The benefits of mandatory auditor rotation

THE RECENT DRUMROLL OF CORPORATE scandals has cast the spotlight on a glaring defect in traditional accounting practice: audit firms that get too cozy with the companies whose books they are supposed to review accurately and honestly. Public outrage over such scandals as Enron and WorldCom prompted

last year's passage of the SarbanesOxley Act, which includes a provision requiring audit firms to change every five years the person who is the lead audit partner or coordinating partner for each public company client. But the new law stops short of requiring the periodic changing of audit firms for each public company.

There is heated debate over the merits and shortcomings of such a practice, known as auditor rotation. In our opinion, although several valid arguments are marshaled against mandatory auditor rotation, they are far outnumbered by the potential benefits.

Perhaps the greatest of those benefits is the practice's usefulness in restoring badly shaken investor confidence in our financial accounting system. Indeed, the public's overall lack of faith in the corporate governance system, and in financial reporting in particular, must be overcome before individuals will truly become comfortable with long-term investing. A study of companies in Italy (where periodic audit firm rotation is mandatory) by Milan's Bocconi University found that the policy did seem to have a positive effect on improving public confidence in the corporate sector.