auditor rotation

Litigation cases that could possibly take down a Big 4 firm

Image courtesy of Adobe Stock.
Image courtesy of Adobe Stock.

If a judgment at trial were big enough, it could mean the end of a large firm. Writing on August 13th at Market Watch, Francine McKenna explains PwC faces 3 major trials that threaten its business.

That threaten its business phrase in the headline actually means could take down the entire firm.

There are three major cases, each with a serious enough impact, that an adverse ruling in any one could take out the firm. One is in court now, another expected next February, with the final one in court within a year.

Work with me as I try to process through the cases. Here is the thumbnail version.

Two lawsuits over one client

Taylor Bean & Whitaker Mortgage Corp allegedly generated massive amounts of fraudulent loans, a large portion of which were sold to Colonial Bancgroup.  Both companies failed during the financial crisis.

PwC audited Colonial Bank and allegedly did not discover the bad loans that their client, Colonial Bank, bought from PwC’s non-client Taylor Bean.

2 questions for those advocating mandatory auditor rotation. My research on the issue

The post “Re-Structuring the Audit Profession: The UK’s Competition Commission Hunts the Woozle” by Jim Peterson discusses weaknesses in research behind the Commission’s conclusion that mandatory auditor rotation is necessary. He says:

Diligent digging through the Commission’s augean piles of paperwork makes clear that its ostensibly supportive “research” ranges from the shallow and irrelevant to a results-driven reflection of its confirmation bias.

Wow. Let’s unpack that:

If auditors won’t audit, mandatory rotation won’t help. Part 2

I started a discussion here about whether the halo effect on auditors is so strong that mandatory auditor rotation is needed to get good audits.

Let’s take two side trips. First, to look at one other way we can make bad decisions.  Second, I’ll ponder how the halo effect could come into play in other areas.

Another danger – making decisions when hungry

Other than being almost impossible to implement, audit firm rotation is a great idea

Jim Peterson points out several rather severe problems with mandatory firm rotation.

Mandatory Auditor Rotation – The PCAOB Sails Off the Charts into the waters where

the legend written on the old flat-earth maps – that beyond the horizons of ignorance, (says) “there be dragons.”

PCAOB will meet to discuss a concept statement about asking for comments on maybe requiring mandatory firm rotation.

Still quite iffy. PCAOB is thinking about maybe asking for reaction to the idea.  A long way from implementation, but it is the next step on that path.

John Hufnagle has a few more words on the topic at Audit Firm Rotation – The Train Is Starting Its Engine. Gotta’ love the title of his post!

I think it is a bad idea. …

Mandatory auditor rotation for large companies – impractical, ineffective, costly, and increases concentration in Big 4 – other than it’s a great idea

Reservations are surfacing about the idea of mandatory auditor rotation, particularly for the really big companies. That is an idea being pushed by the PCAOB. See previous post.

Jim Peterson, at Re:Balance, has a long list of concerns with the idea, as discussed in his post Mandatory Auditor Rotation – – Further Thoughts on PCAOB Chairman Doty’s Bad Idea.

My summary of a few of his ideas:

PCAOB hints at mandatory audit firm rotation – Are they dropping a hint to the audit profession?

The chairman of the PCAOB, James Doty, gave a speech this week that got some attention. He pointed out that the PCAOB had found “hundreds” of audit failures amongst the 2,800 reviews the agency has conducted. Not a particularly encouraging passing rate for the big firms that work on publicly traded clients (or the mighty bold smaller ones that want to run in that world).

He suggested that auditors aren’t taking independence quite seriously enough. Mandatory firm rotation is one of several ideas he is mulling in public.

What kind of problem is the PCAOB seeing that generates these ideas?