One possible answer to the coziness that creeps up between these two parties is mandatory rotation. The PCAOB has suggested (in yet another concept release) that accounting firms should switch off clients every few years. (Some companies have kept the same accounting firm for more than 50 years.) But that idea was rejected by Sarbox lawmakers nearly a decade ago. Instead, the 2002 law requires the lead audit partner to move off an account after 5 consecutive years.

The PCAOB will be challenged over the details of the proposed changes. One likely objection from companies is that getting new auditors up to speed on their business is too time-consuming. (For those who want to speak up, the comment period ends in December.) "It's a huge hurdle for management as well as auditors," says Gail Hanson, CFO of Aurora Health Care. Moreover, for larger companies that have tended to limit their pool of would-be auditors to the Big Four, mandatory rotation won't give them many options, particularly since many companies give their audit work to one Big Four firm and related consulting work to another.

Commentators will also want to know how the regulator will determine what types of information auditors should scrutinize (forward-looking statements can't exactly be audited, for example) and how much additional verbiage should be devoted to such matters in financial reports, particularly for information a company has decided to withhold.

"If auditors think they see something that is a problem that the board and management doesn't, what do you do?" says Xerox's Kabureck. "Auditors don't know more about the client than the client knows itself."

One idea floated by the PCAOB is to give auditors their own discussion-and-analysis section in financial reports. Auditors would use the space to express their thoughts on management's judgments and estimates, accounting policies and practices, and — most controversial — management's "close calls," or debatable estimates.

It's important to note that, as of now, all of these proposals are in flux. The auditor-rotation idea, for instance, "is a long shot," predicts Beresford, who as a former chairman of the Financial Accounting Standards Board has seen his share of proposals amount to nothing. Still, the level of activity at the PCAOB suggests that some changes are imminent (see chart, above).

While CFOs certainly would not welcome higher audit bills, they might like what those higher fees will, in theory, buy. If more auditor-verified information improves the confidence of investors, so much the better for the capital markets, says Hanson of Aurora Health Care. "Companies pay a lot to get an audit," she says. "The hope is that by having those audits go beyond a pass/fail grade, the audit will communicate something to investors that will warrant the higher fees."

Sarah Johnson is senior editor for risk & compliance at CFO.

Mum's the Word

Currently, auditors' reports do not mention the word fraud, nor do they discuss the auditors' responsibility to detect it. That's despite the fact that accounting firms are expected, under the Public Company Accounting Oversight Board's rules, to decide whether a company's financial statements are free of material misstatement, "whether [it be] caused by error or fraud." The PCAOB now wants auditors to spell out this responsibility in their audit opinions.

But even if they do so, that may not provide much confidence that fraud has been vanquished. Because auditors can't look at every transaction a company makes, they focus on risky areas. Clever fraudsters know that. "It's very difficult for auditors to uncover fraud if the people committing the fraud really want to hide it," says Luis Ramos, chief executive officer of The Network, a governance, risk, and compliance consultancy.

Even if audit reports explicitly describe how the external auditor attempts to ferret out fraud, the bulk of responsibility is likely to rest with internal staff and policies. External audits are "one piece of the puzzle to fraud prevention," says Erik Skramstad, a partner and U.S. forensic services practice leader at PricewaterhouseCoopers. "[But] it's ultimately the company's and the board of directors's responsibility to ensure corporate integrity." — S.J.

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