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In addition to improving audit quality, some proponents
have speculated that audit rotation could break the
stranglehold on large-company auditing by the Big Four.
However, many obser vers say that mandatory rota-
tion would cause very little trickle dow n to non-Big Four
firms. “ The early evidence is not encouraging,” Gillis
says, citing the experience so far in China, where man-
datory rotation did not result in large companies mov-
ing to non-Big Four firms. “ What happened was mostly a
swap of clients among the Big Four.”
Albert Au, chairman of BDO in Hong Kong and a for-
mer Institute president, points out that history shows,
when forced to change auditing firms, companies tend
to rotate out of second-tier firms into the Big Four, but
not the other way around.
This has been show n in European countries where
mandatory rotation has been imposed, he explains. “It
is not theoretical,” Au says. “It happened in places like
Italy and Germany. BDO Germany had been auditors for
Schering, which they lost after 20-something years.”
Au adds that he would expect the same situation to
develop in Hong Kong under the same circumstances. “If
a multinational financial institution or a large Chinese
state-owned enterprise is rotated out of one of the Big
Four, chances are they won’t be engaging BDO, because
we are perceived as not being able to ser vice them and
their global requirements purely because of their sheer
size,” he says.
“On the other hand, if one of our largest clients has to
move because of mandatory rotation, chances are they
will choose a Big Four firm, particularly in Hong Kong,
given that we are three times bigger than the [next-
largest accounting] firm,” he adds. “Filtering down is
The Institute prefers to let the market decide on com-
petitiveness. “Our view is that the concentration of listed
company audit work has arisen through market forces and
we are not in favour of measures to artificially adjust the
market,” says Joy.
Rotation, adds Liu at KPMG, necessitates audit part-
ners becoming “salesmen as much as excellent auditors if
they are to have long term careers.
“It potentially makes them more reliant on a good ref-
erence from their current clients, in order to secure future
work, thereby impacting independence,” he says.
THE PROS AND CONS
Arguments supporting mandatory audit firm rotation
According to a December 2012 report issued by the Institute of
Chartered Accountants of Scotland’s research committee, entitled
What Do We Know About Mandatory Audit Firm Rotation?, the main
argument in favour of mandatory audit firm rotation is an increase in
auditor “independence in fact.”
Long tenures by auditors, the argument goes, might lead
to excessive familiarity with the client – potentially resulting in
insufficient audit procedures and reliance on prior results, the ICAS
reporters, led by Corinna Ewelt-Knauer of the Institute of Accounting
and Auditing at the University of Münster, noted.
Meanwhile, a March 2013 briefing paper by EY in the United
Kingdom – Q&A on Mandatory Firm Rotation – cited the “fresh eyes”
argument. A newly appointed audit firm would conduct an audit
with a new perspective and might be more likely to spot issues than
a long-term incumbent firm. In addition, the knowledge that another
firm would soon review the current auditor’s work could reinforce
professional scepticism, the paper noted.
Another argument, the ICAS report noted, is an expected positive
effect on auditor “independence in appearance,” in which the
users of financial statements will perceive the auditor to be more
independent as a result of mandatory rotation, reassuring the
A fourth argument is that mandatory rotation can provide smaller
audit firms with the opportunity to participate in the audits of larger
companies due to increasing market competition.
Arguments opposing mandatory audit firm rotation
According to the ICAS, the first argument against mandatory
rotation is that short engagement periods retard the development
of an effective working relationship between auditor and client
management, and that clients can make their arguments more
persuasive against auditors with little familiarity.
The ICAS report cites a second, related, argument against rotation:
a higher risk of audit failure, since auditors of short tenure have
insufficient time to develop in-depth client-specific knowledge.
In addition, the ICAS report says, rotation could result in a
sharp increase in costs – as high as 20 percent by some measures.
Newly appointed auditors would be required to understand the
client’s business model and organizational structure, while client
management would have to support new auditors in learning
Another issue is transparency, says the ICAS report. The market
might not be able to distinguish a voluntary change of audit firm from
a compulsory rotation, increasing stakeholder uncertainty.
Finally, instead of providing smaller audit firms with more
opportunity, it is also possible that mandatory rotation will lead to
higher market concentration because large corporations tend to
choose one of the Big Four firms, the ICAS report noted.
“New lead and audit
partners will bring in
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