More extreme suggestions
You should be generally aware that more extreme measures have been
suggested as a way of better ensuring that auditors possess the required
independence.
For example, rather than simply rotate the audit partner, critics of the
profession have suggested that there should be a maximum period of tenure
for the audit firm. After, say, five years, audit firms should be required to
resign from the engagement. Such a plan would prevent relationships
developing between management and audit personnel. However, it would
be costly in that every so often a new firm would have to be appointed,
would have to acquire the knowledge and understanding of the client
and more mistakes would be made (there is evidence that audit ‘failures’
typically occur in the early years of an auditor’s appointment).
Nevertheless, this sort of argument has gained ground in influential
circles. The Corporate Governance Code now requires listed companies
to put their audits out to tender at least every 10 years. There is of
course no guarantee that companies will change their auditors, but at
least the question is being asked. This may not be sufficient for some of
the European Commissioners who have been talking about introducing
mandatory rotation of audit firms after only six years in post. At the time
of writing this suggestion is still being debated in political circles but it
must be a cause of concern for the Big Four firms. They will perhaps not
lose out as much as one might think since large companies would be
compelled to engage them so even if they lost some clients at the end of
their tenure, they would naturally pick up new clients as their auditors
came to the end of their tenure. But it is likely that the client’s appetite
for additional advisory services might decline if they are routinely having
to come to terms with a new audit firm and so the firms’ overall income
might suffer. It is almost certainly going to push up costs as each time
there is a change of auditors, a new learning process is involved in the
audit team assembling the necessary background data.
Other suggestions are that a government or quasi-governmental body
should take on the task of appointing and deciding the remuneration of
auditors. This would remove the temptation for auditors to be too familiar
with management or to be intimidated by them.
Another possibility is that government itself could employ auditors to
audit major companies. This sort of suggestion seems to buck the trend
of less government involvement in the regulation of business activities
but it is still worth considering as an option and you should be prepared
to consider these suggestions in answering general questions on ways of
making auditors independent of the companies they audit.
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