If a firm serves as auditor to a client for decades, so the argument runs, it can lose its independence and become less questioning. Especially where lucrative contracts for the provision of non-audit services are involved.
But until now no one has carried out a comprehensive survey of the UK’s leading accountancy firms asking them what they think. With the DTI due to publish its conclusions about the future of audit any time now, this week Accountancy Age presents the findings of our own exclusive survey, which reveals only one firm believes in rotation. The findings will only serve to stir up the debate further.
1. PricewaterhouseCoopers – No
‘Rotation of audit firms does not work because audit quality depends on a good understanding of a business and its management. Rotation loses this. The audit committee is best placed to judge independence based on the individuals they see across the table. Mandatory rotation removes the trust in the audit committee to make this judgement, yet trusts them to assess the beauty parades.’
2. Deloitte & Touche – No
‘Mandatory rotation of audit firms has been shown by researchers to have a negative impact on audit quality. In the first few years new auditors will know less about the business and its management. It is a quick fix full of further unintended consequences and should be rejected. It is also unnecessary given the tough new rules on partner rotation.’
3. KPMG – No
‘The disadvantages would far outweigh the advantages. There is no clear evidence that mandatory rotation, where implemented, has improved audit quality. Indeed the evidence from Italy is to the contrary. There is a heightened risk in the early years of an appointment and it would also impose an increased cost burden on business.’
4. Ernst & Young – No
‘It is the independence of mind and exercise of objectivity by individuals which is critical in achieving high quality auditing. It is for this reason that we are supportive of the ICAEW’s adoption of the EU recommendation for the rotation of key audit partners. On the other hand we believe that compulsory rotation of audit firms or regular re-tendering would tend to reduce audit quality and increase the risk of audit failure in the early years of a major new company audit due to the time it takes to become familiar with an often complex and geographically widespread business.
Choice might be severely restricted in the case of the major companies and even more so in specialist industries. The effect on multinationals would be to force the whole group to rotate auditors or to have different countries.’
5. Grant Thornton – No
‘The Bocconi Report in Italy concluded that mandatory auditor rotation is detrimental to audit quality – mandatory rotation unnecessarily increases start-up costs and disruption and overlooks the fact that most audit failures occur early in the appointment. Instead, we should be looking to build upon the audit quality assurance process.’
6. BDO Stoy Hayward – No
‘There is no evidence that rotation of audit firms will prevent corporate collapse. Our objective must be the restoration of trust in the audit and the auditor and we need to find positive ways of achieving this.’
7. Baker Tilly – Yes
‘Confidence must be restored in British bourses and in Great Britain plc. Compulsory rotation for FTSE 100 companies – which can easily afford the additional fees – could be one way to achieve this and to restore confidence in the market. However, it would be madness to apply this legislation to SMEs which are already besieged by red tape.’
8. PKF – No
‘A key to audit quality and reliability is the personal integrity of those responsible for carrying out audits. The culture within firms is critical to supporting auditors’ personal integrity. Individuals who raise issues and consult with others in the firm must feel encouraged to do so. Professional firms have to earn their reputation and cannot assume it will be automatically understood by staff. It has to be continually impressed by the firm’s leadership.’
9. Tenon – No comment
10. Moore Stephens – No
‘Experience of audit firm rotation is that it has not proved to increase audit effectiveness, specifically in the first two years when a new audit firm has to build a robust and thorough understanding of the business and the audit issues and risks. Properly managed audit partner rotation is a more viable alternative.’
11. Smith & Williamson – Nexia Audit Ltd, an independent audit company – No
‘Rotation is likely to provide opportunities for our firm as organisations increasingly look to high quality, credible alternatives to the Big Four firms. However, compulsory rotation may be detrimental to the overall quality of audit because of the learning curve that new auditors are faced with to develop the depth of understanding of an organisation necessary to provide a robust audit.’
12. Mazars Neville Russell – No
‘It is our view that a system of arbitrary auditor rotation will have a detrimental effect on auditing standards. While it may create a good initial public impression the reality will be rather different. Enhanced and more robust audit committees should be the best judges of when a change is appropriate.’
13 RSM Robson Rhodes – No comment
14 Horwath Clark Whitehill – No
‘Our firm does not believe compulsory rotation of audit firms should be adopted. Although the concept of rotating audit firms has the attraction of being simple and the profession is “seen to be doing something”, ultimately I don’t believe it will achieve its objectives. The argument for having audit partner rotation, where the individual partner is not too reliant on any one client, is a far more powerful safeguard to independence.’
15 BKR Haines Watts – No comment
News analysis, Public Relations
16 Numerica – No
‘Numerica doesn’t do audits, but my view as an FD is that auditor rotation is not the key issue in the whole auditor independence debate. Fundamentally, independence is a state of mind and other safeguards can be built into the system to try to ensure that independence is not compromised’
17 Macintyre Hudson – No comment
18 Saffrey Champness – No
‘We question whether compulsory rotation of auditors would reduce the incidence of audit failures. There is evidence to suggest that there is greater risk of failure in the first year of an audit appointment, as the new auditors are unfamiliar with the company they are auditing. Failure to understand key aspects of a client’s operations is a key factor in many audit failures. This could be exacerbated by a rotation requirement.’
19 Kingston Smith – No comment
20 Chantrey Vellacott DFK – No
‘We agree with the recent changes to the ICAEW’s independence guidelines which have strengthened the guidance on rotation of audit partners. We disagree with the rotation of audit firms. This may be a practical way of addressing independence, but it also creates risks. Knowledge of the business is an important part of effective auditing, and regular changes of audit firm will mean that firms may miss important issues because of their lack of knowledge.’
21 Bentley Jennison – No comment
22 Hacker Young – No
‘Commercially, mid-tier firms could expect to gain from compulsory rotation.
Groups who would not otherwise think to move from a Big Four firm might well consider doing so if forced to rotate their auditors.
‘Professionally, it is a poor idea. Change of auditor is disruptive to the client in the first year or two, as nobody from the incoming firm is familiar with the business.
Probably more importantly, client service is bound to suffer in the final year; whatever anyone may say to the contrary, it is only human nature not to invest in a relationship you know you are about to lose come what may.
‘The reduction in lead partner tenure from seven years to five is just silly. This will bring no benefit whatsoever and needlessly shortens a working relationship most clients would regard as valuable.’
23. Soloman Hare – No
‘Delivering a high quality, rigorous audit requires knowledge and understanding of the client. Bringing in a new auditor repeats the learning curve, increasing the risk of genuine error. The work of a high calibre auditor will not be diminished by length of service. The work of a shoddy auditor will not be improved by rotation.’
24. Vantis – No comment
25. Menzies – No
‘I see this as really an issue only for public interest companies.
‘The additional cost for the private company far outweighs any potential benefit. But I’m not sure that audit rotation will restore confidence.
I’m afraid that it could be seen as job swapping between the Big Four.
The real threat to independence comes from excessive non-audit income.
To restore confidence it may be more appropriate to keep consultancy fees for listed companies to the level of audit fees.’
26. Haysmacintyre – No
‘Investors have lost confidence in the ability of auditors to be independent of their clients but a knee-jerk reaction, such as compulsory rotation, would not restore that confidence.
‘An increase in the role of non-executive directors in appointing and removing auditors might prove to be a more effective way of ensuring auditor independence.’
27. Wilkins Kennedy – No
‘Whilst FTSE-100 companies might be able to cope with the disruption caused by rotation smaller companies will find this unacceptably burdensome.
A “one size fits all” approach would be a disaster.’
28. Armstrong Watson – No comment
29. Buzzacott – No comment
30. Scott-Moncrieff – No
We do not support the mandatory rotation of audit firms as it would not improve corporate governance. It is however crucial that audit committees carry out a thorough review of the effectiveness, performance and value of the audit process before making recommendations to shareholders on the re-appointment of auditors.
‘There are also significant costs associated with changing auditors and the experience of mandatory rotation of auditors in other countries, for example Italy, suggests there are no significant benefits.’
- The top 30 UK firms were asked whether there should be mandatory rotation of audit firms and to explain their views. The research was carried out by Michelle Perry and staff reporters late last year.
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