Mandatory Audit Firm Rotation—Are We Going ‘Round in Circles?

Fayez Choudhury | October 18, 2016 | 7

Last week, the South African Independent Regulatory Board for Auditors (IRBA) announced a timeline for new mandatory audit firm rotation requirements—a policy requiring companies to switch auditors periodically. In the same week, the Monetary Authority of Singapore (MAS) announced its intention to discontinue the very same policy. IFAC recently convened roundtables of international business leaders and regulatory agencies on smart regulation, and this contrast is a prime example of two principles the participants urged policymakers and regulators to observe: start with clear objectives, and assemble a clear evidence base.  

IRBA has proposed the measures to “strengthen auditor independence and enhance investor protection,” also suggesting “we will only see true empowerment when opportunities are provided equally among everyone.” MAS found “research studies conducted thus far internationally did not provide conclusive evidence linking mandatory firm rotation with an improvement in audit quality,” and “from MAS’s observations and feedback received from stakeholders, MAS recognizes that there are also negative consequences associated with frequent rotation of external auditors.”

Business leaders and regulators at IFAC’s recent roundtables suggested that getting regulation right is not just about the answer, but it is all about starting with the right question. Being clear from the outset on what the regulation is trying to achieve is essential. In the case of mandatory audit firm rotation, is it trying to address audit quality and investor protection? Is it about competition and an effective market for audit services? Or is it about economic empowerment? These are all important priorities, and they all demand their own focus to find the approach most likely to yield the desired result.

Many other countries are at various phases of implementing or discontinuing mandatory audit firm rotation, with similarly diverse objectives. South Korea, Argentina, and Brazil have implemented and discontinued the policy for certain sectors; the EU is now implementing with numerous variations across Member States—some of which, such as Spain and Italy, had previously implemented and discontinued the policy; and the US House of Representatives in 2013 voted 321-62 to prohibit the Public Company Accounting Oversight Board from requiring mandatory audit firm rotation.

The list goes on. In the meantime, for global businesses trying to coordinate their audits worldwide, the complexity, costs, and risks of trying to navigate this patchwork regulatory environment detracts from their focus on obtaining the highest quality audit—possibly even going so far as necessitating multiple auditors in different jurisdictions to meet different rotation requirements.

IFAC roundtable participants in Hong Kong and London also stressed that research and a clear evidence basis are vital to identify solutions most likely to be effective. This is all the more critical in light of the costs of regulation to businesses trying to operate in a global environment, and possible unforeseen consequences. However, all too often, it seems to be the solutions looking for the problems, rather than the other way around.

 

Issues and Insights

 
 

Fayez Choudhury

Chief Executive Officer, IFAC

Fayez Choudhury became chief executive officer of the International Federation of Accountants (IFAC) in February 2013. Mr. Choudhury was previously with the World Bank, where his last two assignments were as vice president, Corporate Finance and Risk Management; and controller and vice president, Strategic Planning and Resource Management. See more by Fayez Choudhury

 

Join the Conversation (7)

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Srinath Bhat April 4, 2017

According to me Audit firm rotation will lead to extra cost, as well as the knowledge transfer from one firm to another will be time consuming, but digital (Cloud) or artificial intelligence which is properly placed will be easy for transfering audit file and required documents. Addition to this there would be risk on the transfer of file or report eg; compitaitive firm which will be intrested in the company matters which will effect the control in the audit firm. So this need to be closely watched before switching the Audit firm.

Sanjay Jain January 7, 2017

I think stricter norms for scrutiny of auditors work, and appropriate sanctions are possibly the only way regulators can force auditors independence. MAFR is undoubtedly a decent option, yet there are millions of doubts on its success.

Ian Jenkins October 24, 2016

Priorities for the audit of global finance? We have a world where nearly 200 sovereign States, handling $trillions of public money, have the power to penalise audit and perhap prosecute it for treason for reporting accurate figures internationally. This national contempt for the profession poisons the very culture of audit. The IFAC clearly recognises the problem and asked the G20 this year to address it. But the politicians said no. We therefore have a global profession that isn't allowed to protect immense public funds.

Oluwasegun Alemeru October 20, 2016

Without stating the obvious, mandatory audit rotation won't come through except the core objective of setting it up is established, only then can we have the best comparable to judge its effectiveness. Below is my opinion on the questions raised by Fayez; 1. Trying to address audit quality and investor protection? What then happens to learning curve...aimed at giving the audit firm ample opportunity to know its client for better audit opinion. 2. Is it about competition and an effective market for audit services? Can mandatory audit process actually achieve this, given precedence ? Ordinarily...its in place in a capitalist setting 3. Or is it about economic empowerment? I think putting policies that would ensure Audit fees are paid as at when due would answer this. In conclusion, I think mandatory audit rotation is just a distraction.

Ulrich Schackermann October 19, 2016

The discussion regarding mandatory audit firm rotation (MAFR) is indeed a hot one and does benefit the decision making about rotation of audit firms. From the outset I must say that I do not agree with audits being performed by government agencies, as conceptually, the problem of independence regarding fees will not change, in a meaningful way, and politically driven activity will not necessarily improve the perception of independence and thus audit quality. We need to take a closer look at the IESBA Code of Ethics or its regional versions. Clearly professional accountants have accepted their responsibility to 'act in the public interest' when the Code was adopted in many countries by the professionals through their professional organisation, as binding upon firms and individuals. The Code deals with perceptions of a threat to compliance with the Code of which the professional accountant needs to be aware and for which safeguards have to be provided, not as a nice to have, but as an obligation to the professional accountant. Thus it appears that MAFR addresses this problem of perception and the related public interest concern. One of the reasons of the introduction of the Code was to rebuild the trust of the public in the profession of accountancy which had been damaged during the early years of the 21st century. This task is still ongoing, even though, I suggest, much has been achieved in this respect; but can that work ever be completed? Much of the debate about MAFR is being conducted under the headings of increase costs, diminishing convenience, increased complexity and similar headlines. But I question whether this is the correct approach. The parties to the debate are in the majority professional accounting firms and their leadership as well financial directors (mostly professional accountants) and on the other side of the table the regulators whose appointment, undoubtedly in part, must be to protect the public interest. The value of an audit is frequently questioned, mainly on the basis that it does not provide the the kind of certainty that is expected and the high cost of it. The value of an audit resides largely in the realm of perception and this just what needs to be corrected or at least the perception needs to be changed by additional safeguards and public information. Independence of the professional audit firm is paramount to the value of the audit and unless the profession can fix the perception of the loss of independence over time, in any other way, MAFR seems to be a valuable addition to the Code. It appears to me that MAFR must just be another safeguard that can improve the perception of the public in the services of the accounting profession.

ramji mahadevan yahoo October 18, 2016

As Muhammad Hadidjaja said audit rotation will definitely improve the investor protection, improvement of economy, new ideas, new perspectives. Keeping the same old auditors may reduce compliance costs but make the audit profession dying . IFAC must figfht forward to go for audit rotation. In that case why we need country's president rotation, prime minister's rotations...

Muhammad Hadidjaja October 12, 2016

The main aim of rotation of audit firm is to maintain independency and objectivity of auditor to the client. This aim will always fail because client make payments to audit firm for their service performing the financial audit. The independency and objectivity can be reach as long as this external audit is performed by State Auditor. In the near future Government will ban the public audit to perform the external audit but still remain give the authority to provide management consultation.

 

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