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Setting the benchmark in corporate integrity

Mandatory auditor rotation unnecessary, says Canadian business institute

Calls to make rotation of auditing firm’s compulsory are rejected by Canada’s Institute of Corporate Directors

In light of recent concerns over how transparent companies are being in the way they report their finances, there have been repeated calls for the mandatory rotation of auditors to ensure there is no collusion going on between businesses and their accounting firms.

However, a recent paper has been released by the Global Network of Director Institutes (GNDI) stating their opposition to any new rules that would enforce such rotation of auditors. In partnership with Canada’s Institute of Corporate Directors (ICD), the group said that any regulations that made it compulsory to rotate auditors would pose serious challenges to companies, including through loss of audit knowledge, an increase in time and expense, a loss of flexibility and industry specific knowledge.

The GNDI’s Deputy Chairman, Stan Magidson, who is also CEO of the ICD, said in a statement: “The ICD has been extensively engaged on this topic, providing input to the Enhancing Audit Quality Initiative led by the Canadian Public Accountability Board (CPAB) and Chartered Professional Accounts (CPA). We are pleased to see our views prevailing among our global counterparts, representing thousands of board directors around the world.

“Global consistency on this issue is particularly important for Canadian organisations that conduct business globally. They should not be required to comply with conflicting external auditor requirements.”

The report highlights a series of specific concerns with mandatory auditor rotating, including the loss of experience and knowledge of a business that would occur when changing auditor. It says: “MAFR (Mandatory Audit Firm Rotations) would result in losing the cumulative audit knowledge gained over the years at arbitrary intervals.”

It adds that MAFR would also “eliminate the right and ability of shareholders from determining who their auditors should be and when it is necessary to change” them.

Instead of strict regulations, companies should be encouraged to focus on the quality of their audit and strengthening their audit committees. John Colvin, Chair of the GNDI and CEO of the Australian Institute of Company Directors, added: “In this perspectives paper, directors are strongly arguing that regulators should focus on improving the quality of the audit, by reinforcing the board or its audit committee’s responsibility for the oversight of the audit, audit firm and quality and where necessary enhancing the expertise of the audit committee and potentially expanding communications between the audit firm and the audit committee.

“Further, work may be required to ensure that users of financial statements increase their understanding of the role and nature of an audit, thus narrowing the audit expectation gap.”

In Europe, Internal Market Commissioner Michel Barnier has called for auditors to be changed every 14 years, while the UK Competition Commission is currently consulting on whether to introduce similar laws there.

 

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