Why Rotate?

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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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