Accounting News

Thursday, January 12, 2012
Mandatory Audit Firm Rotation

The International Standards for the Professional Practice of Internal Auditing proposed that audit firms be rotated every few years. The goal is to increase the independence and objectivity of the audit firm. If a firm is working to maintain the relationship and be awarded the work the following year they need to keep the audited firm happy. In a worst case scenario could mean intentionally overlooking problems with the financials.

The Institute of Internal Auditors (IIA) does not believe that there are any problems with keeping the same auditory over many years. They consider the relationship between the company and its auditor to be very important. If the auditor is changed too often this relationship will never be very strong. It will also increase the cost of an audit because there will need to be time for the auditor to learn about the company. The IIA suggest only requiring a company to change auditors if there are indicators of audit failure.

It is easy to appreciate the concerns of the IIA. There is little doubt that the cost of an new auditor is higher. But in the end an audit is performed to ensure that public financial data is accurate. The conflict of interest between staying on as auditor and maintaining independence override the costs. They are worried about all the business they will lose but not considering all the business that is now available for bid.