Audit partners and firms need to be on top of the latest rules on rotation, says Jane Titley.
Auditor rotation might sound like a simple and desirable concept, but dig a little and it is much more complicated than you might imagine.
Firstly, auditor rotation is split into two different elements:
- Rotation of the partners and senior staff on the audit team;
- Rotation of the audit firm.
Rotation of the Team
All auditors in the UK are required to comply with the Auditing Practices Board’s Ethical Standard 3 on rotation.
The basic rules for non-listed audit clients are:
- Where engagement partners, key partners, and partners and staff in senior positions have a long association with the audit, the audit firm assesses the threats and applies safeguards. Where appropriate safeguards cannot be applied, the audit firm either resigns or doesn’t stand for reappointment.
- Once an engagement partner has held this role for 10 years, careful consideration is given as to whether a reasonable and informed third party would consider the firm’s objectivity and independence impaired. Where the partner is not rotated, safeguards are applied, or the reasoning is documented and the facts are communicated to those charged with governance.
For listed audit clients, the rules are more prescriptive and mandate rotation as follows:
Rotation of the Firm
These rules only apply to listed audit clients and are even more complex. Currently, the only audits caught are FTSE 350 entities that are subject to mandatory audit tendering under both the Corporate Governance Code and the Competition and Markets Authority Order.
Mandatory firm rotation, however, is coming next year under EU Audit Reform for all Public Interest Entities (PIEs), defined as:
If you have audits caught by the above, then a very careful review of the rules is required as they have some complex transitional provisions, and not all entities that would be treated as listed for the purposes of rotation of individuals are caught by these rules.
Changes
All of the above is currently out for consultation by both the Department for Business, Innovation & Skills (BIS) and the Financial Reporting Council (FRC), so we can expect some further changes and clarifications before June 2016 when EU Audit Reform rules are required to kick in.
With so many interacting rules with different definitions as to what is a PIE, it is hoped that some clarification will come. But we are all entitled to have our say, which is particularly important if you are involved in the audit of PIEs.
About the author
Jane Titley is head of audit regulation at KPMG and member of the LSCA Regulations and Ethics Review Panel (RERP).