Focus on the quality of the audit not mandatory firm rotation, say global directors.
- Date: 16 May 2013
- Type: Media Release
The issue of when to change audit firms should be a matter for the individual company, its directors, audit committee and shareholders and should not be subject to externally imposed regulations requiring mandatory rotation of audit firms, according to an international network of company directors.
In a perspectives paper released today by the Global Network of Director Institutes (GNDI) on the issue of Mandatory Audit Firm Rotation (MAFR), Chair of GNDI and CEO of the Australian Institute of Company Directors, John Colvin said that while it is important to enhance auditor independence, objectivity and professional scepticism, imposing a regulated time limit on tenure is not the best way to achieve these goals.
“Mandatory Audit Firm Rotation is a concept that is often debated by governments in formulating a response to media, regulators and political pressure as a result of financial crisis,” said John Colvin.
“However, there are significant challenges with MAFR, including the loss of audit knowledge, increase in time and expense, loss of flexibility, loss of industry specific knowledge, increase in global complexity and reduced accountability.”
“Further, the timing, costs and benefits associated with such a change is likely to vary between industries and geographies, and will also depend on the specific circumstances of individual companies.”
“Given this, we believe that it is the board of a company or its audit committee that is best placed, with the experience and intimate knowledge of the company’s business, to determine or recommend to shareholders when the interests of the company would be better served by a change in audit firm,” he said.
“However, audit partner rotation rules and expected personnel changes in both the company and the audit firm can mitigate the negative impacts of long tenure, without the unintended consequences of MAFR.”
GNDI’s view is based on the following concerns with MAFR:
- MAFR would result in losing the cumulative audit knowledge gained over years at arbitrary intervals. However, it should be noted that when the same audit approach is followed continuously, there may be an increased risk that errors remain undetected.
- MAFR would increase the amount of time management spends during a transition on educating the new auditors on the company’s operations, systems, business practices and financial reporting processes. Shareholders indirectly bear those costs.
- A regulatory time frame that sets out when MAFR should occur does not provide the flexibility to enable companies to defer an MAFR when it is at an inopportune time and may not be in the best interests of the company’s shareholders.
- MAFR may reduce the ability of audit firms to accumulate sector/ industry expertise and impact on the ability of audit firms in attracting and retaining talent in specialised industries or remote locations.
- MAFR may increase the complexity of audit compliance within global companies, as there may be differing audit rotation requirements in various jurisdictions.
- MAFR would reduce the accountability and responsibility of the audit committee for periodically assessing the performance of the auditor and, based on that assessment, for determining if, and when, to require a rotation or tendering of the audit.
- MAFR would also eliminate the right and ability of shareholders to determine who their auditors should be and when it is necessary to change their auditors.
- The imposition of mandatory time limits that restrict a company’s choice of auditor is an artificial impediment to the free deliberation of the board or its audit committee.
“In this perspectives paper, directors are arguing strongly that regulators should focus on improving the quality of the audit, by reinforcing the board or its audit committee’s responsibility for the oversight of the audit, audit firm and quality and, where necessary, enhancing the expertise of the audit committee and potentially expanding communications between the audit firm and the audit committee,” said Mr Colvin.
“Further, work may be required to ensure that users of financial statements increase their understanding of the role and nature of an audit, thus narrowing the audit expectation gap,” he said.
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Read the Mandatory Audit Firm Rotation paper.