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Former TIAA-CREF head John Biggs supports auditor rotation

February 9, 2012

John Biggs, a key figure in a 2002 Congressional debate over term limits for public company auditors has thrown his support behind the idea again.

Breathing some life into an idea auditors are trying feverishly to snuff out, retired TIAA-CREF chairman John Biggs has told auditor regulators that public companies should be required to change auditors after 10 years.

His remarks, in a recently posted letter to the Public Company Accounting Oversight Board, are among the few comments the board has received advocating audit firm rotation, a controversial idea vehemently opposed by the accounting and business groups.

Since floating the idea in August, the PCAOB has received 620 letters, about 20 times the normal amount, with most warning of unintended consequences if rotation is passed.

Chief among the critics are auditors, who warned rotation would raise audit costs and hurt the quality of audits as new audit firms got up to speed. Board audit committees also complained about rotation, saying it would usurp their choice over auditors, a responsibility given them by the Sarbanes-Oxley Act. And financial officers at some large companies said they might have trouble finding a new auditor at all because of the shortage of firms with necessary industry expertise.

Biggs sees the issue differently.

A claim by some opponents that first-year audit costs would rise by 20 percent “seems to me to have no real basis,” Biggs wrote. While chairman at TIAA-CREF, one of the largest retirement plan providers in the country, his company switched auditors twice and neither time did fees rise by anything close to 20 percent, he said.

Biggs’ views are notable because he was seen as a favorite to head the PCAOB after its creation by the Sarbanes-Oxley Act. Biggs supporters said at the time he was passed over after accounting firms lobbied against him, partly because of his stance in favor of rotation and other reforms.

Biggs had testified in favor of rotation during hearings on audit reforms that became part of the 2002 Sarbanes Oxley Act.┬áRotation was left out of Sarbanes-Oxley Act in lieu of other measures to shore up auditors’ independence, such as making board audit committees rather than company managers responsible for hiring audit firms.

In Biggs’ view, the recent financial crisis shows those reforms may not be doing the job. He wrote:

“The financial collapse of 2008-2009 certainly suggests that public confidence still needs to be restored in the financial management of our banking institutions. In particular, investors have to wonder about the independence and professional skepticism of the auditing profession.”

While many have criticized sloppy underwriting by banks and securities firms and rating agencies’ lack of skepticism, they were not alone, Biggs wrote.

“Shouldn’t there have been some skeptical auditors, of say, triple-A valuations of CDO’s (collateralized debt obligations) based on sub-prime mortgages?”

Many audit committees have become more diligent about assuring the independence of their auditors since Sarbanes-Oxley was passed, Biggs said.

If rotation is not found acceptable, regulators should at least require that companies disclose how long they have had the same auditor in annual proxy statements sent to investors, he said.

“I’m baffled why that has never been suggested,” Biggs added in an interview. “Wouldn’t the chair of the audit committee be uncomfortable having to sign off on a proxy statement that said we’ve had them for 50 years or 100 years?”

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