A major concern for auditors with new clients is obtaining the information
they need for their audit. However much they have researched the entity
previously, to obtain the depth of understanding needed to do their first audit
takes a major effort and is a significant upfront investment.
This is one reason why compulsory rotation of auditors is not a good idea.
First time audits mean new people, new systems and new issues – a great deal for
the auditors, and the client’s management, to come to grips with.
But many changes of auditors happen, by one group being taken over by another
or by audit committees deciding that a change in auditors is required. The real
issue is how to make this process more efficient.
KPMG, in its recent response to the Financial Reporting Council debate on the
topic, proposed a simple step – to allow successor auditors access to the audit
files of their predecessors. At present, predecessor auditors do not generally
allow their successors to look at their audit working papers.
There are good reasons for this position. An advantage of changing auditors
is that ‘fresh eyes’ look at the client’s systems and policies. There is also a
suspicion, in today’s increasingly litigious climate, that this might increase
the opportunities for claims against the outgoing auditor.
While there are real concerns, we think it would be possible to devise
satisfactory safeguards to enable firms to make certain audit working papers
available. This would greatly reduce the time the new auditors need to spend on
understanding the client and should leave more time for them to critically
appraise the client’s accounting systems and policies.
Of course, the client’s permission to discuss the previous audits with the
successor auditors would need to be obtained. Effective ‘hold harmless’
arrangements and restrictions on the use of the information would need to be
developed, similar to those when firms allow access to their audit files for due
diligence purposes on transactions.
Allowing successor auditors access to their predecessors’ audit files is
already common practice in other jurisdictions. Obviously, no individual firm
can take this step unilaterally but, with these precedents, the profession
should be able to devise a solution that does not put outgoing auditors at
unacceptable risk while making it easier to change auditors.
Myles Thompson is head of KPMG UK’s technical auditing group
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