Institutes attack US mandatory rotation plan

US AUDIT WATCHDOG the PCAOB has broached the idea of mandatory firm rotation, but UK institutes are not impressed.

Forced rotation is popular with regulators on the other side of the Atlantic, and the PCAOB said it could ease pressure on auditors to maintain long-term client relationships, something that might affect independence.

Chairman James R Doty (pictured) said: “One cannot talk about audit quality without discussing independence, scepticism and objectivity. Any serious discussion of these qualities must take into account the fundamental conflict of the audit client paying the auditor.”

However, UK institutes have questioned whether forced firm rotation will have the desired impact, saying it could be detrimental to quality and increase audit errors.

ICAEW executive director Robert Hodgkinson said mandatory firm rotation has been debated for decades, concluding: “The evidence to date has not been supportive and has pointed towards a potential loss of audit quality”.

ACCA warned against over simplifying the issue “simply by setting arbitrary limits to the duration of a professional relationship”.

It said given that the auditor is guardian of shareholders’ interests, it is appropriate for them to appoint the firm and decide upon the terms of the contract.

However, ACCA concluded that for shareholders to effectively execute this responsibility, they “need to be fully engaged with the process and need to be able to make their decision on the basis of a truly competitive market for audit services”.

The first point could be taken in support of the mandatory rotation concept, given that shareholders are often weakly engaged with the audit process. However, the second point underlines the institute’s belief that forced rotation is anti-competitive.

ICAS too had strong reservations about mandatory firm rotation, saying it could hurt audit quality and would not help reduce the level of concentration in the FTSE 350 audit market.

The Scottish institute instead called upon audit committees to demonstrate what they do to ensure “an effective audit process”, including declaring a timeframe for the audit to be put out to tender.

On top of this, ICAS called for “a more in-depth review [of the audit appointment] every five years”, with a focus on shareholder engagement.

CIMA declined to comment.

PCAOB chairman James Doty was reluctant to crystal-ball gaze, saying the watchdog will wait for responses from stakeholders before coming to any conclusion on firm rotation.

It is impossible to generalise about the attitude of different groups towards forced rotation “and would be dangerous to do so”, he said, but Doty did confirm that one major firm has given negative feedback on the idea.

When pressed on the likelihood of top firms and US institute the CPA railing against it, Doty said the proposed ten-year timeframe for mandatory rotation could answer some objections.

“It is possible that the problems associated with rotation every six years or less could be neutralised by the longer timeframe,” he suggested, concluding: “We have lots to learn and hear on the issue.”

Stakeholders have until 14 December to comment, and a public roundtable is planned for March 2012.

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