It’s a balancing act to get independence and efficiency in audit.
The more your auditor knows your organisation the easier it can be – but in some cases that comes at the cost of objectivity and challenge.
Some would say the best approach is to change your auditor regularly and avoid familiarity by starting from scratch each time.
We don’t agree. If you already have a good auditor who knows your organisation well the benefits of sticking with them far outweigh the benefits of switching.
We recommend our clients think about whether they’re happy with their current auditor and why they might want to change rather than just rotating every few years. The audit committee can play a big part in this process by balancing independence and efficiency when recommending auditors.
Do you have to change your auditor under auditor rotation rules UK?
Only the largest businesses in the UK are required to change auditors regularly. The audit firm rotation requirement means that public companies must rotate their engagement partners every 5 years, but there is no requirement for audit firms to rotate in the US.
Under the 2016 regulations all public interest entities must tender for a new auditor every 10 years and rotate their auditor after 20 years. Engagement partners for public companies must also follow the 5 year rotation rule to maintain audit quality and objectivity.
For most smaller organisations there is no such requirement. Instead audit firms themselves must ensure objectivity in line with the Auditing Practices Board’s ethical standards. This is done by assessing the threats and putting safeguards in place where staff have a long association with the audit.
So as long as your auditor is compliant with those rules they should already be monitoring and minimising the risk of bias in the audit.
Assess Your Current Auditor
Assessing your current auditor is a key part of deciding whether to change auditors. Here are some things to consider:
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Quality of Service: How do you rate the quality of service from your current auditor? Are they meeting your expectations? Are they providing valuable insights and recommendations to help your organisation?
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Communication: How does your current auditor communicate with you? Are they responsive to your needs? Do they explain their findings clearly and concisely so you can easily understand the audit results?
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Expertise: What expertise does your current auditor have? Do they have experience in your industry or with similar organisations? Their knowledge can make a big difference to the audit.
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Independence: How independent is your current auditor? Are they free from conflicts of interest? Do they maintain objectivity in their audit opinions so you get unbiased results?
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Fees: Compare the fees of your current auditor with other audit firms. Are they competitive? Are you getting value for money or could another firm do the job for similar or less?
By considering these factors you can decide if your current auditor is meeting your needs and if it’s time to change auditors.
Changing auditors: why do companies change auditors and the pros and cons
There are three main reasons you might want to rotate your auditor regularly: to ensure independence, get a new perspective and keep fees competitive.
Many people think that the longer they work with an auditor the higher the independence risk – in other words the closer the relationship the harder it is for the auditor to remain objective.
There’s also the worry that it could create complacency and you’d just follow the same processes without stopping to think how they could be improved.
Bringing someone new in means you get a new perspective and fresh ideas on how things could work in your organisation and get the chance to find more competitive fees.
The problem is changing your auditor too frequently can be disruptive not just for you but for the organisation as a whole.
First there’s the time you and other stakeholders need to think about your requirements, prepare a tender process and assess the options. It’s essential to get the audit team involved early in the transition so they understand your business and audit risks.
Then once you’ve chosen a new auditor your team will need to get them up to speed, explain processes and share information they’ve probably had to go through in the last audit.
And every time you change to a different auditor you’re taking on the risk their service will not meet your expectations, they won’t have enough sector knowledge or the relationship won’t work – you just won’t click.
The concept of ‘rotate audit firms’ is debated with some saying it can lead to a loss of audit quality and objectivity because of the learning curve auditors face in the early years of an engagement. Others say rotating audit firms can bring fresh perspectives and prevent complacency.
So is the benefits of a new auditor worth the teething problems?
We think not as long as your current auditor is meeting your expectations.
A good auditor will build up an understanding of your organisation that makes the audit process run smoothly but they’ll also be able to maintain their objectivity and challenge you when needed.
They won’t just go through the motions or do things the way they’ve always been done. Instead they’ll look for ways to improve their own service and give practical feedback on your organisation’s systems and processes.
In this case the long term relationship you build with an auditor can be an advantage not a risk, making the audit faster, less stressful for your team and more valuable to your organisation.
Choosing a New Audit Firm
Choosing a new audit firm can be a daunting task but following these steps can help:
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Define Your Requirements: Determine what you want from an audit firm. Consider expertise, independence and communication style. Knowing your priorities will help you narrow down the options.
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Research Firms: Research potential audit firms that meet your requirements. Look into their reputation, experience and fees. Online reviews, industry recommendations and professional networks can be useful resources.
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Request Proposals: Request proposals from potential audit firms. Ensure the proposals include details of their approach, timelines and fees. This will help you compare their offerings.
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Evaluate Proposals: Evaluate the proposals from potential audit firms. Consider expertise, independence and communication style. Look for firms that meet your requirements and values.
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Interviews: Conduct interviews with the audit firms you’re considering. Ask questions about their approach, timelines and fees. This is also an opportunity to gauge their responsiveness and professionalism.
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Make a Decision: Make a decision based on the information gathered. Consider the firm’s expertise, independence and communication style. Choose the firm that best meets your requirements and can deliver high quality service.
By following these steps you can choose a new audit firm that meets your needs and delivers high quality service.
When and how often should you change auditors
Anyway there are times when you should look for a new auditor. The key is to have your reasons for changing and agree within your organisation that you’re ready to look elsewhere. The external auditor’s role is key in this decision as their independence and effectiveness can impact corporate governance.
There could be many reasons for this but some of the most common are:
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You’re not happy with the service or audit quality
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Your fees have increased and you don’t feel you’re getting enough value for them
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You don’t feel your auditor can be objective
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They don’t have enough sector expertise
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Your relationship with them has broken down over time.
If you can’t see a way to resolve those issues with your current auditor then looking elsewhere might be your best option. It’s also worth considering the role of the general meeting in this process as shareholder approval is often required to change auditors during an annual general meeting (AGM).
Seamless Transition
A seamless transition to a new audit firm is key to minimising disruption to your business. Follow these steps:
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Communicate with Your New Auditor: Establish clear communication with your new auditor to set expectations and address any concerns. Open dialogue will help build a strong relationship from the start.
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Provide Information: Provide your new auditor with all the information about your business including financial statements, accounting policies and internal controls. This will help them understand your operations and identify any risks.
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Walkthrough: Conduct a walkthrough of your financial reporting processes with your new auditor. A hands on approach will give them a better understanding of your business and help them identify areas for improvement.
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Timelines: Establish clear timelines for the audit process. Ensure your new auditor understands your deadlines and expectations so the audit can be smooth and on time.
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Monitor Progress: Monitor progress throughout the audit process. Address any issues or concerns that arise quickly to keep the audit on track and high quality.
By following these steps you can ensure a seamless transition to a new audit firm and minimise disruption to your business.
How to Maintain Audit Quality
Maintaining audit quality is key to your financial statements being accurate and reliable. Follow these:
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Set Clear Expectations: Set clear expectations with your auditor. Make sure they understand your needs and expectations from the start to avoid misunderstandings.
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Monitor Progress: Monitor progress throughout the audit process. Regular check-ins will help address any issues or concerns quickly so the audit stays on track.
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Review Regularly: Review your auditor’s work regularly. This will ensure they’re meeting your expectations and delivering high quality service consistently.
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Feed Back: Feed back to your auditor. Constructive feedback will help them understand your concerns and make adjustments to their approach.
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Rotate Auditors: Consider rotating auditors every few years. This will maintain objectivity and independence and bring fresh eyes to your audit.
By following these you can maintain audit quality and ensure your financial statements are accurate and reliable.
Audit Firm Rotation vs Audit Partner Rotation
Audit firm rotation and audit partner rotation are two different ways to maintain objectivity and independence in the audit process. Here’s the difference:
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Audit Firm Rotation: Audit firm rotation means rotating the whole audit firm every few years. This will maintain objectivity and independence by bringing in a whole new team. But it can be disruptive to the business and requires time and effort to get the new firm up to speed.
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Audit Partner Rotation: Audit partner rotation means rotating the audit partner every few years while keeping the same audit firm. This will maintain objectivity and independence without the disruption of changing the whole firm. But it may not be as effective as rotating the whole firm in preventing familiarity risks.
It’s up to you to decide between audit firm rotation and audit partner rotation. Consider size and complexity of your business, expertise and independence of your auditor and disruption to your business.
We provide specialist audit and independent examination services for SMEs, charities, non-profits and the medical sector.
