Auditor rotation for FDs’ credibility?

FREQUENT MANDATORY AUDITOR rotation is welcomed by some chief financial officers as a “check and balance” on the finance function, yet the Hundred Group of finance directors drawn from FTSE-leading companies vehmently disagrees.

Research by recruitment specialist Robert Half found 56% of CFOs and finance directors advocate four-yearly rotation, while 38% would prefer a new auditor every three years.

However, this directly conflicts views of the Hundred Group, which has vociferously attacked mandatory auditor rotation and other European Commission proposals.

Robert Half director Clive Davis said the apparent popularity of mandatory rotation stems more from internal concerns than worries about auditor quality and independence.

“The finance function is under continual scrutiny, and changing auditor provides checks and balances for FDs as well as auditors, proving practices are air tight and there is nothing to hide.”

This suggests many executives are thinking about mandatory rotation not in terms of their relationship with the auditor, but in terms of their relationship with internal stakeholders.

“The audit is a significant investment and it’s better to get it right in the first place than risk running into costly problems at a later date,” Davis continued.

He insisted there is no evidence that finance chiefs are unhappy with their auditors; rather, they are focused on demonstrating integrity to internal stakeholders.

Whose view is it anyway?

Big Four interest has been piqued by the report, which flies in the face of criticism of European Commission proposals – including mandatory auditor rotation – from the Hundred Group of finance directors drawn from FTSE-leading companies.

The Robert Half report questioned finance chiefs at 200 enterprises, and shows large (1,000-plus employees) and listed companies are most in favour of mandatory rotation every three years.

Among listed companies, the majority (37%) favoured a three-yearly rotation, while both private and public sector companies preferred rotation every five years or more.

Large companies were most likely (39%) to plump for three-year rotation, while those with fewer than 1,000 staff were evenly split between rotation every three years and every five-plus years.

The Big Four might be comforted that respondents are happy overall with their work, with 70% disagreeing that the quartet wields too much influence and is anti-competitive.

Here, large companies (73%) and the public sector (80%) were most likely to be happy with the status quo, as well as those in Scotland and Northern England (76%).

Hundred Group stands alone?

Given the Hundred Group’s vociferous criticism of mandatory rotation and other EC proposals, it is surprising that Robert Half’s CFOs are not only in favour, but eager for a much shorter rotation period than the nine years advocated by Brussels.

Davis suggested the finance executives are “more conscious of shareholders and financial markets” than the 100 Group, and pointed out movement in the listed sector is “much greater these days”.

One of the Big Four’s main arguments against the EC’s proposals is that finance executives fundamentally disagree with frequent mandatory auditor rotation, and they will doubtless be encouraging clients to take up this issue with Brussels.

However, this new research indicates support for EC proposals among stakeholders who are less vocal, but still important.

Methodology matters

Critics have questioned whether the ostensibly rotation-friendly CFOs really would welcome mandatory rotation on such a frequent basis, or if in fact, they are open to changing auditors often only if it is convenient.

The Hundred Group has hit back at the Robert Half report, saying it is highly questionable that the survey covered a significant proportion of its members.

A spokesman said the “inevitable reduction in audit quality caused by excessively frequent firm rotation” could only be countered by significantly increased costs to shareholders.

The body also warned the measure would “dent UK pension provision”, pointing out that more than 80% of UK pension schemes are invested in the equity of Hundred Group members.

“Rotation is one of a suite of measures being proposed as a solution to a problem that does not exist,” it concluded.

Nevertheless, even if none of the Robert Half respondents belong to the FTSE 100, this does not negate the validity of their yes-vote for frequent auditor rotation.

The fact that major stakeholders are exercised on the issue indicates it has touched a nerve. Further and more robust study of finance chiefs’ views on Brussels’ audit reform is now necessary to establish whether the 100 Group really does represent UK business, or if it is simply a vocal minority.

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