Long Association of Senior Personnel (Including Partner Rotation) with an Audit Client

  • Long Association of Senior Personnel (Including Partner Rotation) with an Audit Client

    Project Status

    This is an active project

    Staff

    Kaushal Gandhi

    Task Force

    Marisa Orbea (Chair)

    Brian Caswell

    Gary Hannaford

    Chishala Kateka

    Andrew Pinkney

    Objective(s) of project

    This project will review the long association provisions in Section 290 of the Code to ensure that they continue to provide robust and appropriate safeguards against the familiarity and self-interest threats arising from long association with an audit client.

     

    Background

    Familiarity and self-interest threats are created by using the same senior personnel on an audit engagement over a long period of time. Amongst the safeguards to eliminate these threats or reduce them to an acceptable level is the rotation of senior personnel off the audit. Paragraphs 290.151-155 provide specific rotation requirements for audit clients that are public interest entities (PIEs), including a seven year on / two year off rotation requirement for key audit partners. In the IESBA's view, the rotation of key audit partners balances the need for a fresh look on the audit with the need for continuity of knowledge of the client's business and the risks inherent in that business in order to maintain audit quality.

    There have been initiatives undertaken in many jurisdictions to address the question of whether there are ways in which to promote greater professional skepticism and auditor independence, and therefore enhance audit quality. In addition, feedback from certain of the IESBA’s constituents has suggested that the two-year time-out period is too short when placed together with the permissible seven years of service, because it would potentially allow a key audit partner to serve on the audit engagement for a PIE for 14 out of 16 consecutive years.

    In light of this feedback, and the manner in which rotation provisions have developed across a range of jurisdictions, the IESBA agreed that it would be appropriate to reconsider the long association provisions in the Code, particularly the rotation requirements, and determine whether the provisions continue to provide robust and appropriate safeguards against familiarity and self-interest threats arising from the long association of senior personnel with an audit client.

    Task Force progress / Board discussions to date

    At its December 2012 meeting the IESBA  approved the project proposal to review the long association provisions in Section 290 of the Code to ensure that they continue to provide robust and appropriate safeguards against the familiarity and self-interest threats arising from long association with an audit client. 

    At its March 2013 meeting, the received an update on the project. Amongst other matters, the IESBA discussed the approach to research into (a) the partner rotation provisions in major jurisdictions, and (b) the views of stakeholders on the threats associated with long association. 

    The IESBA CAG considered the project proposal at its April 2013 meeting.

    At its June 2013 meeting the IESBA received an update on the project to review the long association provisions in Section 290 of the Code to ensure that they continue to provide robust and appropriate safeguards against the familiarity and self-interest threats arising from long association with an audit client.

    At its September 2013 meeitng the IESBA considered preliminary matters arising from the research undertaken in the project to review the long association provisions in Section 290 of the Code to ensure that they continue to provide robust and appropriate safeguards against the familiarity and self-interest threats arising from long association with an audit client. Amongst other matters, the IESBA discussed: potential structural changes affecting the profession; the involvement of those charged with governance in rotation decisions; who on the engagement team should be subject to rotation with respect to audits of public interest entities; how long the "time on" period should be; the duration of the "cooling off" period; permissible activities during the "cooling off" period; exceptions to rotation requirements; and the need for rotation requirements for audits of entities that are not public interest entities.

    At its December 2013 meeting the IESBA considered issues and Task Force proposals with respect to possible enhancements to the long association provisions in Section 290, Independence – Audit and Review Engagements, to ensure that those provisions continue to provide robust and appropriate safeguards against the familiarity and self-interest threats arising from long association with an audit client. Among other matters, the IESBA discussed proposed improvements to the overall framework of principles addressing long association; communication with those charged with governance; consideration of time served prior to becoming a key audit partner in the rotation decision; the duration of the cooling-off period; and permissible activities during that period.

    At its April 2014 meeting the IESBA further considered issues with respect to proposed enhancements to the long association provisions in Section 290. Among other matters, the IESBA discussed the duration of the cooling-off period for key audit partners with respect to audits of PIEs; if the Lead Audit Engagement Partner (LAEP) were to be subject to a longer cooling-off period, whether the requirement should apply to LAEPs on the audits of all PIEs or only LAEPs on the audits of listed entities; and permissible activities during the cooling-off period.

    The IESBA agreed to further consider the issue of permissible activities during the cooling-off period in a teleconference scheduled for April 29, 2014. 

    Next Steps

    The IESBA will consider a revised draft of the proposed enhancements to the Code with a view to approving an exposure draft at its July 2014 meeting.

  •  
 

Important Note: Please read our website Terms of Use.

ALL RIGHTS ARE RESERVED. You may not reproduce, store or transmit in any form or by any means, electronic or otherwise, including photocopying, recording, or storage in any type of reference or information retrieval system, nor may you translate, modify or create derivative works or adaptations based on the text of any file, or any part thereof, without the prior written permission of the International Federation of Accountants (IFAC). Please direct permission requests to permissions@ifac.org. See also Permissions Information.