Mandatory Audit Firm Rotation Too Costly with Minimal Benefit – IIA

Jack Humphrey, Regulatory journalist
January 09, 2012 /

Auditor independence, objectivity, healthy professional skepticism and, overall audit quality are vital as internal auditors work very closely with external auditors, as mandated by the International Standards for the Professional Practice of Internal Auditing, said the Institute of Internal Auditors.

However, it added that mandatory audit firm rotation could significantly impact the relationship between the external and internal auditors; how their audits are planned, coordinated and performed; and how the external auditors leverage the knowledge, experience and expertise of internal auditors to enhance overall effectiveness.

This was how the IIA responded to the Public Company Accounting Oversight Board’s (PCAOB’s) Concept Release on Auditor Independence and Audit Firm Rotation.

“It’s not clear whether mandatory audit firm rotation will enhance auditor independence, objectivity, and professional skepticism when considering the cost/benefit trade-offs,” said IIA President and CEO Richard F. Chambers in a December 14 letter to the PCAOB.

The IIA — a global professional member association of more than 170,000 internal auditors (63,000 of which are in North America) — went on to say in its response to the PCAOB that their research has indicated a majority of their members disagree with the concept of mandatory audit firm rotation.

Members also feel that the independence, objectivity and professional skepticism of “new” external audit firms is not markedly different than that of a prior existing firm.

The IIA’s member research also cited other disadvantages of mandatory audit firm rotation, including increased costs to the company and/or audit firm; a steep learning curve and loss of knowledge; potential erosion in the quality of audits; potential opportunities for opinion shopping; and possibility that mandatory rotation would diminish the role and influence of the audit committee.

In lieu of time-based mandatory rotation, the IIA suggested the PCAOB require a change in the external auditor when circumstances arise, such as restatements (which result in the Company’s filing an 8K removing reliance on the prior filing); significant frauds in the companies audited financial statements; or other indicators of audit failure which impact investors.

The IIA also suggested increased disclosure about the audit committee’s role in overseeing the quality of the audit, including its periodic evaluation of auditor independence; providing audit committees the ability to request the PCAOB perform a directed inspection of the company’s audit with reporting directly to the audit committee; a requirement that the audit committee solicit bids from other auditors after specified intervals; and greater reliance on internal auditing.

“The internal audit profession is experiencing more inquiry from and providing greater assistance to audit committees in providing perspectives on the financial auditor’s independence and overall audit quality,” added Chambers.

“We encourage the Board to consider ways effective internal audit activities can contribute to the financial auditor’s independence, objectivity, professional skepticism, and audit quality. The costs and risks could be reduced by having the new auditor leverage the knowledge, skills, experience, and expertise of internal auditing and place appropriate reliance on internal audit results.”

The IIA collaborated with a number of internal audit thought leaders in the U.S. and globally in developing its response to the Concept Release.

Comments were based on research, surveys and discussions conducted by a core team of audit professionals who serve on The IIA’s Professional Issues Committee. The core team consisted of Certified Public Accountants, Chartered Accountants, and Certified Internal Auditors who have worked in the public and private sectors, internal and external auditing, and small, medium, large domestic and multinational SEC registered companies.


2 Comments for “Mandatory Audit Firm Rotation Too Costly with Minimal Benefit – IIA”

  1. Pat Fogarty

    I worked for an industrial firm that was audited by Price Waterhouse in the 1980′s. The industrial firm obtained some significant influence over the audit firm by hiring all of their key financial chiefs from the audit firm. So an auditor is very likely raising issues with a former co worker or boss at the audited firm. The industrial firm INTENTIONALLY did this hiring to gain this control. Years later the firm was fined $2 million and PW $1 million for financial distortion. To me, it is necessary to rotate audit firms to insure independence.

    • dan

      There have been many modifications to the independence standards as well as many other auditing, accounting standards, oversight processes and SEC change since the 80′s. I don’t think you can rely on the circumstances in your example for purposes of applying to today’s environment.

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