United States Government Accountability Office

Washington, DC 20548

December 14, 2011 

Office of the Secretary 

Public Company Accounting Oversight Board 

1666 K Street, N.W. 

Washington, D.C. 20006-2803 

Subject: PCAOB Rulemaking Docket Matter 037: PCAOB Release No. 2011-006: 

Concept Release on Auditor Independence and Audit Firm Rotation

This letter provides the U.S. Government Accountability Office’s (GAO) comments on 

the Public Company Accounting Oversight Board's (PCAOB) Concept Release to 

solicit public comment on ways that auditor independence, objectivity and 

professional skepticism could be enhanced. 

We support the general premise of enhancing auditor objectivity and skepticism, and 

commend the PCAOB for seeking ways to strengthen auditor independence and 

improve audit quality. However, we are not convinced that the audit quality issues 

identified by the PCAOB in its Concept Release are caused by a lack of auditor 

independence or professional objectivity. The PCAOB’s Concept Release identifies 

serious audit deficiencies that it has found during its inspections, but does not provide 

compelling evidence that the root cause of the audit quality issues is related to a break 

down in auditor independence. In fact, the PCAOB acknowledges in its Concept 

Release that the root causes of audit deficiencies are complex, vary in nature, and that 

audit deficiencies may not have necessarily resulted from a lack of objectivity or 

professional skepticism.

Even if the PCAOB could clearly establish that a lack of independence or objectivity is 

causing audit quality problems, it is unclear that such a problem would be prevented 

or mitigated by a mandatory audit firm rotation requirement. Finally, if based on the 
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audit deficiency data and inspection results, the PCAOB is able to establish the above 

links, then additional analysis would be needed to evaluate the impact and the costs 

and benefits of a mandatory audit firm rotation policy, and whether other alternatives 

exist that would address the issues.

GAO’s study of mandatory firm rotation raised concerns that a requirement for 

mandatory audit firm rotation may not be the most efficient or effective way to 

enhance auditor independence and audit quality, and could actually place a strain on 

audit quality in the initial years of an auditor’s tenure due to the new auditor’s lack of 

specific knowledge of the client’s operations, systems, and controls. In that report, we 

also concluded that a mandatory firm rotation requirement would likely increase audit 

fees and client costs and may decrease the number of audit firms willing and able to 

perform audit services given the Sarbanes-Oxley Act auditor independence 

requirements concerning prohibited non-audit services. 

As a result of the additional information needed before serious consideration could be 

given to a requirement for mandatory audit firm rotation, we believe it is critical that 

the PCAOB further study audit quality issues to determine the root causes of the 

deficiencies, and propose a range of solutions that specifically address identified

causes of audit deficiencies, along with additional analysis of costs and benefits of 

various alternative solutions. 

A further study of audit quality issues by the PCAOB may point to the need to 

strengthen existing standards, such as those relating to evaluating management’s 

representations, evaluating significant management judgments and estimates, and 

preparing audit documentation, as a means to improve audit quality. For example, as 

part of the Board’s planned review of the fair value standard, the Board may need to 

clarify audit requirements related to auditor’s consideration of alternative assumptions 

or outcomes, whether management has appropriately considered them, and whether it 

is reasonable to exclude them. Further, the Board should consider clarifying 

documentation requirements and guidance related to the auditor’s considerations and 
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conclusions in audit areas that require more auditor judgment. More extensive 

documentation requirements will drive improvements in the sufficiency of evidence 

obtained and facilitate more effective supervisory review of the auditor’s work and 

conclusions. 

The PCAOB should also consider sharing data on audit deficiencies it has identified 

through its inspection process, in a format that is not identifiable to a specific audit 

firm, so that others can also study the causes of those audit deficiencies. Once the root 

cause of poor audit quality is determined, we would be in a better position to 

comment on whether mandatory audit firm rotation is a potential solution or whether 

there is a more viable solution to addressing audit quality issues. 

We thank you for considering our comments on this important issue as the PCAOB 

considers ways to enhance auditor independence, objectivity and professional 

skepticism. 

Sincerely yours, 

James R. Dalkin 

Director 

Financial Management and Assurance