Home' A Plus Magazine : August 2013 Contents Auditing
18 August 2013
There are other alternatives to mandatory
firm rotation to better ensure audit quality,
Institute members point out. “A company that
has a strong corporate governance structure
with an appropriate and effective indepen-
dent audit committee is best positioned to
oversee the audit performance and does not
need arbitrary inter vals to consider audi-
tor performance and the audit quality,” says
Chao at PwC.
“Raising the effectiveness of the audit
committee’s oversight of auditors is one of
the best ways to ensure audit quality,” says
Chao. He adds that an effective audit com-
mittee has the best insight into the expertise
and quality of the audit firm and whether
erosion in expertise and quality war rants
the replacement of the firm. He advocates
better communications between the auditor
and the audit committee and stronger gover-
nance by the audit committee.
Chao says company time spent switching
auditors could be better used implementing
better corporate governance. “ Management,
audit committees and auditors will need to
commit significant time and resources to pro-
posals, diverting their attention away from
the more important activities that drive qual-
ity reporting and audits,” he says.
There is little expectation that audit rota-
tion would be introduced in Hong Kong, even
if it crops up in more major international
markets. “I expect that there would be great
resistance to audit rotation in Hong Kong,
FAR FROM UNITED
Last month, opponents of mandatory auditing firm rotation in the
United States hoped to dig the idea a permanent grave. The House of
Representatives passed a bill that would, if enacted, prevent the Public
Company Accounting Oversight Board, the country’s auditing watchdog,
from ever forcing public companies to periodically rotate their auditors.
The chamber passed the bill convincingly, with 321 votes in favour and
62 against. The progress of the bill in the U.S . Congress will be watched
keenly elsewhere. Indeed, its sponsors said they also hoped the bill would
send a strong message to regulators in Europe, who are considering
auditor term limits, that mandatory rotation would be unlikely in the U.S .
“Mandatory rotation is unworkable in an industry where firms
often have only one or two providers to choose from,” Gregory Meeks,
a Democratic Party representative from New York and a co-sponsor of
the rotation prohibition bill, tells A Plus. “Mandatory rotation is costly,
and may be very disruptive. Studies conducted in the U.S . showed an
increased cost of 20 percent in subsequent years and an additional 17
percent cost for the selection process,” he adds.
Meeks says the free market should be allowed to work. “I believe in
market competition, and there is currently no law that favours only the
Big Four accounting firms,” he points out. “Eventually, we may have new
auditing firms that emerge and gain the confidence of companies and
investors. When that happens, I think that rotation will happen naturally
through market forces, not through legislation,” he adds.
Maxine Waters, a Democratic representative from Illinois and a senior
member of the House finance committee, opened the door for negotiation
by sponsoring a successful amendment requiring the Government
Accountability Office, the congressional auditor, to study the issue and
include a cost-benefit analysis. “I would be open to further debate of this
issue if facts and market conditions change significantly,” says Meeks.
The American Institute of CPAs opposes mandatory rotation and hopes
the recent House vote will clear any doubt. “The PCAOB should pay heed
to the recent congressional vote and refrain from any further consideration
of a mandatory firm rotation requirement,” says Mark Peterson, the
AICPA’s senior vice-president of governmental and public affairs.
Many senior accounting industry figures agree. “My thought is that a
rotation of the audit partner on an engagement would be beneficial [but]
I do not think that a change in audit firms is the proper approach,” says
John Dee, chief operating officer and chief financial officer of Bostrom, a
Chicago-based accounting firm that specializes in nonprofit organizations.
However, the U.S . profession is not unanimous. “I personally believe
that mandatory rotation is an idea that should be seriously considered,
and I am disappointed that the U.S . will not be in the forefront of the
movement,” says Gaylen R. Hansen, a partner with the EKS&H firm in
Denver and chair of the board of the National Association of State Boards
“There is something that just doesn’t feel right when an audit firm has
served for over 25 years and in some cases even over 100 years,” Hansen
adds. “I don’t know if there is anything that can replace [mandatory firm
rotation] in terms of the impact on professional scepticism.”
Despite its easy passage in the U.S . House, the bill is expected to have
a much tougher time in the Senate, and even if it passes there, President
Barack Obama might well exercise a veto. The final result, say political
observers, is likely to be a compromise.
One solution might be a bill to impose mandatory tendering of audit
contracts. Whatever the outcome, political strategists in Washington add,
accountants are almost certain to face more stringent enforcement and
tougher inspections. Hong Kong stakeholders will be watching closely.
18 August 2013
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