Home > Risk > UK Finance Directors speak out on the topic of external auditor reform

UK Finance Directors speak out on the topic of external auditor reform

October 11, 2011 Leave a comment Go to comments

The Hundred Group represents the Finance Directors (CFO in other parts of the world) of the UK’s largest companies, primarily drawn from the largest 100. They have penned a letter to the European Commission, with their views on some of the proposals being floated in the EU.

The group didn’t mince their words. For example:

“We are deeply concerned to hear that the Commission is considering legislating for mandatory joint audits, mandatory auditor rotation, the creation of specialist audit firms and the widespread prohibition of non audit services. Such radical and untested proposals are likely to have very significant and profound implications for the way audits are conducted, none of which are likely to be positive to investors or other stakeholders.”

They continue with even more scathing criticism:

“In our view, these proposals show a fundamental misunderstanding of both the way that external audits are conducted and the current structure of the audit market. They will have the effect, both directly and indirectly, of reducing audit quality, increasing cost and diminishing the value of the audit opinion to investors, without any compensating tangible benefits.”

They attack the merits of appointing a second audit firm (common in France), and make this excellent point (with which I agree) when it comes to the effect of auditor rotation on quality:

“Rotation risks a reduction in audit quality in the initial and final years of the appointment.”

I don’t agree with their suggestion to loosen the rules about providing non-audit services, because the competition for the work alone could be perceived as impairing the independence of the auditor. Personally, I think the tax work that is often done is a conflict because the auditor is then put in a position of assessing the work of his tax experts.

I also agree with this statement, in the Appendix:

“The auditors are not responsible for, nor should be requested to present information on, the strategy, risks and management of the company. This is at best repetitive, and at worst fundamentally undermines the relationship between Directors and investors.”

What do you think of these proposals? Do you think auditor rotation is a good idea?

 

 

  1. October 11, 2011 at 4:19 PM

    To be honest I am surprised that the members of this group found the time to make comment. There must have been a pen at the 19th hole bar, space on the back of the score card and the offer of another round and lunch from a big 4 SP as an inducement to put pen to paper in support of creative rhetoric to their joint benefit. Call me a cynic😉 Seriously though, I do think it important to rotate audit. I can understand that the firms do not like it but I believe in strength through diversity. I appreciate that the changeover can be problematic but I guess it is also up to the client to ensure the services that they receive from both parties are as seamless as possible. Thanks for this interesting item Norman.

  2. October 11, 2011 at 4:51 PM

    These ideas are neither radical nor untested. Joint audits have been conducted in countries like France and South Africa for a number of years, and seem to work well. Joint audits also have the added benefit of helping smaller practices compete in the market.

    I think the point about a reduction in audit quality due to rotation is unfounded, and if we remember correctly rotation was first discussed a number of years ago exactly because it was felt that audit quality was possibly being compromised by the same auditor serving a client for decades.

  3. October 11, 2011 at 7:44 PM

    Until there is accountability there will be no accountability. Therefore the EC is justified in their assessments.

  4. H. Lederman
    October 12, 2011 at 7:58 AM

    By rotating audit assignments, and prohibiting auditors to engage in business that may result in a conflict of interest, the EC is taking a step in the right direction. As auditors, we are always talking about independence and objectivity. The proposed rules add credibility to these ideals.

  5. Deb
    October 12, 2011 at 9:51 PM

    As pointed out by Ramki of PKF in a related discussion group, both auditor rotation (especially at public sector enterprises) and joint auditors (including at associates of many US-based insurance companies) have worked for decades in India. There have been no findings that this leads to a fall in audit quality, rather it may be the other way round (which is perhaps the raison d’etre for the whole proposal).

    This initiative needs to be supported, getting over all well-meaning scepticism (but not motivated banter by parties with vested interests, who may not be satisfied with anything…).

  6. Fabrice
    October 13, 2011 at 5:01 AM

    Norman

    First, I wanted to point out that your website is a goldmine – many posts are just Gold pepite in my view (some may find it normal as you are living on the west coast)

    Second I have the feeling that the EU Commission does not address the true problem with auditors. If the core problems are not discussed by the auditors, whoever represent the profession, changing the speaking partner (rotation) or adding another one (joint audit) will not change anything. What is needed is a structural change in the audit profession where auditors have REALLY the possibility to challenge their clients.

  7. October 13, 2011 at 6:46 AM

    I can understand why the Hundred Group may be concerned, but the recommendations do make sense. Rotating audit assignments would help to reduce the cosiness of the relationship and take away some barriers to challenging the client. We all know there remain serious conflicts of interest in the current setup, and ensuring that audit firms can only audit would definitely change that. It is a major structural change though and there will be obstruction and obfuscation in the process.

    I understand the concern that there will be a greater cost to the client in bringing the new auditors ‘up to speed’ but there is a payoff in better independent assurance, which is in the interests of the shareholders.

    Another idea would be to take away the commercial conflicts of interest completely by eliminating audit fees and replacing them with a corporate fee (tax( that funds the independent audit. Then there would be no direct financial/commercial relationship between the audit firm and the firm being audited. But this might be a step too far and there would need to be a body to administer the process . . . . but at least it would be a job creation scheme!. . . ,

  8. December 3, 2011 at 6:35 AM

    I think audit rotation is good and will not be a major problem. It never hurts to get a different set of eyes and perhaps opinions.

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