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Auditor rotation not a revolution

Posted on September 14, 2010 | Author: Tina Edwin | View 2019 | Comment : 44

Mandatory rotation of audit firms maynot be feasible as most of them are small and do not have the capability to audit accounts of large firms.

artical Picture Familarity rarely breeds contempt between companies and their auditors. More often than not, it results in a level of comfort that weakens auditor independence and reduces audit quality. The price of that closeness is then borne by the non-promoter shareholders, investors, employees and other stakeholders in the company.

Sometimes, it threatens the survival of the company. Such relationships are believed to be the cause for the multi-crore financial fraud at Satyam Computer Services as well as for the collapse of Lehman Brothers in recent years and for the demise of Enron and WorldCom in the early part of this decade.
    
The US administration responded to the many instances of corporate fraud with Sarbanes-Oxley Act of 2002, which, among other things, required mandatory rotation of the lead audit partner and the concurring partner every five years, and cooling off period of five years before that partner could audit the same company.

Other partners of the audit team are to be rotated after seven years, with two-year time-out from that account. The Act did not seek mandatory rotation of the audit firm.
    
For that matter, very few countries such as Italy, Brazil and South Korea have stipulated mandatory rotation of the audit firm, most others have stipulated only rotation of audit partners.
    
Cross over to India. The fraud at Satyam, no doubt a bolt out of blue, appears to have had a deep impact on our lawmakers. So, the ministry of corporate affairs is now planning to make rotation of not just the audit partners but also of the firms mandatory.

The proposal came up during the review of the Companies Bill of 2009 by the standing committee on finance, chaired by former finance minister Yashwant Sinha.

The committee wanted such provisions in the Act to prevent recurrence of frauds perpetrated by promoters and managements in connivance with the auditors of the company. If the proposal does find its way into the Act, the companies will need to find themselves a new audit firm every five years.
    
That’s not all. Individual auditors cannot hope to continue their association with the client after they have completed 3-5 years of consecutive term by hopping to another firm.

A time-out stipulation would make him ineligible for such reappointment for three years. For the audit firm, the cooling off period is proposed to be five years. Also, firms will need to rotate audit engagement partner after three years.
    
Such proposals to ensure auditor independence would without doubt sound good on paper and are well intentioned. But the feasibility of implementing such proposals is debatable, particularly when the audit business is highly fragmented and the firms are small.

A majority of audit firms in the country are small setups with a handful of partners. Most of them would not have the capacity or the capability to audit accounts of large firms. Besides, most companies would prefer to work with established names in the business.

So, more likely than not, mandatory rotation of firms would result in audit mandates circulating among the same set of firms. That will defeat the purpose of trying to break the cosy relationship between company managements and auditors.
    
The economic benefits of mandatory rotation of audit firms have yet to be established globally. Proponents of mandatory rotation feel that new auditors will bring in fresh points of view that the outgoing auditor may not have.

Opponents, however, would disagree: they feel that an incoming auditor would take time to understand the business of the client, and during that period, the quality of audit may be impaired.

And, it is not necessarily true that rotation would prevent auditors from getting very comfortable with the company or turning a blind eye to non-compliance with law.
    
India Inc has all along been opposed to the mandatory rotation of audit firms. Almost all the committees on corporate governance set up in the past few years have favoured rotation of audit partners rather than rotation of audit firms.

The last one, a CII taskforce on corporate governance chaired by Naresh Chandra, too in its report of November 2009 recommended rotation of audit partners every six years, with a three-year cooling period before the partner could resume the audit assignment. The Naresh Chandra committee of 2002 and JJ Irani committee of 2003 too had favoured rotation of partners rather than firms.
    
The wisdom of the legislating mandatory rotation of audit firms, when mandatory rotation of audit partners is not yet required under law, needs to be questioned, even though it is well intentioned.

It may make more sense to begin with mandatory audit partner rotation and then consider moving to firm rotation. Alongside, the government could also stipulate that joint audit by two firms to improve corporate governance.

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Comments (44)

  • small firms can audit better than the so called 'big' firms like pwc& e&y

    Posted by CA. Sethu S. Money | 01 Oct, 2010

  • Rotation should be compulsory.

    Posted by Chandak C.K. | 25 Sep, 2010

  • Firm and partner rotations are expected to trigger fresh look into company's records. New firm or partner may need time to learn operations of the company but these need to sharpen their professional skills beyond tradition. An efficient doctor quickly diagnose ailment with his skilled eyes and fingers than a lagging one who depnds more on pathological tests. Therefore, rotational audit will compel skill improvement. However, some element of client satisfaction will always drive an audit firm. A review audit of atleast big companies by central agencies like CAG, CBDT, CBEC, BICP, MCA, etc as appropriate may supplement rotational benefits. From Debtosh Dey, M.Sc (Engg), FIE, AICWA, ACS, LL.B.

    Posted by Debtosh Dey | 23 Sep, 2010

  • yes the audit firm should be rotated, then only the audit firms could grow otherwise if it roam around few bigs there will be a chance of another SATYAM scandal

    Posted by Goutam Chakraborty | 20 Sep, 2010

  • Its Very Much True Rotation may not be feasible for Small Audit firm to Larger Accounts since they will not be well Equiped (ManPOwert)to do audit of Larger Firm Audit , And Small Audit Firms are not Exposed to Do Audit of Larger Accounts as they are restricted to Smaller Accounts,While doing rotation one has to consider the Size of Audit Firm ,Manpower etc For Feasibility.

    Posted by Kaviraja Addangadi | 17 Sep, 2010

  • Audit for larger companies and production houses is to understand how the departments are functioning and to capture if there have been certain mistakes committed and to take remedial action in the interest of organisation and its obligations to its share holders, associates, employees welfare etc., the top management should not fall prey or establish nexus with the Auditors like that of Sathaym leading to scam, hence like job rotation it is better to appoint new auditors once two years to have grip and control of the organization functioning.

    Dr. J. Rajashekaran, Advisor, Sanjeev Combines, Bangalore

    Posted by J. Rajashekaran , Advisor at Sanjeev Combines | 17 Sep, 2010

  • Change the Audit Firm--- It will lead to network of audit firms who will now stage manage the Company in group which was earlier done individually. All these rotation and joint auditing is useless unless basic intention of the Company is right. You can not expect a firm to stand against its Paymaster. Can Income Tax department itself make a panel of auditors and they decide randomly which firm will do audit of which Company. Payment will be done by Dept. and in return they will charge the same from the Company??

    Posted by Pakki Kandal Rao,Senior Manager, Projects & Engineering at Nicco Projects|17 Sep, 2010

  • Worked as a Sr.Internal Audit Manager and subsquently as a Sr.Regional Finance Manager of one of the reputed MNCs in India and out of my experience I do strongly in favour of legislating mandatory rotation of audit firms for a certain period and signing of the accounts on each year by a separate partners.

    Shyamal Dey Biswas, Solutions Delivered to Management,Kolkata.

    Posted by shyamal Dey Biswas , Proprietor. at Solutions Delivered to Business. | 16 Sep, 2010

  • Compulsory rotation is a MUST. The auditors are like police and their job is to detect possible fraud to the nations's wealth. Whenever any Department of the Govt finds frauds, scams in the matter of tax payment by the citizens etc, FIR is to be filed against the Audit Firm concerned. Bring a law like this. Then all the black money, money laundering, undervaluation, tax evasion etc will vanish from the country and is a fitting tool to bring down the Inflation. Whatever Ramalingaraju has done, he has to be complimented having shown auditors in poor light and even ensuring imprisonment of an auditor. These days auditors are only signature selling traders, doing nothing significant.

    Posted by N Srinivasan , Retd at Canara Bank | 16 Sep, 2010

  • I want to change. But right now I have no better option. If you may give a better oppertunity I can change.

    Posted by Binay Kolley , Sr.Audit Assistance at N.Haldar & Co. | 16 Sep, 2010

  • The point here is how far the audit firm sticks to its ethos. See the condition of ISO audit firms. All are on sale irrespective of size and origin of Firm. The nexus between Audit Firm and Company cannot be broken merely by changing the Audit Firm. The transperency in corporate governing is only way out.

    Posted by Pakki Kandal Rao,Senior Manager, Projects & Engineering at Nicco Projects|16 Sep, 2010

  • Audit firms obligatorily rotated after a block period of 3 years or 5 years( debatable but after a block period). This ensures auditor alert ness. In addition, an audit by a team of independent auditors from different audit firms can be considered for large organisations.

    Posted by Muralidhara NS | 15 Sep, 2010

  • Rotation of Auditors may not be suitable as there are many small firms who are not in a position to carry out large company audits because of manpower constraints. It may be in other way that the same partner of big firms should not sign the accounts of big companies every year. In fact there should be rotation of signing partners of same firm. However transparency depends on the integrity of the company's management and Independent Directors should play the role absolutely independently in a professional manner.

    Posted by Utpal Chaudhuri | 15 Sep, 2010

  • Very correct Mr. Abhyuday Chowdhury. CA firms who are doing audit are responsibile for presentation of correct data. Who are not discharging their duty, should face harsh punishment. After all direclty are indireclty they are doing cheating with company's money. Whether direct shareholders or public money through banks. If our Accounting System will collapsed, the whole industry and India inc. will suffer badely.

    Posted by Anil Kumar Srivastava , Country Head - F & A at Global Export Singapore Ltd. | 15 Sep, 2010

  • Whenever there is a discussion on any change we refer to the west. The bigger consultants influence us to do so as the business comes from there. The west is guided by a thinking society, we saw enron,worldcom,lehman brothers and we saw Sabanes-Oxley Act also. India is yet to amend its own Companies Act to suit the need of the business in India. MD of a very welknown company of Germany was jailed after the relevant Act was amended in Germany. Previously bribing outside Germany was not punishable under the Act. But the country was quick to act. All accused of the satyam shall come out if CBI and judiciary do not take the lead-- this is India. Bigger or smaller, audit firms survive not on the audit fees but on brokery - by whatever name you call it.Companies change auditors till they get ...See More

    Posted by Abhyuday Chowdhury,Partner at practising CA|15 Sep, 2010

  • most of the audit firm are only loyal to the local govt bodies and tax dept and financial institutions only not to the governing body of management or proprietor or managing director. this is the one reason that they are sucessful in 100% error free audit practice and proceedures. ragav iyer

    Posted by ragavan , Accounts Executive at SBPT, SRPR | 15 Sep, 2010

  • The rotation of auditor is not a solution for any type of audit. I have done Risk Focussed Internal Audit independently of 80 bank brnaches for 5 yrs, I found that audit done by CA firms is good in respect of accounting but not so in other areas due to lack of expertise nad time constraints. Further as they are operating firms as profit centre this is a conflicting of interest, no company like to have a adverse report. It is my personal view as per my experience the audits are not being done in effective ways otherwise we don't have Satyam and Enron etc.
    It is my st rong belief that there should be a Comptroller Auditor General type independent institution encacted by Parliament, which have seperate divisions different sectors/companies with expertise in their respective field, ...See More

    Posted by C.S. Maurya | 15 Sep, 2010

  • Time and again this subject has risen for discussion, in India, and all over the world. It is a must that each and every statutory accounting firm must not be reappointed at the end of completion of three years of statutory auditing tenure. Automatically, this will leverage the size of firms, no auditing firm the world over will be too large or too small; and they will have enough audit work to handle as they grow in size and number of employees in the organization. Rotation every three years is a must.

    Posted by FCA PRASHANT CHAVAN , HEAD - RISK ASSURANCE at ANB CONSULTING CO. PVT. LTD. | 15 Sep, 2010

  • Rotation is not the problem or solution and a Satyam or Lehman Bros are exceptions. If one thinks that rotation will wish away these occurances one is dreaming. Look at the top 100 companies in the world ... how many went kaput because of the auditors or their rotation. Next we will want to rotate the MD and the Management team. We have enough regulatory checks and balances so no need for rotation theory. Does not work in the real world.

    Posted by bambi roy , auditor at ABC Ltd | 15 Sep, 2010

  • The Statutory Auditors ( with a few exceptions) of a Listed Company seldom demonstrate independence and impartiality in
    arriving at the conclusive opinions that are expected to provide the necessary information, guidance and
    caution to the stakeholders other than the management.
    ...See More

    Posted by Venkata Satyanarayana M Akella , Certified Fraud Examiner at IndependentConsultant | 15 Sep, 2010

  • YES OF COURSE, NOT BEFORE CONTINUING THREE YEARS FOR SUGGESTION THE ROTATION OF AUDIT FIRMS MUST BE COMPULSURY AND RECTIFICATION TOO

    Posted by saleem peera , ex-Audit officer at v.s. patel and co. | 14 Sep, 2010

  • How can rotation of partner instead of firm help, when in most of the firm the audits are done under the overall management of the senior partner? And when other partners, especially salaried partners have an unwritten boss-subordinate relationship with the senior partner?

    Posted by A.K. Ghosh | 14 Sep, 2010

  • As a member of the CA faternity, my recommendation should be not to change auditors mandatorily. Rather the rules should be made such that the independence of the auditor is not compromised. The removal of the auditor should not be an easy task, this will improve the compliance and will remove the fear factor from the minds of auditors.

    Posted by Rohit | 14 Sep, 2010

  • In my opinion it is better to have the audit allocation through ICAI every year as done for Bank branches by RBI. Regarding small firms, I think a proprietor or a partner of small firm (at least signing person) is reviewing the accounts. Where as in case of big firm not all the partners are visiting/checking the accounts so we can say that it is the name of big banner nothing else. In big banner firm most of the works are done by the staff/article/manager. It is worthless to say those big firms have more talented CA as all CA has succeed through this reputed institute. In reality a partner of small firm or a proprietor is looking various relevant field. I don't think it is correct to say that partners of big firms are having good experience and good knowledge which other CA don't have (As ...See More

    Posted by Ashit Desai,Chartered Accountant - Proprietor at Ashit N Desai & Co|14 Sep, 2010

  • My own expiriance as auditor in software companies is not so good. All Sr.Manager's are wants the things to be undercarpet.And you will become manager if you tell leis & try to dominate with humiliation . They may drag all ur personnel things into use to takeout yo on the way.Most auditing firms including major's will asseses you on the TOP if you make some special arrangement for them. Truely by my assesment neither rotation nor indipenendent will help,unless our business leaders and industry works with little honesty & intigrity. Don't qoute Satyam along with this ,because that was bad time of Mr.Raju. so it leaked out else still we think Satyam would have been is one of the best company & Raju as TOP business leader . In similar tricks there are more companies runnning. It 's just ...See More

    Posted by Suhas | 14 Sep, 2010

  • big firms are afraid of audit rotation as they will not be able to enjoy big fee from big clients. those CA's who are against rotation are from the so called big firms who compromise quality of professional services for pocketing big fee. there is no big firm or big partner as many firms just hold the names but are really not big.

    let us uphold the values and ethics of our great profession and offer the best services to the nation and all interested parties and let the way be made clear for a mandatory rotation of auditors every two years

    Posted by vijayan govindan , partner at v.k.niranjan & co. | 14 Sep, 2010

  • It is like having a Family Doctor. It would be better to have the same auditor to have continuity and also he will be able to spot any weakness before it assumes a big issue/non compliance. It is the basic faith that an Auditor will do his role correctly and there are checks and balances to find out any irregularities.
    Also I concur in the last para statement which recommends joint audit by two firms to improve corporate governance.

    Posted by brahamanapalle Murthy,Manager Internal Audit at Ashok Leyland Ltd|14 Sep, 2010


  • In Indian Context, the debate on rotation of auditors, be it of the firm or of the partner concerned, has been rendered meaningless and only speaks about shifting of the onus of the wrongdoing from wrongdower to the watchdog.
    ...See More

    Posted by Neeraj Prakash,|14 Sep, 2010

  • In my opinion, both the statutory and internal auditors mandatorily be changed once in two years. This system gives no scope for any financial or investment scams in the organisation, as new auditors are always tries to reveal or highlight the weaknesses and non-compliance in the audit reports.

    Posted by T Subramanya | 14 Sep, 2010

  • 5 Year rotation all is a waste exercise.Instead allotment of audit has to be done by MCA or ICAI every year as done for Bank braches by RBI.Regarding small firms dont have capaility/capacity I dont think it is correct.As even big firms / multinational firms partner who sign rarely or even visit client place once in there life time and if visited once they will be busy discussing to increas audit fee with CFO.Only some articles will be left to collect papers and file and So called manager reviews and makes one to 3 page summary for partner to review hence even the papers collected by articles will not be seen by so called MNC partner. Whereas in case of small firm at least signing person will review the accounts.

    Posted by sanjay shresha | 14 Sep, 2010

  • I think Rotation of audit firm in every five years is a good process.But I would like to build up a body (Regionwise/Areawise)from Two Prime Institute-Cost and Chartered Accountants of India where a copy of the audit report of all major Company of the region(Turnover over 10 Crores)will have to be submitted.This Local body will assess the reports of the Company and may call on auditor for any explanation they require.If the body is not satisfied with the answer,they can proceed to higher level-may be to CLB for action.

    Posted by BHASKAR SENGUPTA , DY.MANAGER-ACCOUNTS at JAP STRETCH PVT.LTD | 14 Sep, 2010

  • Strictly speaking like you change auditor. There should be an act / ammendment with regard to to rotate CFO / Finance Head too. He might be the most influential than auditors.

    Posted by Nithyananda Bhat , Manager at XYZ | 14 Sep, 2010

  • Auditor shall be an independent authority to express an opinion on the financial statements, he shall not be influenced by any of factors as such rotation of auditors has got its importance.

    Posted by RAMANATHA PRABHU N,CHARTERED ACCOUNTANT at RAMANATHA PRABHU N|14 Sep, 2010

  • Independence of auditor is more prominent in all this attempts. This can be achieved only through auditors' financial independence. For this appointment of auditors by an independent body which will bear the audit expenses from out of contribution from industry will give more professional independence.

    Posted by Mrutyunjay Bhide | 14 Sep, 2010

  • The recent spate of corporate scandals has cast the spotlight on a glaring defect in traditional accounting practice: audit firms that get too cozy with the companies whose books they are supposed to review & report on accurately and honestly.
    As is evident, there is a heated debate over the merits and shortcomings of such a practice, known as auditor rotation. In my opinion, although several valid arguments are tenable against mandatory auditor rotation, they are far outnumbered by the potential benefits.
    Perhaps the greatest of those benefits is the restoring of badly shaken investor confidence in our financial accounting system.
    ...See More

    Posted by satish.nair | 14 Sep, 2010

  • To protect the interest of the stakeholders and for the sake of transperancy in auditing , the rotation of audit firm is as mandatory as the rotation of auditors --the time limit for the rotation shall be 3 and 2 years respectively. And if the firm size will pose a problem then joint auditors shall be the best option as is the case of audit of Banks. As in today's world almost all the companies are having their internal auditing system in place, hence new auditor or new firm would not be a problem for auditing a new client--- that really the part of the game of auditing, be it for the auditors or for the audit firms.

    Posted by Subrata Neogy , QA/QC Manager at Daelim Saudi Arabia Co.ltd. | 14 Sep, 2010

  • In view of frauds committed across the countries by promoters and managements by taking auditors of the company in confidence, lawmakers across the globe should stipulate mandatory rotation of the audit firms by having a joint audit by the outgoing and incoming auditor. Successful implementation of this will definitely help to improve corporate governance.

    Posted by Chetan Sane,Manager - Internal Audit at Jet Airways India Ltd.|14 Sep, 2010

  • Rotation of audit firms is a must. If firm size is the issue, then audit should be conducted by more joint auditors as is the case with audits of Banks. What prevents Companies from appointing two or more Joint Auditors.

    It is high time that stakeholders see beyond Statutory Financial Audits.
    ...See More

    Posted by CMA. Devarajan Swaminathan,Proprietor at Devarajan Swaminathan & Co. Management Accountants|14 Sep, 2010

  • Certainly rotation of auditors will reduce the manipulation with books of accounts. No audit firm should be allowed to audit the same company for two conjunctive years. There should be a break of at least two financial years.

    Posted by Ashwani Bhatnagar , Managing Director at Satyam Accounting & Hospitality Management Pvt Ltd. | 14 Sep, 2010

  • Well rotation of firm is not good but on the other hand the controls are also required to avoid the chances of any malpractice. So in my opinion Institute and government both have to make certain mandatory rules which should be answered by the each chartered accountant firm before signing any balance sheet or finalizing accounts and a time period should be given say for a week or ten days and in this period if institute have any objection or query than that will be clarified from that firm. in case the institute does not raise any query within this specified period than it should be treated as final and final accounts should be signed.

    Posted by Amit Bagga , Director at Aranyaa advisors Private Limited | 14 Sep, 2010

  • In my opinion mandatory rotation of audit firms as well as partners shall protect the interest of the stakeholders. This would prevent auditors from getting any comfortable zone with the company or turning a blind eye to non-compliance with law.The mandatory rotation period of audit firms and their partners may be fixed for 5 years & 3 years respectively.An incoming audit firm and their partners would not take much time to understand the business of new clients since almost all big companies are having their internal audit department consisting of regional / corporate / social audit teams and the report of which would be guidelines for incoming audit firm besides the last audit report of the outgoing audit firm. Hence, the quality of audit would not be impaired at all ; rather there ...See More

    Posted by Shyamal Dey Biswas , Proprietor at Solutions Delivered to Business | 14 Sep, 2010

  • Rotation of auditors should be mandatory. If some firms are not having big set up, audit firms should be categorized their capacity wise and audit allocation should be according to their size and capacity. In the absence of that fair audit is not possible. Audits firms, who are attached with one company from long period are involved in so many adjustments due to close relation with firms and making good money. If we want to have very fair and true accounting, the rotation is must.

    Posted by Anil Kumar Srivastava , Country Head - Finance & Accounts at Gloab Export Singapore Ltd. | 14 Sep, 2010

  • Rotation of the Auditors will be effective for finding actual facts & the Organization will be benefited with valuable feedback from the auditors. This will be opportunities for the Auditors to explore their knowledge & learning as well.

    Posted by Prakash Kr Ghosh | 14 Sep, 2010

  • Auditor should be rotated and there are mid sized audit firms which has the knowledge and capabilities, It is the fear factor of Board / Audit committee to encage mid sized firms for audits. In case if there is any mal function of Audit firm they can save their skin by justifying that they had encaged the world class and Big auditors.

    Posted by Senthil | 14 Sep, 2010

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