How often should you rotate your auditor? Many board members from publicly-traded companies encourage the nonprofit boards they serve to explore audit firm rotation as a best practice. But, is it a best practice?
The arguments FOR rotation include:
- Audit objectivity. While there is not a standard for mandatory audit firm rotation, some believe it is necessary for audit independence.
- A “fresh look.” Depending on organizational and environmental conditions, your audit may profit from new perspective.
- The antidote for this argument is to ask your audit firm to rotate the engagement team – partner and/or staff. This allows you to retain the expertise, industry knowledge, and service you’re receiving from the incumbent firm, while adding the “fresh look” component you might be seeking.
The arguments AGAINST rotation include:
- Increased costs. More costs may be incurred by the organization and its staff in the procurement process and initiation of a new firm. There may also be an increase in audit costs due to additional time spent in the first years of an audit relationship.
- Of note: The Government Accountability Office surveyed hundreds of companies and auditors about audit firm rotation and reached the general conclusion that rotation increases costs and has very little, if any, effect on the quality of audits.
- Decreased service levels. Some organizations notice that the level of service they receive from their current audit teams decline as the relationships comes to a close. This should not be the case, but it does happen occasionally.
- Loss of existing organizational knowledge and relationships. Likely, your audit firm has a good handle on your industry and your organization. Starting from scratch when it comes to building relationships and bringing a new firm up to speed can feel daunting.
How do you determine what is best for your organization?
- Ensure independence and objectivity. Ask yourself whether your current firm adheres to and performs in accordance with auditing standards. In addition, all firms are subject to a peer review process every three years to ensure the processes of independence and objectivity are followed. Ask your firm for its most recent report.
- Look for participation. Is your auditing firm anxious to meet with your audit committee to discuss procedures, help them understand objectivity, and discuss any matters that have come to the auditor’s attention? Passionate auditors are valuable to the success of your organization.
- Consider level and quality of service. If you are not receiving the level and quality of service you expect, discuss the issues with your auditors. If they are no longer able to meet your standards, a change may be in order.
If you’re still unsure about whether or not to switch auditing firms, check out the AICPA’s new Not-for-Profit Resource Center. Specifically, they have an Audit Committee Toolkit that includes a paper titled, “AICPA Not-for-Profit Audit Committee Toolkit- Evaluating External Auditors.” This checklist will guide you as you consider the performance of your current auditors.