Home' A Plus Magazine : August 2013 Contents A proposal in the United States to prohibit the accounting
regulator from adopting mandatory auditing firm rotation
has thrown the controversial issue into the spotlight.
George W. Russell reports on the potential repercussions
for the profession in Hong Kong, China and globally
he Hong Kong ac-
and regulators have
been watching the
growing spectre of
firm rotation – com-
pulsorily enforcing a regular change of audit-
ing firms on public companies – with concern.
With China instituting mandatory rota-
tion last year – following in the footsteps of
Brazil and the Netherlands – and other major
markets such as Australia and India giving it
serious thought, the local profession has been
weighing the likelihood of the issue cropping
up in Hong Kong.
Mandatory rotation has been
mooted over the years as a way to
both improve audit quality and
broaden the competition among
auditing firms. Accounting firms
and many businesses disagree, cit-
ing newly appointed auditors’ lack of knowl-
edge of their client companies and the pros-
pect of higher costs.
Both sides’ arguments have been widely
presented (see “The pros and cons” on page
17) but the profession in both Hong Kong and
internationally have largely concluded that
mandatory auditing rotation is unlikely to
achieve any of its stated aims.
Opponents received a boost in the United
States last month when the U.S. House of Rep-
resentatives passed a bill to prohibit the Public
Company Accounting Oversight Board, the
country ’s accounting regulator, from impos-
ing any form of mandatory auditing firm rota-
tion (see “U.S. stakeholders far from united”
on page 18).
The U.S. move follows recent events in the
European Union, where initial support among
government officials for the concept – which
picked up after the start of the global financial
downturn and the euro currency zone crisis –
has been tempered.
An EU plan released in 2011 called for
compulsory rotation of auditors every six to 12
years. However, in April, the European Parlia-
ment ’s legal affairs committee endorsed a ver-
sion that recommends 25-year limits. (Mean-
while, the United Kingdom’s Competition
Commission decided last month not to pursue
mandatory rotation as a reform option.)
The Hong Kong profession is also closely
watching China, where since last year all
state-owned enterprises have been required
to commission an audit tender process every
three years, and an auditor cannot ser ve for
more than five years (see “Mainland emerges
as rotation laboratory” on page 19).
In Hong Kong, the profession generally op-
poses any regulation that mandates change
of auditing firm upon a client. “ We do not
support mandatory rotation,” says Chris Joy,
executive director of the Hong Kong Institute
of CPAs. “ There is no evidence to believe it en-
The Big Four tend to agree with the Insti-
tute’s position, saying studies conducted so far
haven’t shown that mandatory auditing an-
swers perceived shortcomings.
“Much research has been done on auditing
rotation in different countries and jurisdic-
tions and the results are inconclusive and con-
troversial,” notes Raymund Chao, Asia-Pacific
assurance leader at PricewaterhouseCoopers
in Hong Kong and an Institute member.
To be sure, academic investigations have
not borne out the benefits of mandatory ro-
tation on audit quality. “Academic research
is sceptical about audit rotation,” says Paul
Gillis, professor of accounting practice at the
Guanghua School of Management at Peking
University in Beijing. As an example, Gillis
cites a 2007 study of former Arthur Ander-
sen clients that were forced to find new firms
after the firm’s collapse. “It found no im-
provement in financial reporting,” he says.
Gillis adds that no positive conclusions
concerning quality improvement can yet be
drawn from China’s recent adop-
tion of mandatory audit rotation
of state-owned enterprises.
Meanwhile, a recent Insti-
tute of Chartered Accountants
of Scotland report notes how at
least one study confirms that clients with
short auditor tenures believe that they can
more easily persuade their position in case
of a disagreement with their auditors.
Auditors are also less likely to issue a going-
concern opinion during the initial years of
engagement than they are in later years,
adds the Scottish report, entitled What Do We
Know About Mandator y Audit Firm Rotation?
There are concerns that even if there
were benefits of mandatory rotation, they
would be outweighed by the negative ef-
fects. “[Rotation] may have the opposite
effect on audit quality because it uproots
the auditor’s knowledge of the client,” says
Benny Liu, head of audit at KPMG China in
Beijing and an Institute member.
Hong Kong auditors suggest that longer
tenures actually enhance quality. “An in-depth
Illustrations by Jackal Tam
August 2013 15
“We do not support mandatory
rotation. There is no evidence
to believe it enhances quality. ”
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