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Public company oversight group studying whether move would lower failuresSANTA ROSA -- The Public Company Accounting Oversight Board, the entity that oversees firms that audit public companies, is considering term limits on relationships between auditors and public companies.

The PCAOB was formed out of Sarbanes Oxley. Because of SOX, it became mandatory that any accounting firm that audited public companies would be required to change the partner who performed the audits regularly.

Now, and not for the first time, the board is considering switching the firms themselves every so often.

"There was a fear that if a given CPA firm gets too close to a company it will impair their objectivity," said Carol O'Hara, shareholder in charge of the North Bay practice of Burr Pilger Mayer. "But so far, there has not been a requirement on public companies to force them to rotate their auditors."

It was in 2002, when Congress first considered requiring firm term limits during the debates that ultimately led to the Sarbanes-Oxley Act.

At that time, it was agreed that the idea required more study.

[caption id="attachment_35717" align="alignright" width="220" caption="James Doty, Public Companies Accounting Oversight Board"][/caption]

"The PCAOB has now conducted annual inspections of the largest audit firms for eight years," said James Doty, chairman of the PCAOB. "Our inspectors have reviewed more than 2,800 engagements of such firms and discovered and analyzed hundreds of cases involving what they determined to be audit failures."

He said more than 1,500 inspections of smaller domestic firms and of non-U.S. firms have also been done.

"These include multiple inspections of hundreds of those firms. And our inspectors have identified hundreds more cases involving what they determined to be audit failures," he said.

The question of switching firms is not as simple as just who does the audit, said Ms. O'Hara. There is a question of familiarity of the entity being audited and its practices.

"When you have one firm serving an institution for a number of years, you have a great idea where the risk area is," she said. "There are many public companies, thousands, and most have good auditors. Don't change a rule based on the bad ones, have stricter enforcement for the firms that come up with negative audits from the PCAOB. Most CPAs take their relationship seriously."

Mr. Doty said it is because of the audits the board has done that have shown poor judgment on the auditor's side that he believes it is up to the PCAOB to take up the debate about firm tenure and "examine it with rigorous analysis and the weight of evidence in support and against."

"I don't have a predetermined idea as to whether the PCAOB ultimately should adopt term limits. My only predilection is that the PCAOB deepen the analysis of how we can better insulate auditors from client pressure and shift their mindset to protecting the investing public," he said.

"As such," he said, "the board plans to issue another concept release to explore whether there are other approaches we could take that could more systematically insulate auditors from the forces that pull them away from the necessary mindset.

"We expect to issue this concept release around the same time that we issue the concept release on the auditor's reporting model, in order that they can be considered together in a holistic manner."

Ms. O'Hara said she thinks the biggest threat is that the quality of audits will suffer.

"After Enron, a lot of attention went to audits and people wanted a lot of time spent on audits," she said. "Now people are trying to cut costs and this should not become a commodity shopping. It is quality."

Earlier this year, European Union Internal Market Commissioner Michel Barnier said he plans to introduce draft legislation in November to so the concentration of auditing work is not solely among the Big Four firms.

"This is an ambitious agenda," said Mr. Doty. "Rethinking the structural foundation for auditing is not only in the best interest of investors, but in the best interest of auditors and preparers."