Companies that are married to their auditors

By Amit Tandon

In the debate on 'mandatory auditor rotation'  its  supporters and opponents are evenly balanced.

The proponents weighing in on the auditor being replaced every few years  cite auditor's incentive to cosy up to the management, who pay their fees, is reduced once they know they will be replaced.  In addition they argue that a mandatory change would keep the current auditor in check if they fear that a new auditor would expose any previous errors or omissions.

Its opponents argue that the costs of mandatory rotation are far higher than the perceived benefits. Today's corporations are very complex, and an  auditor must develop industry and company specific knowledge to fully understand the company's finances. Mandatory rotation erodes this institutional knowledge and reduces audit quality thereby undermining the very purpose of the mandatory rotation is set out to achieve.

It is important to note that  no centralized database exists regarding tenure of auditor. One has to go find company annual reports to ascertain the terms of the audit firms. As most companies have annual reports going back five or ten years on their website,  this data is patchy. However IiAS has managed to  collect some data on the length served by the auditors.

IiAS recommends auditor rotation every six years, with change in audit partner every three. Till this gains currency IiAS proposes  that companies disclose the following at the time of seeking  re-appointment:

*For how many years has the audit firm being auditing the companies accounts

*For how many years has the audit partner been signing the accounts

*Total and audit fees paid during the last three years, and what is proposed during the current year

*Chairman of audit committee should  give the reason for recommending the reappointment  of the audit firm (if term is beyond six years)

(The writer is is the founder, managing director of IiAS, a proxy advisory firm)

For details of auditor tenure at leading companies, click the attachment below:

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