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Mandatory Auditor Rotation .

Mandatory Auditor Rotation . Hasan Kılıç 26 April 2007 Antalya. Index. Why Discussing Rotation? New Regulations and Mandatory Auditor Rotation Auditor Rotation in the World Auditor Rotation in Turkey Why Rotate? Rotation is not the Solution Alternatives to Rotation

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Mandatory Auditor Rotation .

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  1. Mandatory Auditor Rotation. Hasan Kılıç 26 April 2007 Antalya

  2. Index • Why Discussing Rotation? • New Regulations and Mandatory Auditor Rotation • Auditor Rotation in the World • Auditor Rotation in Turkey • Why Rotate? • Rotation is not the Solution • Alternatives to Rotation • Responsibilities of Companies • Results of Certain Studies

  3. Why Discussing Rotation?

  4. New Regulations and Mandatory Auditor Rotation • Sarbanes – Oxley Act (US) • 8th Directive (EU) • CMB, Capital Markets Board Auditing Standards (Communique X/22) • BRSA, Banking Regulation and Supervision Agency Auditing Standards

  5. Auditor Rotation in the World • US: Audit firm rotation is not mandatory, rotate only audit partner: 5 years (7 years for some cases) • EU: Audit firm rotation is not mandatory, rotate only . audit partner: 7 years (Rotation is left to member country jurisdictions.) • Canada, Japan & Australia: Rotation discussed but mandatory in these countries. • Italy: 6 years + 6 years = 12 years

  6. Auditor Rotation in Turkey • CMB Communique X/22 • 7 years • Start: 2003 • End: 2009 • Rotate: 2010 • BRSA Communique • 8 years • Start: 2002 • End: 2009 • Rotate: 2010

  7. Why Rotate? Closeness to Client Management • Interact intensively with client • Troublesome close relationship • Conflict of interest when contentious issue • Lack of professional scepticism • Auditors hired by former clients Staleness & Redundancy • Repetition of prior audits • Tendency to anticipate results • Reliance on prior audit workpapers • Less experienced audit staff Eagerness to Please the Client • Please the client so as to retain for future periods • The most compelling argument on auditor rotation

  8. Rotation is not the Solution • Auditor should interact with management, • Relationship with client should not be limited by number of years, • Management should be willing to share information, • Solution partner when problems arise, • Audit of documentation goes with sharing of information. • Close relationship contribute sharing of information. • Prior experience increase audit efficiency. • Understanding of client operations and changes in activities over periods, • Less disruption of day to day business, • No proof of the benefits of mandatory audit firm rotation.

  9. Rotation is not the solution (cont’d) • Studies highlight rotation decreasing audit quality. • Rotation increases cost of audit firms as well as cost of audit services received. • Pressure to please client due to rotation, • Less attention to a client to rotate, • Rotation may result in opinion shopping.

  10. Alternatives to Rotation • Supervision of audit firms, • Rotating audit partner (problem for small firms), • Improving independence policies, • Assigning second partner for quality assurance review, • Internal quality control procedures, • Emphasizing the importance of audit team independence, • Risk and independence policies.

  11. Responsibilities of Companies • Improving duties and responsibilities of audit committee under corporated governance principles, • Evaluation and assesment of audit firm services, • Coordination bete • Collaboration between management and audit committee, • Independence board members and audit committee members, • Effective accounting and reporting standards, • Improving the responsibilities of management on accounting and financial reporting, • Ethical principles.

  12. Results of Certain Studies • PCAOB Study: Average audit failure rate is three times higher in the first years. • US General Accounting Office (GAO)/ General Accountability Office Report: • No evidence of auditor rotation guaranteeing better audits. • 99% of Fortune 1000 companies do not have policy on auditor rotation. • Average tenure for Fortune 1000 companies is 22 years, 10% with 50 years of audit with the same auditor. • Federation des Experts Comptables Europeens (FEE) Study: • Mandatory auditor rotation has serious disadvantages outweighting perceived benefits. • Audit firm rotation should not replace audit partner rotation. • Intensive interaction for understanding and auditing client’s operations cannot be established with a short period of services. • Audit failure subsequent to rotation is more likely to occur.

  13. Results of Certain Studies (cont’d) • Bocconi University Study: • Rotation has an adverse effect on competition rather than improving it. • Higher costs for auditor and auditee. • Rotation decreases the quality of services in the first years. • Rotation adversely affects shareholders and share values. • AICPA Study: As per the federal hearing statistics, rotation leads to audit falilures in the first years above the average.

  14. Member of Deloitte Touche Tohmatsu

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