Mandatory rotation – the best motivation?

PLUMMETING QUALITY is a classic argument against mandatory auditor rotation, but critics normally warn of poor performance affecting the early years of the relationship.

Recently, The Hundred Group of FDs trundled out the same argument for the contract’s end, warning: “Firm rotation risks a reduction in audit quality in the initial and final years of the appointment.”

A recent Audit Quality Forum (AQF) meeting aired a similar view, with participants arguing too-frequent firm changes could be a recipe for disaster during the last years of a contract.

Money motivates?

However, non-audit services – often much more profitable than statutory audit – might ensure auditors continue to provide high levels of service during the final years of the contract, according to Robert Beattie, head of internal audit at Friends Life.

“Firms recognise they need to transition into a different (potentially lucrative) relationship with their client and will seek to evidence their capability and commitment,” he said.

The knowledge and experience gleaned from audit remain valuable post-transition and a professional approach to handing over the reins could leave the firm well-placed to pick up other contracts.

“Maintaining relationships and credibility will be paramount with an eye to future work, even potentially as external auditor again,” Beattie concluded.

Non-audit services are widely seen as a lucrative market, so this argument might provide persuasive support for mandatory rotation.

Auditors also strongly protest the assertion that quality will be sacrificed. RSM Tenon compliance director Alistair Hunt, said: “This is completely untrue. There will be no loss of quality in the final year of appointment as there is continuity of service.

“The only way there could possibly be a drop in quality is if the team decides it doesn’t want to do the job and focuses its attention elsewhere.”

Non-audit silo

Nevertheless, some stakeholders are not convinced. David Combs, former director of risk management and internal audit at Avis and Alpha, said mandatory rotation could mean “there is not so much commitment during the final years of the audit”.

He questioned the strength of Beattie’s non-audit services argument, saying firms “often work in silos” and audit partners “might not see any individual benefit” to laying the groundwork for tax or consultancy colleagues. “They are only really interested in their own clients and work,” he continued.

Rotation reticence

FTSE-100 audit committee chairs, questioned on behalf of the ICAEW, raised more conventional concerns, saying mandatory tendering would diminish the “last resort” threat of changing auditor if the incumbent is found wanting.

Firms could also take their best people off the audit, while the contracts could simply rotate between the Big Four, doing little to open the market for smaller competitors, respondents warned.

AQF participants and audit committee chairs were in agreement on one point, though, that the audit market is not perfect and measures should be taken to improve it.

Many professed they were open to change, but non-Big Four attendees were most outspoken on the need to examine audit reform proposals rather than dismissing them one-by-one.

Yes we can

Grant Thornton’s Steve Maslin warned against “too much picking holes”, saying options like shared audit should be explored, rather than settling for a knee-jerk rejection of joint audit.

BDO senior audit partner James Roberts echoed him, saying: “Audit chairs would be predisposed to oppose joint audits, as they have been widely trailed as being costly and lower quality. They won’t have been exposed to emerging ideas on consortia or shared audits. This whole area needs the profession’s input to ensure such audits are delivered at the right price and are effective. This isn’t a challenge that should be beyond us.”

Nevertheless, the ICAEW survey looked damning for the European Commission’s (EC) audit reforms.

Influential FTSE-100 audit chiefs protested vehemently on audit-only firms and were strongly opposed to mandatory joint audit and tendering, although they did adopt a slightly softer stance on mandatory tendering.

While they make up the minority of audit clients, their opinions seem to tally with those of the Department for Business, Innovation & Skills. The department hinted at its stance in a speech to the AQF, but its thinking was more starkly outlined in a recently leaked email urging European counterparts to resist EC audit reform proposals.

Judging by the ICAEW’s research and opinions of AQF attendees, it seems the UK’s official line to Brussels will not stray far from the unofficial rumblings of recent weeks.

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