More on auditor rotation

Spfahey writes:

Big4.com Exclusive: European Commission Proposal will Hurt Audit Quality, says PwC 

http://www.big4.com/pricewaterhousecoopers/big4-com-exclusive-european-commission-proposal-will-hurt-audit-quality-says-pwc

In an effort to reduce any possible collusion or conflicts of interest among executives and their auditors, the European commission is looking to implement “firm rotation” guidelines where companies will have to rotate away from a firm and have a cooling off period.

I know my company is worried about this policy entering the US with our audits because we are not a Big4 firm and each client is very important to our overall success. I am conflicted if we should implement a similar system here. Ideally it is beneficial for external users of the financial statements to have another set of eyes on the financial statements. It seems like a way to help pick up fraud or misstatements that one firm may have missed for several years. 
On the other hand, if a firm is happy with their auditors, should we really force them to fire them after a set period of time?
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About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

7 comments

  1. I do not think auditor rotation will help increase the quality of audits. It may help by increasing auditor independence, but not audit quality. There have to be other measures that can implemented to increase competition in the audit industry and increase audit quality. One measure to increase quality is maybe have a more in depth peer reviews on audit procedures. Another measure could be stricter rules on what audit findings need to be put in the auditor's report. Anyway I look at it, I don't think mandatory auditor rotation will increase audit quality or competition in the industry. For large clients, small and midsize firms just don't have to manpower to conduct those audits. If auditor rotation was implemented, clients would just keep recycling through the same 2 or 3 auditors that are big enough to conduct the audit. Since the auditors would know that they will eventually get that client back, they would have no motivation to spend the money to increase their audit quality. If there was a chance they could lose the client permanently, then firms would have to motivation to increase the quality of their audits. I just don't think auditor rotation will increase the quality of audits due to the lack of motivation to do so.

  2. I definitely agree that audit rotation should not be a big issue. If you believe that your employees work can suffer or that they may act in an unethical manner because they have had too much experience with a particular client, than you haven't done a good job of hiring. The audit process is a lot smoother when you are working with the same client over and over and I believe it makes you more likely to catch errors because of your familiarity.

  3. This was a frequent topic of conversation during my interviews with different CPA firms last fall. I would say that 9 out 10 managers and partners think that this mandatory audit rotation is not going to happen, and it’s just talk. Most of them said that there is a big learning curve when it comes to auditing certain companies and industries, and by forcing clients to switch their auditors – which in many cases have been the client’s auditor for years- it would actually affect the quality of the audit engagement, thus doing the opposite of what was intended in the first place. A lot of them also said that there is no proof that objectivity is lost just because a client uses the same auditor for years, and a lot of them gave me a doctor or a similar analogy to show how ridiculous this proposition is (Does a family doctor lose any objectivity just because he has been treating since you were a kid?); and finally, it would not be cost effective for the main parties involved: the auditors and the client. Therefore, based on what I read and heard from people with decades of experience in public accounting, I don’t think mandatory audit rotation will happen.

  4. I do not believe that mandatory audit firm rotation is necessary, nor will it increase audit quality. I agree with Blackswan that it would have the opposite effect because it seems that the forced rotation will decrease audit quality because of the learning curve when you take on a new client. This proposal will not open opportunities for increased competition either because companies will just rotate the same big firms versus giving smaller audit firms a chance. The only positive to this idea is the possibility that it will lessen the opportunity for conflicts of interest amongst auditors and their clients. With mandatory rotation, auditors may not feel the need to appease their clients and turn a blind eye because they are so worried to lose them as a client .

  5. I am pretty much in agreement with everyone here. I don't think that rotation will be something that we will be able to link to improvements in an audit. I think it will also waste a significant amount of time for larger clients as a new CPA firm will have to learn how the processes work at each company. I think there are other methods we can apply that can help give assurance to the readers of the financial statements. I think a peer review process for the largest US companies would work very well.Instead of switching to a new CPA firm, have another firm provide a less substantive review. The review process could happen every few years just to make sure everything looks ok. I am not sure how that would be paid for though.

  6. I don't agree with this audit rotation requirement for auditing firms. Many of these companies have worked years to establish their relationships with their clients, and it isn’t fair to take that away. I feel like it also crosses a line that shouldn't be crossed, especially if the client is paying and has chosen that company as there auditor for a reason. This will just make companies rotate between the top auditing firms and make the audit process more complicated than necessary.

  7. In my opinion, audit rotation does allow for varying methods of testing together with varying approaches to factoring in unpredictability when performing audits. A benefit to third party users of the financial statements. Also, the audit rotation requirement should be viewed as a Control similar to that of mandatory vacation for persons performing custodial functions for company assets such as cash, inventory, etc. If audit firms know that another firm will be taking over the audit engagement and reviewing their work, they will be mindful to remain ethical and prudent in their dealings.The client audit relationship should not be build around familiarity, but independence.

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