Tuesday, 16th May 2017
A recently-published study suggests that mandatory auditor rotation does not, necessarily, foster greater professional scepticism. Klaus-Peter Hillebrand of Russell Bedford member firm Domus AG, Berlin, offers his comments.
The proposed introduction of statutory audit reforms – and auditor rotation in particular – was met with considerable controversy at the start of this decade. Mandatory audit firm rotation has, nonetheless, now been implemented in Europe. Following the application of new statutory audit regulations in the EU in 2016, public interest entities – PIEs, including listed companies, credit institutions, insurance organisations, or larger entities as defined by individual EU Member States – must now put statutory audits out to tender every 10 years, and change auditors at least every 20 years.
The key controversy in the years preceding the adoption of the new rules concerned mandatory firm rotation (MFR), which regulators viewed as fundamental to ensuring auditor independence and ending the long-standing auditor–client relationships believed to be behind the Enron and other accounting scandals more than a decade ago.
But will the intended impacts of the new regulations actually be borne out? A recent study from the American Accounting Association’s journal Behavioural Research in Accounting suggests MFR does not, necessarily, promote greater professional scepticism. Based on a survey of 233 auditors and their client CEOs and CFOs, the study identifies what the researchers describe as “a healthy balance at the heart of this interpersonal relationship that merits leeway from regulators.” Regarding mandatory rotation specifically, the authors “found no significant relation between auditor scepticism and the length of companies’ relationships, either with audit firms or engagement partners.”
Klaus-Peter Hillebrand, of Russell Bedford member firm Domus AG, Berlin, commented: “If the original intention of EU audit reform was to open up the audit market and reduce threats to the independence of statutory auditors, then the recent research from the American Accounting Association would appear to suggest that rotation will lead to no significant reduction in the risks associated with auditor–client interdependence. The research does not, however, consider other aspects of the audit reforms – including limitations on the fees charged for non-audit services. As multinationals seek to protect themselves from any breach in procuring non-audit services from their incumbent auditors, it may be that this, rather than mandatory rotation, that delivers the market change originally envisaged by regulators.”
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