Auditor Rotation

12-0825 - musical chairsAuditor rotation is again receiving a lot of attention. Many board members from publicly-traded companies encourage the nonprofit boards they serve to explore audit firm rotation as a best practice. While there is not a standard for mandatory audit firm rotation, some believe it is necessary for audit objectivity. Many others believe the costs would significantly outweigh any benefits.

Generally, the main reason organizations look at audit firm rotation is to provide a “fresh look” at their organization and operations. This is a valid issue, and one that audit firms regularly address in their procedures. Independence and objectivity are the basis of the audit process. Auditors are required to perform and document their work in accordance with auditing standards and firms are subject to a peer review process every three years to ensure the processes are followed.

Audit committees can help ensure the audit they are receiving brings value. They should meet with their auditors regularly to understand the processes and procedures used in the audit, how the auditors maintain their objectivity, and to discuss matters that come to the auditor’s attention. When there is a continuing interest in gaining a different perspective, many audit firms are able to rotate the engagement team – partner and/or staff. This allows the organization to retain the expertise, industry knowledge, and service they receive from the incumbent firm.

The drawbacks of frequent audit firm rotation include the costs incurred by the organization and its staff in the procurement process and initiation of a new firm, an increase in audit costs due to additional time spent in the first years of an audit relationship, and a potential decrease in service level as the end of the audit tenure approaches. The GAO surveyed hundreds of companies and auditors about audit firm rotation. The general conclusion from those responding was that rotation increases costs and has very little, if any, effect on the quality of audits.

When is rotation of auditors appropriate? Organizations that are not receiving the level and quality of service they expect should discuss the issues with their auditors. When the current auditors are no longer able to meet the high standards of the organization, a change may be in order.

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