. 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 • Responsibilities of Companies • Results of Certain Studies Mandatory Auditor Rotation/ Hasan Kılıç ©2007 Deloitte Türkiye 2 Why Discussing Rotation? Mandatory Auditor Rotation/ Hasan Kılıç ©2007 Deloitte Türkiye 3 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 Mandatory Auditor Rotation/ Hasan Kılıç ©2007 Deloitte Türkiye 4 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 Mandatory Auditor Rotation/ Hasan Kılıç ©2007 Deloitte Türkiye 5 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 Mandatory Auditor Rotation/ Hasan Kılıç ©2007 Deloitte Türkiye 6 Why Rotate? Closeness to Client Management Staleness & Redundancy Eagerness to Please the Client Mandatory Auditor Rotation/ Hasan Kılıç • • • • • Interact intensively with client Troublesome close relationship Conflict of interest when contentious issue Lack of professional scepticism Auditors hired by former clients • • • • Repetition of prior audits Tendency to anticipate results Reliance on prior audit workpapers Less experienced audit staff • Please the client so as to retain for future periods • The most compelling argument on auditor rotation ©2007 Deloitte Türkiye 7 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. Mandatory Auditor Rotation/ Hasan Kılıç ©2007 Deloitte Türkiye 8 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. Mandatory Auditor Rotation/ Hasan Kılıç ©2007 Deloitte Türkiye 9 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. Mandatory Auditor Rotation/ Hasan Kılıç ©2007 Deloitte Türkiye 10 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. Mandatory Auditor Rotation/ Hasan Kılıç ©2007 Deloitte Türkiye 11 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. Mandatory Auditor Rotation/ Hasan Kılıç ©2007 Deloitte Türkiye 12 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. Mandatory Auditor Rotation/ Hasan Kılıç ©2007 Deloitte Türkiye 13 Deloitte Türkiye Member of Deloitte Touche Tohmatsu