Prescribing the right medicine

That is losing their independent perspective and failing to be challenging and robust in their approach to the audit and relations with management.

In practice, it is not a real issue.

Rotation of auditors within an audit firm is embedded in the business.

The rotation of audit engagement partners – the partners who sign the accounts – is a well-established practice.

Professional standards require the engagement partner to stand down after seven years. In many cases in practice, the rotation period is less.

A second partner review of significant judgments is also required.

The profession has recognised the risk of partners’ objectivity becoming impaired and has dealt with it.

One of the delights as an audit partner is to respond to the regular and vigorous challenge to any element of status quo from a bright and energetic audit team.

The key issue is the quality of the opinion expressed on published accounts.

A high-quality opinion stems from a deep understanding of the client company’s business and the economic environment it faces, a comprehensive analysis of the risks the business faces and an assessment of the adequacy of the controls which deal with those risks, a rigorous evaluation of other evidence supporting the disclosures in the accounts and a balanced assessment of judgements made in reaching those disclosures.

This requires a well-trained team.

Exercising independent judgement involves interaction between senior individuals in two organisations and this is most effective when one trusts the other and respects his/her opinion. Lack of trust can have costly and disruptive outcomes.

Auditing standards recognise the conflicting demands of knowledge and independence. The proponents of mandatory audit rotation are prescribing a medicine, potentially costly and with unwelcome side-effects, for a non-existent condition.

A medicine that is rarely prescribed in the private sector in other countries and which can kill off the benefits of corporate continuity combined with rotation of individuals.

And that does nothing to improve that to which all parties aspire, a quality audit opinion.

– Ted Awty is head of assurance at KPMG.

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