How to weigh the pros and cons of auditor rotation

Some organizations switch auditors regularly — that can mean going to a new firm or just getting a new lead auditor —  but there can be both advantages and disadvantages to this practice.

Although the Securities and Exchange Commission regulates how often public companies need to switch lead auditors, there’s no requirement for anyone else to do so. It’s individually determined by the organization.

“I don’t have any hard evidence, but my perception is that very few of our clients utilize audit rotation; most don’t bid it out periodically,” says Mark Van Benschoten, CPA, CGMA, a principal at Rea & Associates.

Smart Business spoke with Van Benschoten about best practices for auditor rotation, including the benefits and drawbacks.

Why do some companies rotate auditors?

Auditors are supposed to be independent of their clients, closely scrutinizing their operations. Some feel if they’re with the same auditor too long, the auditor may lose objectivity and won’t ask hard questions. They also may feel that if the auditor has always tested the accounts receivable this way, then he or she may continue to do so — even if it’s no longer the best method.

Another reason is price. Companies may keep bidding audit work out, believing that an audit firm provides a lower price for new clients in hopes of gaining additional work.

What are the drawbacks to audit rotation?

If an audit firm is familiar with an organization, it knows what reports to ask for and where to get them. It also learns the company’s terminology, which streamlines the audit process. Auditors can be more effective after they’ve gone through a couple of audit cycles because they have institutional knowledge.

Although switching to another firm may cost less upfront, in the long run, you might experience the indirect cost of your time — or, more specifically, the extra time you’ll have to spend training the new firm and familiarizing them with your operations. Or, it’s possible that the final bill is higher than anticipated because the auditor had to undertake additional work, like bookkeeping. There’s also a cost to a deficient audit. If the auditor missed something, such as an organizational weakness that encourages fraud, the company ends up paying more later.

How can employers determine if it’s time to rotate auditors or stay put?

You need to get a sense of how your audit relationship is going through some kind of auditor evaluation. Do you have a relationship with your auditor? Do you only see him or her once a year? You should have ongoing communication. Do you feel comfortable calling your auditor with a question? Is your auditor knowledgeable about your industry?

Talk to your staff about the audit itself. Was it done timely? Are the auditors pleasant to work with? Are they demanding? Did they respond to all questions? Are they always dealing with new audit staff?

You don’t want an audit to be such a laborious task that your people dread it. It should be a positive working relationship, where both parties are striving for effective and efficient audits. Financial information is most useful when it’s timely and accurate. If you sacrifice one for the other, you diminish the value.

Before you switch, think through what you’re trying to accomplish and what’s giving you angst. What do you want that you’re not getting now? You need to have some basis, so when you get proposals you have some measure to evaluate them by.

Don’t just implement auditor rotation because everyone does it. For example, if you want a fresh set of eyes, make sure that you’re really accomplishing that by changing auditors. You may decide to stick with the same firm for its institutional knowledge but just request a new partner to work with.

What else is important to know about the audit process?

There needs to be a relationship between the auditor and the board or audit committee, as well as several people in management. The auditor shouldn’t just deal with the CFO, for instance, because he or she might lead the auditor down a path that narrows the vision. If an auditor is talking to others it gives a broader perspective as to what’s going on.

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