Study backs fears over auditor rotation
A study into auditor rotation has backed firms' reservations about the controversial proposal to make the changing of company auditors compulsory.
The study, carried out in Italy where auditor rotation has been mandatory for nearly 30 years, found the practical benefits of rotating auditors were not as obvious as expected.
According to the study, audit firms in their first year with a company were more likely to be cautioned by the stock market regulator than in any other year.
The advantages of rotation were the improvement of the company’s image, as investors believe this to be a more transparent and efficent way of auditing company accounts.
Professor Massimo Livatino, one of the authors of the study at Bocconi University in Milan, told the Financial Times: ‘There is a trade-off between the perceived advantages and the actual disadvantages of compulsory rotation. This is clearly an effect that goes against what the measure is intended to do.’
Livatino added the rotation of audit partners within the firm might achieve better results.
Audit firms have long opposed compulsory rotation, not only because it would leave them more open to the competition, but also because of the extra costs involved in auditing a new client.
Partners at Big Four firms said they would consider stopping audits altogether if rotation was made compulsory because of the additional extra costs and work involved in a new audit.