8/10/2019 MandatoryAuditFirmRotation_SummaryofImpacts.pdf
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Mandatory Audit Firm Rotation
Summary of Impacts
Debate continues, mostly initiated in Europe, about proposals to
require companies to change their audit firm after a set
period.
This is being referred to as mandatory audit firm rotation.
This document sets out some of the views expressed for and
against the idea. These views have been collected from
published
studies and public commentary into the debates. The purpose of
collating these comments is to provide a simple summary of
some of the complex views being raised in relation to the issue.
The views are not provided to promote any particular view but
merely to provide information in a clear manner for those
wishing to obtain an overview of the issues.
The views have been summarised in relation to the impact of
mandatory audit firm rotation on appearance of independence,
audit quality, commerciality and markets.
Impact on the Appearance of Independence
Views in favour Views not in favour
The objective of independence is
more likely achieved if the auditfirm changes on a regular
basis. Itgives a clear appearance ofseparation between the audit
firmand the company and reduces therisk of bias or familiarity.
Basic threats can be reduced(self-interest,
advocacy,familiarity, intimidation)
Prevents the auditor beingbeholden to managementfor
thecontinuation of the auditrelationship
Removes managements ability tothreatento remove other
servicesfrom auditor in return for keepingthe audit engagement
Reduces thestream of futurepayments that the audit firm
risksshould the auditor disagree withmanagement. Objectivity could
bediminished if auditors are afraidthe audit work will jeopardise
therelationships between their firmsand the companies they
audit
Prevents the auditorsubconsciously advocatingthecompanys point
of view
In Australia, the signing audit partner, who is responsible for
the audit
opinion, is required to change after a set period (every 5 years
for listedentities). This allows independence and objectivity to be
maintained inpractice, and is a concept that can be used to support
appearance ofindependence (the audit partner signs an audit opinion
in their own name)
Introduces substantial additional cost and complexity for no
real benefitother than appearance. It is disruptive to both the
auditor and the companyto change auditors on an arbitrary schedule
regardless of the companyscircumstancesthe company will have to
spend time and money bringing theauditor up to speed
Adverse effects for other stakeholders in the financial
reporting supply chain,such as preparers (cost and inconvenience),
regulators (cost andadministration to monitor and regulate
rotation) and stakeholders (lack of
choice and visibility).Little support from engaged market
participants. Globally the idea of auditfirm rotation has raised
strong opposition:
90% of letters to a PCAOB debate opposed the idea of mandatory
auditfirm rotation
Many commentators in the European Parliament have voiced concern
atthe proposals
There are alternative and more effective, less costly and less
disruptivemethodsto reinforce auditor independence, objectivity and
professionalism,such as signing partner rotation, professional
standards relating to fee levelsand type of work, and audit
committees overview and assessment. Theseoptions provide a
framework for independence, objectivity andprofessionalism which
can also be tailored to specific entity circumstances.
Substantial Australian laws and standards are already in placeto
addressauditor independence
Studies of mandatory audit firm rotation are inconclusive on any
benefit toactual independence
Impact on Market Participants
Views in favour Views not in favour
Independence is vital togiving an objective opinionwhich is
relied upon byinvestors. Firm rotation is
a measure to achieveindependence
Audit committee effectiveness is reduced. Forced rotation
artificially limits thefreedom of those charged with governance to
appoint the audit firm which best meetsthe needs of the company and
its stakeholders
Shareholders will lose ability to understand if there is a
reason for change ofauditors. Currently if there is a change, it
can signal to shareholders that there may bedispute. If there is
mandatory rotation, this signalling will be lost
Reduces competition and restricts free market forces. Due to the
interaction withindependence rules, some firms may be unable to
tender at the time of the proposal
8/10/2019 MandatoryAuditFirmRotation_SummaryofImpacts.pdf
2/2
Mandatory Audit Firm Rotation
Summary of Impacts
Debate continues, mostly initiated in Europe, about proposals to
require companies to change their audit firm after a set
period.
This is being referred to as mandatory audit firm rotation.
This document sets out some of the views expressed for and
against the idea. These views have been collected from
published
studies and public commentary into the debates. The purpose of
collating these comments is to provide a simple summary of
some of the complex views being raised in relation to the issue.
The views are not provided to promote any particular view but
merely to provide information in a clear manner for those
wishing to obtain an overview of the issues.
The views have been summarised in relation to the impact of
mandatory audit firm rotation on appearance of independence,
audit quality, commerciality and markets.
Impact on Quality of Work
Views of those in favour Views of those not in favour
Increases level of scepticism
If auditors are more independent, they will apply morescepticism
to their work
No conclusive evidence that mandatory audit firm rotation
will increase auditor independence hence no link toincreased
level of scepticism
Brings a fresh perspectiveand view to the audit.Auditors will
spend more time seeking evidence ratherthan assuming or
anticipating results based on priorknowledge
Any loss in efficiencies gained from past experiencecould be
mitigated through enhancedpredecessor/successor auditor
communications
Loss in knowledge adversely impacts quality
A change in the audit firm means a loss in the knowledge ofthe
client, their operations and fundamental business risks.This
knowledge is an integral part of a quality audit
Predecessor communications are not an effective way toobtain
knowledge of corporate behaviour
The rotation of key audit partnersbalances the need for afresh
perspective with the need for continuity of knowledgeof the client
and inherent risks
Gives auditors incentives to be more alert, sincethey know that
their work will be reviewed by anotherfirm. May pay closer
attention to detail and be moresceptical
Removes tendency to placeexcessive reliance onprior year
files
Auditing standardsgovern the level and extent ofprocedures and
the collection of sufficient appropriate auditevidence from a
number of sources. Scepticism is requiredunder these auditing
standards, and under APES 110.
Additional regulation is a duplicative and added layer toaddress
audit behaviour which is already mandated.
Commercial Impacts
Views of those in favour Views of those not in favour
Provideswider range of audit firms access toaudit opportunities.
Mandatory rotation means moreopportunities for firms of all sizes
to tender
Could lead to more companies moving to larger auditfirmsbecause
these firms have more resources to get upto speed quickly which
will be a key driver in the tenderprocess
It may make the best qualified audit firmunavailableif,for
example, a firm chooses not to tender
Smaller audit firms may be able to obtain morework in other
areas if larger firms restrict providingother services to make
themselves available foraudit
Could reduce qualityif companies move to auditorsoffering lower
fees but which dont have necessaryspecialism, geographical spread,
or industry knowledge
