Mandatory Audit Firm Rotation

Summary of Impacts
Debate continues, mostly initiated in Europe, about proposals to require companies to change their audit firm after a set period.
This is being referred to as mandatory audit firm rotation.
This document sets out some of the views expressed for and against the idea. These views have been collected from published
studies and public commentary into the debates. The purpose of collating these comments is to provide a simple summary of
some of the complex views being raised in relation to the issue. The views are not provided to promote any particular view but
merely to provide information in a clear manner for those wishing to obtain an overview of the issues.
The views have been summarised in relation to the impact of mandatory audit firm rotation on appearance of independence,
audit quality, commerciality and markets.
Impact on the Appearance of Independence
Views in favour Views not in favour
The objective of independence is
more likely achieved if the audit
firm changes on a regular basis. It
gives a clear appearance of
separation between the audit firm
and the company and reduces the
risk of bias or familiarity.
Basic threats can be reduced
(self-interest, advocacy,
familiarity, intimidation)
Prevents the auditor being
beholden to management for the
continuation of the audit
relationship
Removes managements ability to
threaten to remove other services
from auditor in return for keeping
the audit engagement
Reduces the stream of future
payments that the audit firm risks
should the auditor disagree with
management. Objectivity could be
diminished if auditors are afraid
the audit work will jeopardise the
relationships between their firms
and the companies they audit
Prevents the auditor
subconsciously advocating the
companys point of view
In Australia, the signing audit partner, who is responsible for the audit
opinion, is required to change after a set period (every 5 years for listed
entities). This allows independence and objectivity to be maintained in
practice, and is a concept that can be used to support appearance of
independence (the audit partner signs an audit opinion in their own name)
Introduces substantial additional cost and complexity for no real benefit
other than appearance. It is disruptive to both the auditor and the company
to change auditors on an arbitrary schedule regardless of the companys
circumstances the company will have to spend time and money bringing the
auditor up to speed
Adverse effects for other stakeholders in the financial reporting supply chain,
such as preparers (cost and inconvenience), regulators (cost and
administration to monitor and regulate rotation) and stakeholders (lack of
choice and visibility).
Little support from engaged market participants. Globally the idea of audit
firm rotation has raised strong opposition:
90% of letters to a PCAOB debate opposed the idea of mandatory audit
firm rotation
Many commentators in the European Parliament have voiced concern at
the proposals
There are alternative and more effective, less costly and less disruptive
methods to reinforce auditor independence, objectivity and professionalism,
such as signing partner rotation, professional standards relating to fee levels
and type of work, and audit committees overview and assessment. These
options provide a framework for independence, objectivity and
professionalism which can also be tailored to specific entity circumstances.
Substantial Australian laws and standards are already in place to address
auditor independence
Studies of mandatory audit firm rotation are inconclusive on any benefit to
actual independence

Impact on Market Participants
Views in favour Views not in favour
Independence is vital to
giving an objective opinion
which is relied upon by
investors. Firm rotation is
a measure to achieve
independence
Audit committee effectiveness is reduced. Forced rotation artificially limits the
freedom of those charged with governance to appoint the audit firm which best meets
the needs of the company and its stakeholders
Shareholders will lose ability to understand if there is a reason for change of
auditors. Currently if there is a change, it can signal to shareholders that there may be
dispute. If there is mandatory rotation, this signalling will be lost
Reduces competition and restricts free market forces. Due to the interaction with
independence rules, some firms may be unable to tender at the time of the proposal

Mandatory Audit Firm Rotation
Summary of Impacts
Debate continues, mostly initiated in Europe, about proposals to require companies to change their audit firm after a set period.
This is being referred to as mandatory audit firm rotation.
This document sets out some of the views expressed for and against the idea. These views have been collected from published
studies and public commentary into the debates. The purpose of collating these comments is to provide a simple summary of
some of the complex views being raised in relation to the issue. The views are not provided to promote any particular view but
merely to provide information in a clear manner for those wishing to obtain an overview of the issues.
The views have been summarised in relation to the impact of mandatory audit firm rotation on appearance of independence,
audit quality, commerciality and markets.
Impact on Quality of Work
Views of those in favour Views of those not in favour
Increases level of scepticism
If auditors are more independent, they will apply more
scepticism to their work
No conclusive evidence that mandatory audit firm rotation
will increase auditor independence hence no link to
increased level of scepticism
Brings a fresh perspective and view to the audit.
Auditors will spend more time seeking evidence rather
than assuming or anticipating results based on prior
knowledge
Any loss in efficiencies gained from past experience
could be mitigated through enhanced
predecessor/successor auditor communications
Loss in knowledge adversely impacts quality
A change in the audit firm means a loss in the knowledge of
the client, their operations and fundamental business risks.
This knowledge is an integral part of a quality audit
Predecessor communications are not an effective way to
obtain knowledge of corporate behaviour
The rotation of key audit partners balances the need for a
fresh perspective with the need for continuity of knowledge
of the client and inherent risks
Gives auditors incentives to be more alert, since
they know that their work will be reviewed by another
firm. May pay closer attention to detail and be more
sceptical
Removes tendency to place excessive reliance on
prior year files
Auditing standards govern the level and extent of
procedures and the collection of sufficient appropriate audit
evidence from a number of sources. Scepticism is required
under these auditing standards, and under APES 110.
Additional regulation is a duplicative and added layer to
address audit behaviour which is already mandated.


Commercial Impacts
Views of those in favour Views of those not in favour
Provides wider range of audit firms access to
audit opportunities. Mandatory rotation means more
opportunities for firms of all sizes to tender
Could lead to more companies moving to larger audit
firms because these firms have more resources to get up
to speed quickly which will be a key driver in the tender
process
It may make the best qualified audit firm unavailable if,
for example, a firm chooses not to tender
Smaller audit firms may be able to obtain more
work in other areas if larger firms restrict providing
other services to make themselves available for
audit
Could reduce quality if companies move to auditors
offering lower fees but which dont have necessary
specialism, geographical spread, or industry knowledge