Last year, in a post about Honeywell International (NYSE: HON) switching auditors after a 45-year relationship with PwC, we looked at a sample of auditor tenure across the S&P 500. The main takeaway: long auditor tenure is not unusual in the U.S., and large companies rarely switch auditor.
In this post, we will look at auditor changes and auditor tenure among the Russell 3000. More than half of the companies in the Russell 3000 have auditor relationships stretching back more than 10 years, with Procter & Gamble (NYSE: PG) topping the charts at 125 years with Deloitte.
Auditor tenure and rotation has been a hot topic for discussion. In 2011, the PCAOB issued a concept release seeking feedback on mandatory audit firm rotation, which they presented as an approach to enhance “auditor independence, objectivity and professional skepticism.” Implementing this approach would have surely caused an increase in auditor changes and a sharp decrease in auditor tenure. A slew of comment letters against the approach, and a bill that was passed by the House of Representatives in 2013, led the PCAOB to abandon its pursuit of mandatory audit rotation in early 2014.
Other countries have considered mandatory audit firm rotation as a viable approach, and a few have even implemented the practice. The EU, of course, has famously mandated auditor rotation across all its member states. (We discussed EU Regulation 537/2014 in another post last year.) In India, The Companies Act of 2013 also requires auditor rotation after ten years.
A recent study argued that “rotation actually inhibits skepticism rather than encourages it as current policies maintain.” It will be interesting to look at the data and see the impact that these policies have in the coming years.
Turning back to the United States, around 80 Russell 3000 companies have switched auditors through the first half of 2015. This is on track to match the historical rate of about 4%-5% auditor turnover among the Russell 3000.
Roughly half of the companies in the Russell 3000 that made auditor changes this year have auditor tenures lasting over 10 years, including MSA Safety, who ended a 56 year relationship with PwC and engaged Ernst & Young as its independent public accounting firm. There were also several companies who changed auditors after only one year.
Here is a sample of auditor changes and the outgoing auditor’s tenure from Russell 3000 companies made during the first half of 2015.