Transcript IAS template

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Mandatory Auditor Rotation
Hasan Kılıç
26 April 2007
Antalya
Index
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Why Discussing Rotation?
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New Regulations and Mandatory Auditor Rotation
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Auditor Rotation in the World
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Auditor Rotation in Turkey
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Why Rotate?
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Rotation is not the Solution
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Alternatives to Rotation
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Responsibilities of Companies
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Results of Certain Studies
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Why Discussing Rotation?
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New Regulations and Mandatory Auditor Rotation
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Sarbanes – Oxley Act (US)
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8th Directive (EU)
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CMB, Capital Markets Board Auditing Standards (Communique X/22)
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BRSA, Banking Regulation and Supervision Agency Auditing Standards
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Auditor Rotation in the World
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US: Audit firm rotation is not mandatory, rotate only audit partner: 5 years (7
years for some cases)
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EU: Audit firm rotation is not mandatory, rotate only . audit partner: 7 years
(Rotation is left to member country jurisdictions.)
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Canada, Japan & Australia: Rotation discussed but mandatory in these
countries.
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Italy: 6 years + 6 years = 12 years
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Auditor Rotation in Turkey
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CMB Communique X/22
- 7 years
- Start: 2003
- End: 2009
- Rotate: 2010
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BRSA Communique
- 8 years
- Start: 2002
- End: 2009
- Rotate: 2010
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Why Rotate?
Closeness to
Client
Management
Staleness &
Redundancy
Eagerness to
Please the Client
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Interact intensively with client
Troublesome close relationship
Conflict of interest when contentious issue
Lack of professional scepticism
Auditors hired by former clients
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Repetition of prior audits
Tendency to anticipate results
Reliance on prior audit workpapers
Less experienced audit staff
• Please the client so as to retain for future periods
• The most compelling argument on auditor rotation
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Rotation is not the Solution
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Auditor should interact with management,
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Relationship with client should not be limited by number of years,
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Management should be willing to share information,
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Solution partner when problems arise,
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Audit of documentation goes with sharing of information.
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Close relationship contribute sharing of information.
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Prior experience increase audit efficiency.
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Understanding of client operations and changes in activities over periods,
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Less disruption of day to day business,
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No proof of the benefits of mandatory audit firm rotation.
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Rotation is not the solution (cont’d)
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Studies highlight rotation decreasing audit quality.
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Rotation increases cost of audit firms as well as cost of audit services received.
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Pressure to please client due to rotation,
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Less attention to a client to rotate,
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Rotation may result in opinion shopping.
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Alternatives to Rotation
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Supervision of audit firms,
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Rotating audit partner (problem for small firms),
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Improving independence policies,
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Assigning second partner for quality assurance review,
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Internal quality control procedures,
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Emphasizing the importance of audit team independence,
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Risk and independence policies.
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Responsibilities of Companies
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Improving duties and responsibilities of audit committee under corporated
governance principles,
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Evaluation and assesment of audit firm services,
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Coordination bete
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Collaboration between management and audit committee,
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Independence board members and audit committee members,
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Effective accounting and reporting standards,
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Improving the responsibilities of management on accounting and financial
reporting,
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Ethical principles.
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Results of Certain Studies
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PCAOB Study: Average audit failure rate is three times higher in the first years.
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US General Accounting Office (GAO)/ General Accountability Office Report:
- No evidence of auditor rotation guaranteeing better audits.
- 99% of Fortune 1000 companies do not have policy on auditor rotation.
- Average tenure for Fortune 1000 companies is 22 years, 10% with 50 years of audit
with the same auditor.
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Federation des Experts Comptables Europeens (FEE) Study:
- Mandatory auditor rotation has serious disadvantages outweighting perceived benefits.
- Audit firm rotation should not replace audit partner rotation.
- Intensive interaction for understanding and auditing client’s operations cannot be
established with a short period of services.
- Audit failure subsequent to rotation is more likely to occur.
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Results of Certain Studies (cont’d)
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Bocconi University Study:
- Rotation has an adverse effect on competition rather than improving it.
- Higher costs for auditor and auditee.
- Rotation decreases the quality of services in the first years.
- Rotation adversely affects shareholders and share values.
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AICPA Study: As per the federal hearing statistics, rotation leads to audit
falilures in the first years above the average.
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