Focus on the quality of the audit, not mandatory firm rotation, says the Institute of Corporate Directors (ICD) and its global counterparts

TORONTO, May 17, 2013 /CNW/ - The issue of when to change, or recommend to shareholders changing, audit firms should be a matter for the individual company, its directors and audit committees and should not be subject to externally imposed regulations requiring mandatory rotation of audit firms, according to an international network of company directors.

In a perspectives paper released today on the issue of Mandatory Audit Firm Rotations (MAFR), the Global Network of Director Institutes (GNDI) states that while it is important to enhance auditor independence, objectivity and professional scepticism, imposing a regulated time limit on tenure is not the best way to achieve these goals.

Such a regulation poses significant challenges including the loss of audit knowledge, increase in time and expense, loss of flexibility, loss of industry specific knowledge, increase in global complexity, reduced accountability and are an impediment to strong corporate governance.

"The ICD has been extensively engaged on this topic, providing input to the Enhancing Audit Quality initiative led by the Canadian Public Accountability Board (CPAB) and the Chartered Professional Accountants (CPA)," said Stan Magidson, Deputy Chairman of GNDI and President and CEO of the ICD. "We are pleased to see our views prevailing among our global counterparts representing thousands of board directors around the world."

"Global consistency on this issue is particularly important for Canadian organizations that conduct business globally. They should not be required to comply with conflicting external auditor requirements," said Magidson.

GNDI's view is based on the following concerns with MAFR:

• MAFR would result in losing the cumulative audit knowledge gained over the years at arbitrary intervals. However, it should be noted that when the same audit approach is followed continuously, there may be an increased risk that errors remain undetected.
  
  
• MAFR would increase the amount of time management spends during a transition on educating the new auditors on the company's operations, systems, business practices and financial reporting processes. Shareholders indirectly bear those costs.
  
  
• A regulatory time frame that sets out when MAFR should occur does not provide the flexibility to enable companies to defer an MAFR when it is at an inopportune time and may not be in the best interests of the company's shareholders.
  
  
• MAFR may reduce the ability of audit firms to accumulate sector/ industry expertise and impact on the ability of audit firms in attracting and retaining talent in specialised industries or remote locations.
  
  
• MAFR may increase the complexity of audit compliance within global companies as there may be differing audit rotation requirements in various jurisdictions.
  
  
• MAFR would reduce the accountability and responsibility of the audit committee for periodically assessing the performance of the auditor and, based on that assessment, for determining if and when to require a rotation or tendering of the audit.
• MAFR would also eliminate the right and ability of shareholders from determining who their auditors should be and when it is necessary to change their auditors.
  
  
• The imposition of mandatory time limits that restrict a company's choice of auditor is an artificial impediment to the free deliberation of the board or its audit committee.

"In this perspectives paper, directors are strongly arguing that regulators should focus on improving the quality of the audit, by reinforcing the board or its audit committee's responsibility for the oversight of the audit, audit firm and quality and where necessary enhancing the expertise of the audit committee and potentially expanding communications between the audit firm and the audit committee," said John Colvin, Chair of GNDI and CEO of the Australian Institute of Company Directors.

"Further, work may be required to ensure that users of financial statements increase their understanding of the role and nature of an audit, thus narrowing the audit expectation gap."

About GNDI
GNDI is an international network among nine leading membership organisations for corporate directors in Australia, Brazil, Canada, Europe, Malaysia, New Zealand, South Africa, the United Kingdom, and the United States.

The following membership organisations are members of GNDI and collectively represent more than 100,000 corporate directors worldwide:

• Australian Institute of Company Directors (AICD)
  
• Brazilian Institute of Corporate Governance (IBGC) in Brazil
  
• European Confederation of Directors Associations (ecoDa)
  
• Institute of Corporate Directors (ICD) in Canada
  
• Institute of Directors in New Zealand (IoDNZ)
  
• Institute of Directors in Southern Africa (IoDSA)
  
• Institute of Directors (IoD) in the United Kingdom
  
• Malaysian Alliance of Corporate Directors (MACD), and
  
• National Association of Corporate Directors (NACD) in the United States.

For further details please go to www.gndi.org

About the ICD
The Institute of Corporate Directors (ICD) is a not-for-profit, member-based association representing Canadian directors and boards across the for-profit, not-for-profit, and government sectors. The ICD has more than 7,200 members and 11 local chapters across Canada. The ICD fosters the sharing of knowledge and wisdom through education, professional development programs and services, and thought leadership and advocacy to achieve the highest standard of directorship. For more information, please visit: www.icd.ca.

SOURCE: Institute of Corporate Directors (ICD)

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