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Posted on May 27, 2013

Mandatory Auditor Rotation-  Is a Change Really Necessary?

by Corey Arvizu, CPA, Managing Partner

The idea of mandatory auditor rotation has been receiving a lot of attention in the past year. Many articles have been written on the topic, standard setters are debating the issue, and of course key stakeholders are weighing in on the matter, including auditors themselves. Much of the discussion centers on the belief that after a period of time auditors lose their objectivity and therefore may overlook internal control matters or financial statement misstatements that a new auditor would be able to identify.

The concept of auditor rotation is not entirely new. The issue received a great deal of attention during the development of the Sarbanes-Oxley Act in 2002. Some involved with the reform believed mandatory auditor rotation was necessary to ensure objectivity, while others believed the costs would significantly outweigh the benefits.

In response, Congress requested that the Government Accountability Office (GAO) research the matter. While conducting the research, GAO surveyed hundreds of parties from both management of companies as well as auditors. Although their research was limited to audits of publicly-traded companies, the GAO ultimately did not provide a recommendation on mandatory auditor rotation. However the general conclusion from the respondents was that mandatory auditor rotation would increase the costs of audits while having little, if any, effect on audit quality.

Ten years later the issue is once again receiving attention due to the Public Company Accounting Oversight Board’s (PCAOB) concept paper (http://pcaobus.org/Rules/Rulemaking/Docket037/Rele... 006.pdf) on mandatory audit firm rotation. Although once again the discussion is limited to that of publiclytraded companies, the “trickle down” effect is impacting audits of all types of organizations, including governments and nonprofit organizations. Many organizations are now evaluating the term of their auditors and considering a change in auditors for a “fresh look” at their operations.

Clearly the objectivity and independence of the auditor is critical to ensuring a quality audit and protecting the interests of the users of the financial statements; however simply changing auditors may not achieve this purpose.

The following are some items that should be considered:

  • Auditors have a number of standards which require them to evaluate and assess independence and objectivity for every audit performed. This process is also “audited” every three years during the audit firm’s peer review.
  • All auditors are required to perform and document their audit in accordance with audit standards. Although professional judgment is used during an audit, every auditor must meet the requirements of the profession, regardless if it is the first year performing the audit or the 20th year performing the audit.
  • As noted above, there has been no evidence to date that auditor rotation would improve auditor objectivity or enhance audit quality. In addition, there is no evidence that audit failures of the past had any relationship with auditor tenure.
  • Currently no standard setter or regulatory body requires auditor rotation. This includes the SarbanesOxley Act, the Single Audit Act, IRS regulations, and Government Auditing Standards. The Arizona legislature recently approved a bill to repeal a statute that was going to require Arizona charter schools to rotate auditors every six years.
  • The procurement process is an excellent method for organizations to address any concerns regarding auditor objectivity. As a matter of practice, any organization should periodically bid audit services as it provides the ideal opportunity to evaluate auditor performance and objectivity. Many governments and nonprofits have procurement practices which require such periodic procurement of services.
  • Have your auditors meet directly with your governing board and/or audit committee. Although auditors work closely with management, they ultimately work for the governing board. Providing the auditors opportunities to meet with the board not only allows the auditors to communicate audit matters directly with them but it also provides opportunities for the board to ask the auditors tough questions regarding objectivity, the audit process, and the responsibilities of all parties.
  • Lastly, should there be an interest in obtaining a different perspective during the audit many firms can provide a different engagement team to perform the audit. Changing the engagement team would ultimately achieve the same result of getting a “fresh look” while retaining the audit firm’s expertise, industry knowledge, and service level.

Mandatory auditor rotation is a challenging issue due to the limited amount of measurable research and the false perceptions of what auditors are required to do when performing an audit. Assessment of this issue can also be clouded by other variables affecting audit quality which having nothing to do with auditor tenure.

While there may be other perspectives on this issue not presented here, all parties, including the audit profession, agree that auditor objectivity is paramount to protecting the public interest and maintaining the high level of credibility of the audit profession. To ensure achievement of this key principle it is important that your organizations decision makers are fully informed on the matter, any audit service concerns are discussed with the auditors, and that the quality, service level, and expertise of your auditors are held to the highest standard.


The content of these pages is for general information purposes only and does not constitute advice. Heinfeld, Meech & Co., P.C. tries to provide content that is true and accurate as of the date of writing; however, we give no assurance or warranty regarding the accuracy, timeliness, or applicability of any of the contents.