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Exclusive survey – FDs call for rotation of auditors

In mid-February 2002, we emailed a short questionnaire to 3,000 subscribers – and almost 800 replied. We also invited comments from survey participants and more than 175 obliged.

A pdf of the complete list of commments received are also available.

The key findings reveal that 57% of respondents believe that companies should be compelled to rotate their auditors, but that barely a third expect regulations here or in the US to make rotation mandatory. More than half believe that “best practice” will be the driver of change. Some readers noted:

“I do not know if Andersen failed to operate the right level of skill and care when auditing the books of Enron, but I see no case for introducing draconian measures that force rotation of auditors. It would offer no guarantee that another Enron could not happen.”

“You probably need to rotate the audit partner, rather than the audit firm, every four years to ensure a new viewpoint is introduced on a regular basis. This happened to us recently and was refreshing.”

“I think that there is an increasing risk that all listed companies will be forced to rotate. Every five years is probably the best period. The main drawback will be in year five, as any firm will be sensitive to a new firm coming in and being critical. An audit in that year will probably be hell!”

However, there is much less appetite for a ban on non-audit work being given to the group auditors, with almost two-thirds opposing the idea, and just over one third supporting it. Again though, more than half expect best practice to result in a reduction in the amount of non-audit work awarded to auditors.

“The age of using audit as a loss leader for value-added services is over. In future, investors will want to see real scrutiny of company accounts and those companies which are not seen to be providing it will suffer.”

“There should be more strongly enforced ‘Chinese walls’ as there are in investment banking between audit teams and other groups in firms.”

“I believe that it is an insult to the intelligence of management to suggest they cannot select advisers on their own criteria.”

“A limit should be set on non-audit fees – say, 50% of audit fees.”

“I believe in auditor independence and any consultancy or tax engagement can destroy this independence.”

“I would draw a distinction between tax work, which is acceptable, and large consulting contracts, which are not.”

Many of the questions in the survey deserved different answers, according to whether publicly-quoted companies or owner-managed businesses were under discussion.

“The whole idea of auditor independence is of much greater importance when they are reporting to shareholders who do not form part of the management team. When auditing private companies, cross-selling of consultancy work, etc, can bring benefits without the same risks that lack of auditor independence could bring to a public company.”

But while almost two-thirds believe that auditors should do more to ensure there is no fraud or other irregularity in the company accounts, our readership is evenly split as to whether they should be prepared to pay more for such a service.

“At the end of the day, company directors are responsible for preparation. Ensuring no material fraud is contained in the accounts is an issue for the directors. The auditor is not the main problem here, I feel, it’s lax control in big companies.”

“Fees should be set up in a way so that auditors share the risks and take responsibility for their errors.”

“Auditors used to check that things were right. Now they look at trends and pretend to be business advisers. They should get back to basics.”

“Audit fees have risen beyond the value supplied and I would expect better value from the work. My experience of a Big Five firm is that they have not understood the business as well as our current auditors.”

“I believe companies do not get good value for money from their audits. Auditors spend far too long form-filling to ensure their PI (insurance) requirements are met. Critical systems reviews are rare – often audit staff are so inexperienced they wouldn’t spot a fraud if it bit them.

“The pressure on audit managers is too great to bring an audit home ‘within fee budget’ that they cannot spend quality time with the client. I would be happy to pay higher audit fees if I felt I was getting value added.

“The speed with which auditors sign-off after the year-end indicates to me that they are relying heavily on representations.”

“I can’t be alone in thinking that use of the phrases ‘off balance-sheet’ and ‘special purpose entity’ state the users’ intention to mislead.”

To evaluate the impact of the scandal on Andersen, we asked readers whether the Enron affair would affect their choice of auditor were they to put their audit out to tender. Andersen may take some comfort from the fact that, even with the press still laden with the scandal, more than 40% would be prepared to give Andersen the benefit of the doubt. Nevertheless, more than three-quarters of respondents expect Andersen corporate clients here and in the US to seriously consider switching firms.

“Using Andersen at the moment would be like taking a flight immediately after 11 September: because of heightened security it made it much safer. The whole firm will be so aware of the Enron problem that they are very unlikely to allow any questionable transactions.”

“We are on the point of moving to a Big Five firm across Europe but we excluded Andersen from the list. The publicity did not help their cause.”

“A chastened Andersen will probably be the most conscientious of auditors for the next few years.”

“I don’t believe Andersen will survive this.”

“It is difficult to see how Andersen’s reputation can be saved and it will lose some business as a result.”

“A change of name always helps!”

Just under 60% of respondents believe that, up until now, their company or audit committee has been giving adequate thought to the question of auditor independence. That seems certain to change now, with a consequent change in best practice, regardless of what the regulators may eventually decide to do.

“The press needs to be more realistic in its expectations of auditors.”

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