The Sarbanes-Oxley Act of 2002 mandates that publicly held companies rotate the lead partner in an audit firm off the audit project every five years. Many private entities have followed suit, accepting audit rotation as a regular business practice even though they aren’t bound by any requirement.
But they’re missing out on benefits that come with an established working relationship, says Mark Van Benschoten, a principal with Rea & Associates.
“My ability to offer valuable advice only increases with the amount of time spent with a client,” he says. “When you change auditors, you lose that ability to cement a relationship where you fully understand each other.”
Smart Business spoke to Van Benschoten about misconceptions regarding audit rotation and the various benefits derived from a long-term relationship with an audit firm.
Why do companies rotate auditors?
Sarbanes-Oxley came about after the Enron scandal when there was a perception that the auditing firm was too close to the company. The thought was that switching auditors would ensure an independent perspective. Private companies followed the mandate even though it doesn’t apply to them. Many of those same business leaders encouraged boards of the not-for-profit organizations they are a part of to require an auditor change every three to five years. As a result, businesses and organizations severed ties with auditing firms that had done excellent work.
What is required by the law?
People misinterpret the mandate to mean that they must switch audit firms. However, only the lead partner in the audit firm must rotate off the project every five years. Businesses can get a new set of eyes on the audit without changing firms. Auditors have a professional responsibility to be objective. But if you believe someone may be too close, working with a different manager or partner accomplishes the same thing. This way you get a fresh perspective while maintaining the benefits that come with a long-standing relationship.
What are the benefits of keeping the same audit firm?
One is institutional knowledge. When there is a change in staff, an auditor can help educate from a historical perspective, explaining how something came about. This is extremely beneficial with nonprofits that have term limits for board members and experience changes in leadership.
You also can take advantage of an auditor’s industry experience. Someone with more than 100 manufacturing clients can take expertise from one and leverage that among other clients. For example, if a business owner is too focused on one specific area and is not abreast of what’s occurring in the whole manufacturing universe, an auditor can add value by discussing those issues with the owner.
There’s also a cost to getting a deficient audit. If a firm doesn’t catch some bad financial reporting, it will come back to haunt you.
Are there benefits derived from switching auditors?
If your auditor is not doing the job — not looking at key areas, responding to your needs or is tardy in providing service — you should change even if you have a commitment.
But change in itself does not bring any benefit; it’s more a result of not thinking through goals for the auditor selection process. What are you trying to accomplish with the audit? Audits have become very commoditized; some companies just solicit bids regularly and go for the lowest cost. The only thing they value is getting that opinion letter. You can get too focused on cost and miss out on added value.
What should you look for when choosing an auditor?
Find someone who knows your industry and can make a commitment to the timing and staffing levels needed so the audit isn’t obtrusive. Do some due diligence — find out if they have similar clients and talk to references.
Many companies have audits because a bank or funder requires it, and they want to get through the audit with the least amount of pain. But auditors should also add value.
Mark Van Benschoten is a principal at Rea & Associates. Reach him at (614) 889-8725 or [email protected].
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