17 
shows selected responses to question 41--"Are there factors other than 
the nature and complexity of your company's operations and financial 
reporting practices that influenced your answer to the preceding 
question [on the number of years it takes for an auditor to become 
familiar with your company's operations and financial reporting 
practices].” 

Table 17: Auditor Knowledge and Experience with a Company's Operations 
and Financial Reporting Practices: 

Factor impacting audit risk: Industry expertise and learning curve;

* Comment: "Industry expertise - we have six segments, all in 
specialized industries, headquartered in four different cities, doing 
business worldwide, making it very difficult to find or retrain new 
auditors.” 
* Comment: "Understanding of the industry. Familiarity with who to 
contact to follow up on issues. Experienced based understanding of key 
issues and competence of personnel.” 
* Comment: "Audit staff turnover, prior years work papers, and 
knowledge transfer impacts the auditor's efficiency in periods beyond 
the first year.” 
* Comment: "It takes time for an auditor to understand even the 
simplest company's operation and financial reporting structure.” 
* Comment: "With the accelerated reporting dates recently established, 
it will be very difficult for a public accounting firm to gain a 
complete understanding of a client's business during one audit cycle.” 
* Comment: "The evolving nature of GAAP as well as changes in the 
economic environment often have implications for areas within the 
organization that were not previously considered overly important.” 
* Comment: Geographic locations: "Changes due to acquisitions, 
divestitures, and restructurings. As well as new management and changes 
to information systems. New SEC and FASB regulations that require 
interpretation by accounting firms and the Company.” 

Factor impacting audit risk: Geographic locations;

* Comment: "As a multi-national company, we have operations in 27 
countries. Each would require a change.” 
* Comment: "Number of geographic locations and statutory 
requirements.” 

Source: GAO analysis of survey data.

[End of table]

Impact of the Sarbanes-Oxley Act on Achieving the Benefits of a "Fresh 
Look": 

While 77 percent of the respondents indicated that mandatory rotation 
of lead and reviewing partners sufficiently achieves the intended 
benefits of the "fresh look" and is less costly than mandatory audit 
firm rotation, another 18 percent of the respondents said the mandatory 
rotation of lead and reviewing partners may not be as effective as 
mandatory audit firm rotation in achieving the intended benefits of the 
"fresh look" but is a better choice given the high cost of mandatory 
audit firm rotation, and 4 percent answered that mandatory audit firm 
rotation is necessary to effectively achieve the intended benefits of a 
"fresh look." The remaining 1 percent indicated that checks and 
balances are already in place. One respondent provided comments to 
question 66 about the checks and balances already in place. See table 
18.

Table 18: Comment Received: Checks and Balances Are Already in Place 
for the Auditors to Achieve the Benefits of a "Fresh Look": 

General category of comment: Checks and balances already in place;

* Comment: "I also believe that in the current environment, everyone is 
fully aware of the need for independent evaluation and it is highly 
unlikely that audit failures will occur as a result of 'too' much 
familiarity with a client. The firms have put in the necessary checks 
and balances to ensure against this and chief financial officers and 
chief executive officers are signing-off quarterly on the accuracy of 
their financial statements.” 

Source: GAO analysis of survey data.

[End of table]

Implementing Mandatory Audit Firm Rotation: 

More than 80 percent of our respondents said that, if mandatory 
rotation of public accounting firms were required, it should be applied 
uniformly for audits of all public companies regardless of the nature 
or size of the public company. Most respondents (135 out of 173) 
indicated that the requirement should be applied uniformly because all 
public companies should be treated equally and size does not matter. 
However, the remaining respondents (38 out of 173) indicated that the 
requirement should not be applied uniformly primarily because of issues 
relating to complexity, size, risk, or cost. Table 19 shows selected 
responses to question 79--"Please explain why you believe such a 
requirement should, or should not, be applied uniformly to all public 
companies.” 

Table 19: Comments on the Uniform Application of Mandatory Audit Firm 
Rotation to All Public Companies: 

Position: In favor of uniform application;

* Comment: "Shareholders invest in public companies of all sizes. If 
mandatory rotation is aimed at improving financial statement integrity, 
size should not matter. Investors are still susceptible to losses if 
financial statements are misstated at any company.” 
* Comment: "It should be applied uniformly to ensure that all public 
companies are treated equally and that the investors are protected with 
the same level of controls/review applied to any public company.” 
* Comment: "Mandatory rotation would be implemented only after the SEC 
determined that it would unquestionably improve auditor independence 
and the quality of audit practices. If this were to occur, the 
perceived benefits should be applicable to all public companies for the 
protection of all investors and stakeholders.” 
* Comment: "If you believe rotation provides benefits that outweigh the 
cost, the rule should be applied to everyone so that every investor 
enjoys the benefits.” 
* Comment: "I don't believe that mandatory rotation will improve audit 
quality. In fact, I believe it will increase audit risk and 
significantly increase costs. If it were required, all companies, 
regardless of size, should have to comply.” 
* Comment: "We believe audit risk is inherent in all companies 
including privately held. Assuming auditor rotation reduces audit risk, 
applying the requirement to only a subset of all public companies 
implies audit risk occurs only within that particular subset.” 
* Comment: "Any non-uniform application would be arbitrary and 
potentially confusing to the capital markets.” 
* Comment: "One set of standards is easier to administer and companies 
competing in the same public markets should be subject to the same 
standards.” 
* Comment: "Inequities in laws or regulations lead to unfair 
competitive advantages.” 
* Comment: Vary application: "All are public with shareholders money at 
risk. Size does not matter.” 

Position: Vary application;

* Comment: "The entire concept is a well intentioned but misguided 
overreaction to the misdeeds of a few. A 'one size fits all' answer 
fails to recognize real variations in industry risk, cultural issues 
and other factors which have much more influence on the accuracy of the 
financial statements than changing auditors. The costs of implementing 
these and other changes is staggering and is another 'tax' on doing 
business in the United States.” 
* Comment: "Cost to small companies may make it prohibitive.” 
* Comment: "I believe mandatory rotation does not by itself result in 
better audits or less audit failures. If there is evidence that 
mandatory rotation yields better results in companies with certain 
characteristics, it should be applied to those companies and not every 
company as it is disruptive and, I believe, can result in greater risk 
of audit failure.” 

Source: GAO analysis of survey data.

[End of table]

Overall Views on Requiring Mandatory Audit Firm Rotation: 

Most (88 percent) respondents said their overall current view was that 
they do not support requiring mandatory rotation of public accounting 
firms because of the higher costs, risk of audit failure, and audit 
inefficiencies associated with rotating the auditor of record, among 
other issues. While 4 percent of respondents supported mandatory audit 
firm rotation at this time and 8 percent believed that more time was 
needed to evaluate the effectiveness of the various requirements of the 
Sarbanes-Oxley Act, table 20 shows selected responses to the follow-up 
portion of question 81--which asked respondents to provide the 
principal reasons for either supporting or not supporting mandatory 
firm rotation.

Table 20: Explanations of Overall Current Views: 

View: Supports mandatory audit firm rotation;

* Comment: "Mandatory rotation would provide a 'fresh look' and all its 
corresponding benefits and overall would outweigh related costs.” 
* Comment: "It seems like it would positively impact the independence 
of auditors, if handled correctly. It will certainly be costly to 
implement, particularly on the company side.” 
* Comment: "The principal reason for supporting mandatory firm rotation 
at this time is to ensure that public accounting firms perform their 
responsibilities with full diligence, knowing that another firm in the 
future, will replace them and will review their work papers, possibly 
questioning certain positions and financial reporting.” 

View: Does not support mandatory audit firm rotation;

* Comment: "Mandatory rotation of external auditors might force a 
company to select an audit firm whose performance and value proposition 
is less than that which is provided by the preferred audit firm. This 
issue will be further exacerbated by the initial increase in costs, 
fees, and disruption to operations and financial reporting. More 
importantly, there will likely be an initial drop in audit performance 
and reduced ability to provide assurance that there are no material 
misstatements in the financial reporting. This drop in performance is 
in perfect contradiction to the intended result.” 
* Comment: "The key requirement for adequate audits is to make sure 
competent personnel are on the engagement. Changing firms just 
increases costs with no benefits.” 
* Comment: "Loss of expertise is a far more significant risk than the 
theoretical benefit of a 'fresh look'.” 
* Comment: "We are a complex organization, with operations around the 
globe. Mandatory rotation would result in a less capable audit team, at 
a higher cost.” 
* Comment: "The cost of implementation does not provide additional 
benefits to investors and may in fact increase the risk of audit 
failures in large complex companies.” 
* Comment: "Rotation of auditors could hinder the quality of audit 
opinions and attestations due to the inexperience of the auditor with 
the company or the industry.” 
* Comment: "Auditor rotation will not reduce audit failures but will 
add costs and increase risks.” 
* Comment: "It will reduce reliability, increase auditor training costs 
and send the entire industry into a marketing frenzy while dramatically 
increasing costs.” 
* Comment: "We, like all companies I've known, attempt to hire the most 
capable firm to audit our company, in our industry and geographic 
footprint. We demand strong SEC and GAAP expertise and have changed 
audit firms when we didn't receive that expertise. This plan would 
force us to accept inadequate counsel. That's a bad idea.” 
* Comment: "We believe that the 'fresh look' benefit is, in fact, 
assured via partner rotation and that the costs of mandatory rotation 
are not justified.” 
* Comment: "The incremental costs will exceed the benefits. 
Additionally, more time is necessary to evaluate the effectiveness of 
the numerous requirements of the Sarbanes-Oxley Act of 2002 on 
enhancing audit quality.” 
* Comment: "'Fresh look' and independence can be achieved while not 
rotating the audit firm.” 
* Comment: "Mandatory firm rotation should not be required. The 
accuracy of the financial statements is the responsibility of 
management. As such, management should be entrusted with the decision 
on whether to continue with the use of a firm or not. Due to legality 
reasons, firms and management have an incentive to ensure that the 
financial statements are as accurate as possible.” 

Source: GAO analysis of survey data.

[End of table]

Additional Comments on the Effects of Mandatory Audit Firm Rotation: 

We asked respondents to volunteer any additional comments on the 
effects of mandatory rotation of public accounting firms. A number of 
the respondents mentioned concerns about mandatory rotation being too 
expensive, not being the solution, providing no benefit, and other 
issues. Table 21 shows selected responses to question 82--"Please 
provide any additional comments you may have on the effects of 
mandatory rotation of public accounting firms.” 

Table 21: Additional Comments: 

Type of Comment: Too costly;

* Comment: "The benefits of mandatory rotation are likely minor in 
comparison to the costs.” 
* Comment: "Clearly a confidence crisis has developed in the area of 
independent accountants. Public trust must be restored. The Sarbanes-
Oxley Act is designed to accomplish this restoration. I believe we need 
to let it work, mandatory rotation punishes companies with increased 
costs and we question the benefits to the investing public. We support 
the restrictions on 'services' provided by the external auditors. We 
believe this will significantly insure independence.” 
* Comment: Not the solution: "There are numerous new deterrents to 
improper accounting behavior on the part of public companies and their 
audit firms. The cost to implement and comply with these new procedures 
is very high. Adding another requirement such as audit firm rotation 
will likely compromise the other requirements already enacted. Our 
audit firm already has a high degree of independence in their audit, 
adding rotation requirements will add cost and risk (due to 
inexperience) and do very little in terms of improving audits.” 

Type of Comment: Not the solution;

* Comment: "I am concerned that this will be the first step in moving 
towards government audits of public companies. That would be a mistake 
with a few notable exceptions, the current system has been effective 
for a long time and will remain effective. Neither the Sarbanes-Oxley 
actions nor the mandatory rotation of auditors will make dishonest 
people become honest. More importantly, these actions will not make 
honest people more honest.” 

Type of Comment: No benefit;

* Comment: "We have seen over the past three years the effect of what 
rotation of auditor personnel on the engagement can have on the quality 
and internal costs. Our audit team (external) has turned over 
completely in the past 2-3 years without a rotation of audit firm. The 
new members of the audit team do not know our company nor our industry. 
The questions asked are shallow and demonstrate a lack of 
understanding. It has taken a tremendous amount of internal time to 
educate the auditors. Clearly if one lacked integrity, this would be 
the time to try to get away with something to enhance financial 
reporting. In our case, that would never happen due to the integrity of 
management, but if one wanted to do something irresponsible we could 
see how it could occur without being detected.” 
* Comment: "Any such change would be entirely cosmetic and political - 
industry and shareholders would pay a net price.” 
* Comment: "Aside from the cost/benefit scenario, additional rules re: 
mandatory rotation of public accounting firms, to govern the process 
will only serve to further dilute the public's trust in the value of an 
audit and make matters even more complex.” 

Type of Comment: Other Concerns;

* Comment: "It is certainly a judgment call on whether to have 
mandatory rotation of accounting firms. A 'fresh look' is more likely 
to find an intentional error, but less likely to find an unintentional 
error.” 
* Comment: "The mandatory rotation is a response to a failure in a 
select group of large cap companies and lack of audit committee 
involvement in these companies. Just to change auditors does not 
necessarily mean a 'bad' company will be good. The large 'cap' 
companies have more room to maneuver then a small cap company because 
our size allows the audit firm to push as usual.” 
* Comment: "I believe that the audit model is broken. I believe that 
audit firms are conducting audits to protect themselves, not primarily 
to reach a conclusion about the fairness of the financial statements. I 
also believe that the 'expectation GAP' between the auditor and the 
general public has grown as a result of the recent audit failures. The 
auditing profession has NOT adequately addressed this GAP, only 
increased the GAP through comments they have made. I do believe that 
there must be more audit procedures performed to the detection of 
fraud, as, from those instances that are currently in the public, there 
appears to have eluded detection from the auditors in a rather 
rudimentary manner. The FASB is also currently considering going from a 
'Rules-based' to a 'Principles-based' approach, which in my opinion, 
will potentially lead to more opportunity for incorrect financial 
reporting.” 
* Comment: "We do not believe that mandatory rotation is necessary or 
effective. The cost to implement a mandatory program will be greater 
than today's already higher levels. The burden in added out-of-pocket 
costs and inefficiency due to training the new auditors in the policies 
and practices of the company will not; outweigh the benefit, if any, 
that will come from a mandatory rotation. We believe that the proposal 
to rotate the engagement partners periodically is the most effective 
approach. Also, the PCAOB should establish mandatory rotation 
requirements for lower level audit engagement personnel in addition to 
the audit engagement partners.” 

Source: GAO analysis of survey data.

[End of table]

[End of section]

Appendix VI: Selected Written Comments from Fortune 1000 Public Company 
Audit Committee Chairs: 

Audit committee chairs surveyed were invited to add written comments to 
a number of questions to further explain their answers that were 
provided in the questionnaire or to add additional answers. The survey 
of public company audit committee chairs, annotated with summary 
responses for each question, is in appendix III. Of the 191 audit 
committee chairs who responded to the survey, 183 provided written 
answers to at least one of the following open-ended comment questions 
in our survey: 

* potential costs and benefits under mandatory audit firm rotation,

* implementing mandatory audit firm rotation,

* overall views on requiring mandatory audit firm rotation, and: 

* additional overall comments on mandatory audit firm rotation.

The following tables display selected comments from respondents to 
these questions to reflect the range of views that were provided by 
respondents. Some of the quotes illustrate typical comments made by 
several other audit committee chairs, while others represent a unique 
viewpoint of only that audit committee chair. While these specific 
comments provide valuable insights, the number of comments of a 
particular type reproduced here is not necessarily proportional to the 
number of other similar responses, and, therefore, the comments are not 
meant to be representative of the views that might be found in the 
population of Fortune 1000 public company audit committee chairs as a 
whole.

Potential Costs and Benefits under Mandatory Audit Firm Rotation: 

Under mandatory audit firm rotation, 89 percent of Fortune 1000 public 
company audit committee chairs stated that costs are likely to exceed 
benefits, 4 percent stated that costs and benefits would likely be 
about equal, 2 percent stated that benefits would likely exceed costs, 
and 5 percent stated they had no basis to answer the question. Table 22 
shows selected responses to question 5--"Please tell us the primary 
reasons for your view on the potential costs and benefits that may 
result under mandatory audit firm rotation.” 

Table 22: Views on Costs and Benefits: 

Costs likely to exceed benefits: Increased costs/increased audit 
risk;

* Comment: "Conducting a periodic competitive bid and evaluation 
process to select a new audit firm is a time-consuming and costly 
process. The benefits of an arbitrary change in audit firms are unknown 
and questionable. An auditor who is familiar with the firm's operations 
and management can be expected to do a more thorough and informed job 
as auditor.” 
* Comment: "[Our company] went through the audit firm rotation in 2002 
by necessity, moving from Arthur Anderson to [another Big 4 firm]. 
While clearly getting a fresh set of eyes, it took a full year for [the 
Big 4 firm] to 'get up to speed' and give the audit committee 
definitive responses to our questions and concerns. The transition has 
clearly required more company resources in educating [the Big 4 firm] 
and increased out of pocket costs for the first annual audit by more 
than $1 million. I am also concerned about the lame duck effect in the 
final year of a relationship.” 
* Comment: "Monetary costs of changing auditors is significant, but 
other costs are more important still. In addition to disruption of 
financial management of operations, quality of audits during transition 
is likely to be lower until new auditors become familiar with the new 
client's operations and the details of its control systems and 
reporting functions.” 
* Comment: "The learning curve on a new engagement is very steep and 
time consuming. Risk of audit failure is highest in the early years of 
a relationship.” 
* Comment: "Company effort involved in selection process leads to 
higher costs. Time and effort of both audit firm and client staff 
invested during start-up period lead to higher audit fees and overhead 
costs. Time required by audit engagement team to become familiar with 
company structure and industry may lead to lower-quality audits.” 
* Comment: "Mandatory audit firm rotation doesn't make sense. Once the 
audit firm had figured out the intricacies of the company it is 
auditing, it would have to quit and the learning process started all 
over again with a new firm.” 
* Comment: "Knowledge of business and familiarity with employees 
(strength/weaknesses) are important components of audit quality. 
Rotation implies less in-depth business knowledge and superficial 
relationships that could, in fact, reduce audit quality and increase 
the risk of overlooking an issue or being 'manipulated' by 
management.” 
* Comment: "Start-up costs are likely to be significant, and audit 
firms are likely to take a shorter-term view of their potential 
engagement. Thus, they will want to recapture these costs in higher 
fees more quickly. Benefits are highly uncertain. Firms will have less 
incentive to specialize their practices, perhaps [with] the result that 
quality declines.” 
* Comment: "The perceived benefits of a 'fresh look' would be more than 
offset by the loss of continuity of the team. For example, many issues 
impact a company's financial statements over a period of years and are 
event based; therefore, continued knowledge of the transactions history 
is needed. Mandatory rotation would eliminate relationship pricing from 
the firms, thereby increasing costs. Additionally, the time and efforts 
on the part of management would increase to get the new firm up to 
speed on issues as well as the relationship with the audit committee.” 
* Comment: "We had a set rotation policy between [a public accounting 
firm] and [a Big 4 firm] (switched every 5 years). We found that for 
the first 2 years of the audit the new firm was learning and had little 
in the way of suggestions for improvement. They got better after 2 
years, so we had a poor audit for the first 2 years. Thus, we stopped 
the rotation.” 

Costs likely to exceed benefits: Benefits hard to see;

* Comment: "There is no assurance that rotation will eliminate 
potential conflicts; it could potentially reduce competition among the 
Big 4 and make it worse.” 
* Comment: "I think the benefits are imaginary and the costs, 
especially the disruption costs, are significant.” 

Costs likely to exceed benefits: Existing requirements;

* Comment: "The current policy of rotating lead audit and reviewing 
partners every five years is a good, balanced approach in that it 
provides for continuity of certain members of audit team and a fresh 
look.” 
* Comment: "Most of the intended benefit of accounting firm rotation 
will be achieved through other requirements of the Sarbanes-Oxley Act 
and related corporate governance initiatives (such as rotation of audit 
partners involved in the engagement, the increased responsibilities of 
the independent audit committee, pre-approval requirements, etc.) 
without the significant costs of firm rotation.” 
* Comment: "Until the accounting profession stabilizes post-Sarbanes-
Oxley, I would strongly oppose any mandatory rotation of auditing 
firms.” 
* Comment: "The primary areas of concern--absence of a 'fresh look' 
potential for making the same mistake repeatedly--are well addressed by 
partner rotation and the strengthened oversight process within the 
firms themselves. The loss of continuity, or institutional memory, 
would be a negative aspect of firm rotation that could be damaging to 
audit quality.” 
* Comment: "The Sarbanes-Oxley Act, and increased awareness generally, 
have produced many positive changes at audit firms and in the 
management practices and audit committees of public companies. It is 
not clear that mandatory rotation would add significant additional 
benefit. Public companies would bear the additional internal cost of 
transitioning to a new firm and absorb, through fees, the audit firm 
start-up costs.” 

Costs likely to exceed benefits: Few qualified firms;

* Comment: "With only 3 other firms qualified to do our audit, 
mandating a change would only reduce the quality and drive up the costs 
of the audit.” 
* Comment: "If we rotated within Big 4 [firms], we would quickly run 
out of preferred firms.” 
* Comment: "With only 4 large audit firms, more use of other firms for 
non-audit services will reduce our flexibility in choosing a new firm. 
Industry-specific specialization is also important.” 
* Comment: "Continuity and broad familiarity and knowledge of the 
company's highly complex worldwide operations are extremely valuable 
and necessary to conducting effective independent audits. Few 
independent audit firms possess the worldwide capabilities to audit 
large U.S. operations as well as operations in 28 countries outside the 
USA. Nevertheless, individual lead auditors within the audit firm must 
be rotated every 4 to 5 years.” 

Costs likely to exceed benefits: Counterproductive timing of change;

* Comment: "Mandatory audit rotation could result in a change of 
auditors at a time that would be counterproductive for the audit firm 
and the company.” 
* Comment: "Financial/economic cost to change auditors; mandatory 
change of auditors in midst of strategic shifts/mergers or acquisitions 
could impair business; overly burdensome to smaller public companies.” 
* Comment: "Since the timing of the change would not be under the 
control of the audit committee, it could come at a time when the 
expense of a change would be inordinately high, such as during a major 
acquisition, recapitalization, or restructuring.” 

Costs likely to exceed benefits: Responsibility of the audit committee;

* Comment: "The audit committee should rigorously evaluate the work of 
the independent auditors on an on-going basis. Changes should be made 
to strengthen the independent audit team, as needed, or to change audit 
firms based on the performance of the independent auditors and the 
needs of the company --not on a mandatory rotation schedule.” 
* Comment: "Rotation for the pure purpose of regulating change does not 
substitute for watchful review by audit committees. The committee can 
decide if auditors are complacent, [are] too close to management, or 
are no longer effective.” 
* Comment: "I do not believe that mandatory actions and legislation can 
substitute for honesty, integrity, judgement, and quality work. 
Mandatory changes would take something away from responsibility that 
should be on directors and management's shoulders to bring judgement to 
bear on when change might be called for. In my experience, companies 
with good governance periodically open the audit up for bid anyway and 
evaluate who will do the best job for the company and shareholders.” 

Costs and benefits likely to be about equal: Increased cost offset by 
increased benefits;

* Comment: "Costs are likely to moderate slightly because there would 
be more turnover and more competition. Quality would benefit from a 
fresh set of eyes and suffer from lack of familiarity. Overall no 
significant change in quality.” 
* Comment: "The increase in costs would be offset by increased 
benefits. Increased costs would be moderate due to auditing firms' 
competitive nature and desire to be associated with a prestigious 
client; benefits would include unique or different perspective, 
suggestions for improvements, and additional resources within our 
industry available to us.” 
* Comment: "Costs will be competitive, and the benefit of a fresh look 
at financials would not be expensive.” 

Costs and benefits likely to be about equal: Few qualified firms;

* Comment: "In a smaller community there is probably only one large 
firm who knows the industry well. A change means going out of town 
entailing start-up costs and additional travel.” 

Benefits likely to exceed costs: Enhanced audit committee 
responsibilities;

* Comment: "A fresh look at company procedures would enhance and 
improve audit committee responsibilities.” 

Benefits likely to exceed costs: Reduced pressure;

* Comment: "Pressure to 'go along' would be significantly reduced if 
audit had a finite period.” 

Costs likely to exceed benefits: Multiple firm use mitigates costs;

* Comment: "Mandatory audit firm rotation represents the only truly 
effective way to achieve the 'fresh look' contemplated by the Sarbanes-
Oxley Act. While additional costs would be incurred, I feel that these 
can be substantially mitigated in today's environment where most 
registrants are using multiple firms to provide important non-audit 
services. In my opinion, this involvement would reduce the start-up 
time traditionally associated with auditor changes.” 

No basis to answer question: Lower audit quality;

* Comment: "While rotation of audit firms would increase probability of 
arms-length relationships, it would decrease significantly the 
understanding of the audited companies' circumstances and thus the 
quality of the audit.” 
* Comment: "Benefits are likely to reduce because of loss of continuity 
and familiarity with operations. Costs may reduce because of the 
bidding process to obtain a new client. This in turn may cause corner 
cutting with resultant lower quality audit.” 

No basis to answer question: Costs/benefits not clear;

* Comment: "Not enough sound information to know the costs, benefits, 
and risks.” 
* Comment: "I expect an increase in costs but until there is more 
experience with such rotation, the cost/benefit is difficult to 
assess.” 

Source: GAO analysis of survey data.

[End of table]

Implementing Mandatory Audit Firm Rotation: 

About 65 percent of Fortune 1000 public company audit committee chairs 
indicated that mandatory audit firm rotation, if required, should be 
applied uniformly for audits of all public companies regardless of the 
nature or size of the company and 35 percent stated mandatory audit 
firm rotation should not be applied uniformly to all audits of public 
companies. Many of the audit committee chairs provided an explanation 
for their response to question 22, as shown in table 23.

Table 23: Comments on Whether Mandatory Audit Firm Rotation Should Be 
Applied Uniformly for Audits of All Public Companies: 

Should be uniformly applied: Size is not a determining criterion;

* Comment: "If a practice/policy change is sufficiently valuable, 
important to apply to some, it should apply to all. Applying the rule 
to some rather than all would seriously undermine the premise that the 
change to the new policy is appreciably adding to the quality of 
audits.” 
* Comment: "The requirement should be uniform since size of company 
does not guarantee that problems that may arise in large companies may 
not arise in small companies and vice versa.” 
* Comment: "If there is any point to rotation, it should apply to all 
public companies, small or large. In fact, a smaller company might be 
in more need for rotation than a large company, particularly if it is 
not audited by the Big 4 CPA firms.” 
* Comment: "Size is not the issue--integrity is. Companies change size 
or profile rapidly. Whatever criteria are set, a company may move in or 
out of the requirements over time. While I do not support mandatory 
rotation, if implemented, it should be implemented for all public 
companies. Otherwise some firms will be at a cost disadvantage.” 
* Comment: "All reporting companies should be subject to the same 
requirements and rules. Large companies should not have an advantage or 
be disadvantaged. Small companies, if regulated and not able to comply 
with requirements, can elect a number of remedies to become non-
regulated and non-public.” 
* Comment: "A uniform application of mandatory rotation would result in 
a more uniform cost structure as it relates to audit fees. That is, I 
would expect a two-tier fee schedule to develop, otherwise, whereby 
those companies facing mandatory rotation requirements would pay higher 
fees than a potential competitor might pay if the competitor were not 
required to engage in mandatory rotation.” 
* Comment: "If mandatory rotation increases audit quality, it makes 
sense to do it for all companies. All companies should be treated 
equally.” 
* Comment: "If someone wants to try to bend or break the rules, the 
size or nature of the company won't be a deterrent. As much as I 
dislike a 'one size fits all' approach, in this case the requirement 
should be universal.” 
* Comment: "Why would one class of public company be considered more or 
less honest?".

* Comment: "Risks are not correlated to the size of a company. Early 
start-up/growth companies often have complex systems and relatively 
inexperienced management.” 
* Comment: "As long as there is market risk and reward, size should not 
be the determining factor.” 
* Comment: "Rotation cost is relative to size and would not put a 
greater relative burden on small companies than large.” 
* Comment: "If the concept were adopted, the requirement should be 
uniformly applied. Not to do so would create a tiered structure which 
might suggest that smaller companies were not subjected to the same 
high standards as larger companies.” 
* Comment: All security holders should be protected: "All public 
companies should be held to identical requirements. Shareholders are 
the same for big and small and should be entitled to the same 
safeguards.” 

Should be uniformly applied: All security holders should be protected;

* Comment: "If one believes that mandatory rotation would give better 
protection to public (investors, lenders, employees, etc.), then all 
parties should be protected regardless of size.” 
* Comment: "The objective of financial statement integrity is absolute. 
If a company wants the capital market benefits associated with being a 
SEC registrant, it needs to meet a common standard. It is not apparent 
why the risk of problems is not the same across all companies, and all 
securities holders should be equally protected.” 
* Comment: "The primary purpose of the new process would be to protect 
investors in public companies. The standards of protection should be 
the same for all investors; accordingly, such processes should be 
applicable to all public companies.” 

Should not be uniformly applied: Too few qualified firms;

* Comment: "There would not be enough firms to go around.” 
* Comment: "…(1) For some industries there are only a limited number of 
public accounting firms with the skill set to audit a particular firm. 
(2) The cost to smaller public companies will be high, thus affecting 
shareholder value. (3) Location of firms (physically) may increase 
unique problems due to where the skill set on the part of the service 
provider is inconvenient to timely meet the needs of the company.” 
* Comment: Public company diversity: "Some industries have very 
specialized issues with limited qualified firms, such as registered 
investment companies.” 

Should not be uniformly applied: Public company diversity;

* Comment: "Such diversity exists among public companies in terms of 
line of business, size, etc., that I believe that a uniform standard 
will work to the detriment of many companies.” 
* Comment: "The size and complexity of public companies varies greatly. 
Therefore, the disruption associated with initial implementation of 
mandatory rotation should be mitigated by 'rolling out' the initiative 
in an orderly manner.” 
* Comment: "There are too many variations in companies to provide a 
blanket policy. Small companies should be treated differently than 
large companies with multiple operations. Those operating abroad should 
be treated differently than those that are domestic only.” 

Should not be uniformly applied: Too costly for small companies;

* Comment: "The process is far too expensive for smaller firms and, 
therefore, should be applied according to some sales and/or asset 
figures.” 
* Comment: "Smaller companies could have a longer rotation cycle 
because the costs to change auditors is more significant and the risks 
to investors and capital markets is less.” 
* Comment: "The cost to smaller companies could be prohibitively 
expensive relative to their sales or earnings and would be more likely 
to result in a detriment to the interests of stockholders rather than a 
benefit. The disruption of financial management of operations would 
likely be disproportionately greater for smaller firms.” 
* Comment: "In smaller companies, costs will outweigh the benefit to 
the company and investors. Mandatory rotation for all companies should 
include such factors as size, nature of industry, and location. 
Mandatory rotation should be required for companies retaining the same 
audit firm for 15 years or more.” 
* Comment: "Some threshold of annual revenues should be set for 
imposing mandatory rotation. Often such companies have simpler business 
models and fewer business segments.” 

Should not be uniformly applied: Difficulties for large complex 
companies;

* Comment: "Mandatory accounting firm rotation will involve significant 
costs, particularly for large multinational companies … that have 
complex and geographically dispersed operations. These significant 
costs, as well as the increased risk of audit failure, do not justify 
the minimal, if any, benefit of such mandatory rotation.” 
* Comment: "Mandatory rotation poses a substantially greater difficulty 
for very large complex international companies than it does for smaller 
companies with limited product lines in very few countries.” 
* Comment: Apply to large, complex, or multinational companies: "Issues 
related to staffing audit work on large global companies will be more 
complex and difficult.” 

Should not be uniformly applied: Apply to large, complex, or 
multinational companies;

* Comment: "[Mandatory rotation] should apply initially to large, 
complex national or multinational companies.” 
* Comment: "Start with largest companies first and those who have had 
qualified opinions in the past.” 
* Comment: "If there were mandatory rotation, I believe there should be 
a size hurdle on the companies to which it applies. Two reasons: first, 
the financial and administrative burden of rehiring and retraining 
auditors would weigh more heavily on smaller companies than on larger 
ones. Also, the global impact of an Enron type problem is much more 
serious when it involves a very large company as opposed to a very 
small one. An accounting mishap or even fraud at a small company would 
impact a much smaller universe than would the same event at a large 
company.” 

Source: GAO analysis of survey data.

[End of table]

Overall Views on Requiring Mandatory Audit Firm Rotation: 

About 90 percent of Fortune 1000 public company audit committee chairs 
stated they do not support requiring mandatory rotation of public 
accounting firms registered with the PCAOB, 2 percent stated they did 
support such mandatory rotation, about 7 percent of Fortune 1000 public 
company audit committee chairs supported the concept of requiring 
mandatory audit firm rotation of registered public accounting firms but 
believed that more time was needed to evaluate the effectiveness of the 
various requirements of the Sarbanes-Oxley Act of 2002, and 1 percent 
stated other opinions. These respondents were also given the 
opportunity to provide an explanation for their opinions expressed in 
question 24, which are summarized in table 24.

Table 24: Explanation for Overall Opinion on Requiring Mandatory Audit 
Firm Rotation: 

Does not support mandatory audit firm rotation: Increased risk not 
outweighed by benefits;

* Comment: "Expensive both externally and internally and does not 
guarantee a quality audit. Actually risk in quality occurs in the early 
years of a new firm performing an audit before totally understanding 
the company being audited.” 
* Comment: "I do not believe the 'fresh look' benefits outweigh the 
loss of company-specific knowledge and knowledge of the quality and 
integrity of the key financial and control personnel.” 
* Comment: "Not enough benefit would result from the costs incurred. 
Strong and consistent accounting standards should provide the same 
effect. The limited (and shrinking) number of large accounting firms 
provides minimal benefit to rotation, as does the learning curve that 
is necessarily present for a new audit.” 
* Comment: "Effective audits of large, diverse, and worldwide 
organizations require significant knowledge and experience of the 
individual company.not just the industry. This knowledge can only be 
obtained through direct and hands-on experience. It takes 2-3 years 
working directly with the company to obtain the knowledge. [Knowledge] 
accumulated over many years that is extremely valuable to an audit firm 
responsible for a financially complex multinational corporation. 
Mandatory rotation of audit firms is contrary to this belief and, 
therefore, is not supportable. Audit effectiveness and audit 
reliability would be negative.” 
* Comment: "Using a five year model, the new auditor would require as 
much as two years to become familiar with the 'rhythm' of a new client 
as well as its risks and vulnerabilities. The years following would 
likely produce a sound auditing service. The final year would take on 
the stigma of a 'lame duck' assignment.” 
* Comment: "It has not been determined that mandatory rotation will 
result in better, more efficient independent and more valuable 
audits.” 
* Comment: "Not enough work has been done to properly evaluate the 
costs and benefits associated with mandatory rotation. We also need to 
understand potential risks with this concept.” 

Does not support mandatory audit firm rotation: Few qualified firms;

* Comment: "The Big 4 [firms] provide too little choice for companies 
that need them; I think partner rotation provides most of the 
benefits.” 

Does not support mandatory audit firm rotation: Audit committee/board 
responsibilities;

* Comment: "The audit committee and board should be able to continually 
monitor the audit process and retain the proper firm for the company.” 
* Comment: "Our audit committee takes its role very seriously in 
protecting the shareholders and other stakeholders. We feel comfortable 
with our current public accounting firm. We are in the best position to 
judge if a change is needed.” 
* Comment: "The audit committee of the firms should be exercising 
strong attentiveness and responsibility in conjunction with the 
rotation of partners and managers of a new accounting firm.” 
* Comment: "The audit committee is ultimately responsible for audit 
quality. I do not think mandatory rotations changes that. The audit 
committee needs to do its job and have complete flexibility with 
respect to hiring or firing the auditors.” 
* Comment: "Selection and retention of the independent auditors should 
be conscious decisions of the audit committee based on facts relating 
to the independent auditors and the company and should not be based on 
a predetermined rotation schedule.” 
* Comment: "The issue is not about auditor rotation but corporate 
values and auditor effectiveness. Rotation doesn't solve or address the 
issues. Boards and audit committees need to determine corporate values 
and auditor effectiveness, not some arbitrary rule.” 
* Comment: "A public company should periodically assess the suitability 
of the incumbent public accounting firm relative to all facts and 
circumstances including the consideration of the qualifications of 
other firms. Regulation of requirements substituting for judgment is 
not appropriate.” 
* Comment: "Although rotation is beneficial, the decision is one that 
should be made by the board and not by law.” 

Does not support mandatory audit firm rotation: Cost/benefit;

* Comment: "The increase in audit fees to public companies will be 
significant with benefits that would likely be achieved through other 
means (i.e., partner rotation).” 
* Comment: "The costs far outweigh the benefits. Any gain in confidence 
that might occur is offset by the increase in audit costs. You need 
honest people to oversee the audit and changing auditors will not make 
honest people out of people that are not trustworthy.” 
* Comment: "I do not believe mandatory rotation would add significantly 
to the reliability and accuracy of financial statements. I believe the 
cost would be exorbitant, and there would likely be other unintended 
consequences of such a dramatic change that have not been thought 
through.” 

Does not support mandatory audit firm rotation: Existing requirements;

* Comment: "Problems have arisen because of cozy relationships among 
persons (coupled with personal compensation considerations determined 
by the engagement relationship), not among institutions. Hence, 
rotation of appropriate personnel, coupled with a strong audit 
committee, should suffice.” 
* Comment: "Partner rotation accomplishes benefit with less cost and 
disruption.” 
* Comment: "With Sarbanes-Oxley, etc., I believe companies will apply 
good business judgment to change audit firms when appropriate--
sometimes even for public appearance sake.” 
* Comment: "Rotation is an incredible overreach which penalizes honest 
companies, those in the vast majority. The Justice Department, the SEC, 
and quality board members are the appropriate remedy.” 

Does not support mandatory audit firm rotation: Integrity;

* Comment: "It's about integrity--of audit committee members, of 
financial officers, of chief executive officers, and of audit firm that 
makes the difference. Rotation of audit firms will never replace 
integrity.” 

More time is needed to evaluate the effectiveness of the Sarbanes-Oxley 
Act: 

* Comment: "Various requirements of the Sarbanes-Oxley Act of 2002 are 
designed to enhance audit quality. More time is needed to evaluate the 
effectiveness of these requirements.” 
* Comment: "The costs and risks are significant, and I would prefer to 
see the effects of the Sarbanes-Oxley Act and other governance 
initiatives first before moving to mandatory rotation.” 

Source: GAO analysis of survey data.

[End of table]

Additional Overall Comments on Mandatory Audit Firm Rotation: 

We asked Fortune 1000 public company audit committee chairs to 
volunteer any additional comments on the issues in the survey. A number 
of the audit committee chairs mentioned that existing requirements 
would likely achieve the intended benefits of mandatory audit firm 
rotation or the requirements should be given time to determine their 
effectiveness; mandatory audit firm rotation was a bad idea, not cost-
effective, and could adversely affect audit quality; and Fortune 1000 
public company management, boards of directors, and their audit 
committee chairs should be held accountable. Table 25 provides selected 
additional comments of audit committee chairs to question 25.

Table 25: Additional Overall Comments: 

General category of comment: Existing requirements/ Sarbanes-Oxley Act 
experience;

* Comment: "If audit committees and public accounting firms follow 
already existing regulatory and other guides to professional 
performance, rotation is not necessary. In addition, I believe that 
less rather than more restrictions on the degrees of freedom of boards 
and management are desirable, despite the abuses of the last few 
years.” 
* Comment: "The impact on the auditing firm economies should be 
studied. The Sarbanes-Oxley Act has done a good job in repositioning 
the importance of the auditor in our capital markets system. It also 
empowered and clarified responsibilities of board and audit committees 
in a way that impacts auditor performance in a positive way. These 
initiatives should be allowed to work.” 
* Comment: "The restrictions placed on auditors under the Sarbanes-
Oxley Act sufficiently protect the public and all users of financial 
statements and provide for auditor independence. This, together with 
officer certifications and the renewed reliance and responsibilities of 
the audit committee and directors in general sufficiently meet the 
desired objectives. Rotating the auditor potentially creates a window 
in the early years of engagement, that could expose the public to the 
easier perpetration of fraud.” 

General category of comment: Accountability;

* Comment: "Our company has been run with the utmost scrutiny and 
respect for proper and truthful accounting procedures. Those companies 
that have reported untruthfully and illegally and unethically should be 
prosecuted to the full extent of the law. The rest of us should not be 
considered 'guilty until proven innocent'.” 
* Comment: "Well-run companies with good boards do not need anything 
being suggested here and my answers come from that perspective. For 
those pushing the limits, or worse, perhaps there is a case for 
rotation and new conditions which go with it. I think, in the 'new 
world of corporate governance,' there is a big positive change overall 
and now is not the time to 'over' regulate. Everybody who 'pushed the 
envelope' certainly should now have the message they had better get it 
'right'.” 
* Comment: "Accounting and reporting abuses are best minimized by 
investors, regulators, and other authorities holding managements, audit 
committees, and accounting firms to high professional standards and 
codes of conduct. In the absence of such standards and codes, mandatory 
rotation of accounting firms will not help.” 
* Comment: "Most of the Sarbanes-Oxley Act requirements solidify the 
assured integrity of the entire financial reporting process. The 
proposed rotation is a reactionary action that is unfounded and without 
logic. Any further attention should be directed toward improving our 
criminal justice system to increase probability of successfully 
prosecuting wrongdoers!".

General category of comment: Cost effectiveness/increased risk;

* Comment: "The costs in effectiveness of audits cannot be over 
emphasized, in addition to the monetary costs. Even an experienced and 
effective audit team will likely take one to two years to become fully 
'up to speed' in even a moderately complex large corporation. The 
ability to know what to look for, where to look, and whom to talk to 
definitely improves with time.” 
* Comment: "Mandatory rotation will impose a higher burden (cost) on 
shareholders and will not result in a better work product. A focus on 
better auditing standards and training (including ethics) is of greater 
importance.” 
* Comment: "It seems difficult to justify the costs, disruptions, and 
learning-time consequences of mandatory rotation for all corporations. 
But it does seem that it would be beneficial for some. It seems worth 
serious consideration about criteria and approaches that might strike a 
better balance than blanket rotation.” 
* Comment: "One negative of changing auditors is that the new firm, 
usually in an effort to impress the new client, has become overly 
aggressive in some of its advise. This is a risk which must be guarded 
against.” 
* Comment: "Companies with operations in smaller cities would probably 
find considerable difficulties in switching audit firms as would 
companies with operations in non-U.S. parts of the world. Applying this 
approach to foreign firms with operations here would provide another 
unneeded point of argument with foreign countries.” 

Source: GAO analysis of survey data.

[End of table]

[End of section]

Appendix VII: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Jeanette M. Franzel, (202) 512-9471 William E. Boutboul, (202) 512-
6924:

Acknowledgments:

In addition to those individuals named above, Cheryl E. Clark, Robert 
W. Gramling, Michael C. Hrapsky, Charles E. Norfleet, and John J. 
Reilly, Jr. made key contributions to this report.

(194380):

FOOTNOTES

[1] U.S. General Accounting Office, Public Accounting Firms: Required 
Study on the Potential Effects of Mandatory Audit Firm Rotation, GAO-
04-216 (Washington, D.C.: Nov. 21, 2003).

[2] Mandatory rotation is defined in the Sarbanes-Oxley Act as the 
imposition of a limit on the period of years in which a particular 
public accounting firm registered with the Public Company Accounting 
Oversight Board may be the auditor of record for a particular public 
company. For purposes of this report, the auditor of record is the 
public accounting firm issuing an audit opinion of the public company's 
financial statements.

[3] Pub. L. No. 107-204, 116 Stat. 745.

[4] GAO-04-216.

[5] Factors listed in question 9 include: appropriate staff education, 
training, and experience; appropriate knowledge of Generally Accepted 
Accounting Principles; appropriate knowledge of Generally Accepted 
Auditing Standards; appropriate audit team staffing level; appropriate 
access to the firm's technical resources (whether locally or 
nationally); appropriate firm experience within the public company's 
industry; appropriate risk assessment process for the client acceptance 
process; and appropriate knowledge of the client's operations, systems, 
and financial reporting practices.

[6] Question 15 provides the following additional or enhanced audit 
procedures: additional procedures in areas material to the financial 
statements over what would likely be applied if the firm was more 
client experienced; additional verification of client-supplied 
statements and data likely to be material to the financial statements; 
enhanced access to key members of the previous firm's audit engagement 
team; and enhanced access to audit documentation of the previous firm's 
audit engagement team.

[7] Question 15 provides the following additional or enhanced audit 
procedures: additional procedures in areas material to the financial 
statements over what would likely be applied if the firm was more 
client experienced; additional verification of client-supplied 
statements and data likely to be material to the financial statements; 
enhanced access to key members of the previous firm's audit engagement 
team; and enhanced access to audit documentation of the previous firm's 
audit engagement team.

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