Mandatory Audit Firm Rotation – Recent Conversations

During the past few weeks we have had the opportunity to meet with several nonprofits who are contemplating a change in their audit firms. One of the questions asked was whether there is any requirement to change audit firms after a number of years. Here are some thoughts and research on the matter.

The concept of mandatory auditor rotation comes from the Sarbanes-Oxley Act of 2002 (the Act) which dictates requirements for public companies. Enforced by the Securities and Exchange Commission (SEC), the Act requires a public company to rotate audit engagement partners every five years but contains no requirement for the rotation of audit firms. In fact, the U.S. House of Representatives, in July 2013, approved a bipartisan bill that would prohibit the SEC from requiring mandatory audit firm rotation for public companies. The bill would amend the Act to prohibit the SEC from requiring public companies to use specific auditors or requiring the use of different audit firms on a rotating basis. The bill would have to be approved by the Senate, which has not taken up the issue, and signed by the President to become law.
Given the stance taken for public companies, which is that mandatory rotation of audit firms is not a good idea, why does this topic continue to be discussed by nonprofit entities? The discussion likely stems from a deep desire of board members and trustees to hold themselves and their organizations to the highest level of fiduciary responsibility. This high level of responsibility suggests a routine evaluation of all significant vendor relationships, and evaluating whether you are receiving value from your audit firm is a reasonable question to raise and answer.

Many nonprofit entities respond to this desire to refresh their audit relationship by rotating audit engagement partners within the same firm every five or seven years. This is a reasonable response and allows the nonprofit to experience a fresh set of eyes on the engagement without the time spent in interviewing audit firms to achieve this goal.

Our advice – if you are not satisfied with the relationship between your Board or Audit Committee and your audit firm, consider your options which might include a change in service providers. On the other hand, if you believe you are with a full-service, qualified firm but would like to refresh the relationship, discuss with the firm your desire to change audit engagement partners. This small change may be all you need.

As always – let us know if there is anything Eide Bailly can do for you!

By: Peggy Jennings, Partner
Denver office
Eide Bailly, LLP

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