There’s nothing like a study that puts accepted wisdom on its head, if for nothing else than sheer provocation. And here’s a doozie: Could the concerns about mandatory rotations of audit firms or engagement partners be unwarranted?
Mandatory auditor rotation is rooted in the belief that auditors and clients should avoid the buildup of a trusting relationship lest it compromise the professional skepticism so necessary for audits.
While there are mandatory rotation requirements for audit engagement partners in the United States, no such rules currently exist for mandatory rotation of audit firms.
But a team of European researchers believes they have upended mandatory rotation concerns, saying that trust and professional skepticism aren’t contrary issues at all. In fact, they work hand in hand.
In Trust and Professional Skepticism in the Relationship between Auditors and Clients: Overcoming the Dichotomy Myth, published in the spring issue of the American Accounting Association journal, Behavioral Research in Accounting, auditors’ trust in their clients relates positively to the clients’ perceptions of auditors’ professional skepticism.
This finding, the authors observed, “implies that regulatory measures that impede the evolution of identification-based trust between auditors and their clients will fail to enhance professional skepticism.”
And it actually could harm it.
“Wouldn’t auditors, after all, tend to be trusting of clients that view them as properly skeptical?” asked study co-author Ewald Aschauer, a professor at Johannes Kepler University in Linz, Austria. “And to the extent that clients resist professional skepticism, the auditors will tend to become less trusting.”
The researchers’ findings determined a “healthy balance that merits leeway from regulators,” he said. Further, there was no significant relationship between auditor skepticism and how long companies worked together with audit firms or engagement partners.
The study was based on questionnaires between 233 pairs of auditors and their contacts at client firms, mostly CEOs and CFOs.
Measures to gauge auditors’ trust of client contacts included “a strong sense of justice, sticks to his/her word, would not knowingly act against our interests, and contributes to the audit more than required.”
Auditors’ professional skepticism, as judged by clients, was based on rankings that included “thinks that learning is exciting, takes his/her time when making decisions, likes to understand the reasons for other people’s behavior, has confidence in himself/herself, and frequently questions things he/she sees or hears.”
In analyzing survey answers, researchers controlled for factors that could affect views on either side. These included:
- The gender and age of audit partners and client contacts.
- Length of relationships with clients.
- Size of client firms.
- Whether audit firms were among the Big Four (Deloitte & Touche, EY, KPMG, or PwC).
- The amount of nonaudit services provided by audit firms to clients.
Client companies averaged about 800 employees.
As for regulators, the researchers believe that a framework should be designed to give auditors and clients as much leeway as possible to build “identification-based trust,” but impose whatever restrictions are necessary to avoid misconduct. One way to do this: implement a systematic external review of auditors’ work.
However, Aschauer said nothing in the study should be seen as underestimating possible danger from collusion between clients and auditors. For that, external review is the best solution, he added. In the United States, that’s provided by the Public Company Accounting Oversight Board; in the United Kingdom, it’s the Financial Reporting Council; and in Germany, it’s provided by the Financial Reporting Enforcement Panel.
Rather, the study raises questions about the value of auditor rotation, he said, adding that “if further initiatives in that regard are in abeyance at the moment, that is probably a good thing.”
Aschauer’s co-authors for the study included professor Matthias Fink of Johannes Kepler University; professor Andrea Moro of Cranfield University in Cranfield, England; senior lecturer Katharina van Bakel-Auer of Vienna University of Economics and Business in Vienna, Austria; and professor Bent Warming-Rasmussen of the University of Southern Denmark in Odense, Denmark.