Home' A Plus Magazine : August 2013 Contents 16 August 2013
ness relationships with audit clients.
An existing counter to too-close relationships in many
countries, and a boost for the concept of professional scep-
ticism, is partner rotation. “Some believe that long tenure
by auditors makes them less sceptical and more willing to
accept client representations at face value,” notes Gillis.
“Some fresh eyes might audit better.”
In Hong Kong, key audit partner rotation provisions in the
Code of Ethics are in force. The key audit partner in respect of
a public interest entity is required to rotate after seven years,
and he or she cannot be a member of the engagement team
or be the key audit partner for the next two years. This helps
to prevent long-term relationships between companies and
their auditors creating a level of closeness that impairs au-
The Hong Kong profession generally supports partner
rotation. “New lead and audit partners will bring in f resh
perspectives and professional experience,” says Liu at
KPMG. “However, if you rotate the entire firm, you take
away all the accumulated experience the firm has of the
client. A lack of knowledge and understanding of the client
potentially increases risks of not detecting errors.”
However, critics of partner rotation argue that the former
audit partner often stays close to the client, even rotating
back on the engagement as soon as possible. New lead part-
ners might be reluctant to challenge the work of a colleague,
The Institute believes that partner rotation safeguards
are adequate to ensure the integrity of audits in Hong Kong.
“ Work is going on to extend requirements to more members
of the audit team,” adds Joy.
He notes that the International Ethics Standards Board
for Accountants is developing a project to review the long
association provisions in Section 290 of the Code of Ethics.
“ This will ensure that they continue to provide robust and
appropriate safeguards against the familiarity and self-
interest threats arising from long association w ith an
audit client,” Joy says.
understanding of the client ’s business, industry risks,
operations and controls obtained through years of ser-
vice would allow the auditor to do a better job of focus-
ing on the key risks and raising the appropriate ques-
tions, thereby enhancing audit quality,” says Chao.
Auditors stress that mandatory rotation puts unneces-
sary burdens on both auditors and clients, especially as
the hardest part of an audit engagement is at the begin-
ning. “Studies indicate most problems arise in the first
two years of appointment,” says Joy.
Accepting a new audit engagement requires exten-
sive research about the nature and complexity of the
company’s business, the qualifications and reputation of
senior management and board as well as internal analy-
sis of the auditing firm’s ow n expertise.
In the U.S., the PCAOB received hundreds of com-
ment letters from company directors who argued that
mandatory auditor rotation would not improve audit
quality because auditors at large public companies
would face a steep learning cur ve in the first few years
of the job.
“In a large company, the new auditor would take a
year or two to get up to speed on all the activities and
issues relevant to the new audit engagement,” Rob-
ert C. Pozen, the former chairman of MFS Investment
Management and a senior lecturer at Harvard Business
School, told the PCAOB.
Many objections to long audit
contracts centre on profes-
sional scepticism – an atti-
tude that requires an auditor
to keep an open, questioning
mind, assume that manage-
ment is neither honest nor dis-
honest, and maintain alertness
to conditions which may indicate
possible misstatement due to error or
fraud, and a critical assessment of audit
“ There are specific professional ethical
standards and independence requirements
in place for auditors to safeguard auditor indepen-
dence,” Chao says, citing the prohibition of direct
financial interests in audit clients and of contin-
gent fee arrangements, restrictions on scope of
ser vices, personal relationships and joint busi-
“There are concerns
that even if there were
benefits of mandatory
rotation, they would
be outweighed by the
negative effects. ”
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