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Mandatory rotation could hinder rather than help audit quality. If a company is undergoing significant change, such as a major acquisition, it may be better to remain with the current provider. The IMA also questions whether mandatory rotation will succeed in opening up the market, as it is likely that companies will simply switch to another “Big Four” provider. A more measured approach would be for the audit to be tendered every 10 years on a “comply or explain” basis in a framework where there is more accountability to shareholders.
We agree that measures are needed to control the level of non-audit services provided by a company’s auditor, as they can impact the auditor’s objectivity and independence. But the proposed limit of 10 per cent of the audit fee for “related financial audit services” is too restrictive. In addition, banning large firms from providing non-audit services could make it difficult for them to attract and retain high calibre staff which could, in turn, have an adverse impact on audit quality.
Giving evidence to the European Parliament’s Legal Affairs Committee, Liz Murrall Director of Corporate Governance said: “We welcome a number of the reforms. However, some of the proposals, particularly those on mandatory rotation and audit only firms run the risk of reducing rather than improving audit quality.
“It is vital that the package of reforms enjoys the support of the investment community – the real end clients of the audit process.”