Auditor rotation can affect the auditing profession

Auditing has evolved from a routine checking of the books of account to a vital part of the governance process of companies. The global financial crisis, which included the collapse of Arthur Anderson more than a decade ago, as well as more recently Enron and Lehman Brothers, has raised issues of trust for the profession and called into question the relevance of audit in terms of providing an early warning system.

South Africa's external auditing standards are among the best in the world. Yet breaches of corporate governance, and fraudulent behavior, still occur occasionally. In the wake of the Enron scandal, we've seen the drastic interventions by governments, regulators, and the auditing profession itself, which have given rise to various new laws, regulations, and standards that govern financial reporting and the auditing thereof.

A heavy debate has been raging since the release of the EU Green Paper that suggested that audit firms should be rotated every few years as a way of preventing auditors from getting too familiar with their clients and making it tough to establish fraudulent relationships with individuals they should be held to account.

It's clear that the accountancy profession has been deeply affected by the financial crisis.

According to the Big Four auditing firms — PwC, Deloitte, EY, and KPMG — the notion of compulsory firm rotation will have an adverse effect in the auditing industry. They pointed out that it takes time to understand a large, complex business, and starting from scratch every few years has cost implications. A far better solution, as recently provisionally recommended by the UK authorities, would be to improve competition by putting auditing contracts out to tender every five years.

Factors such as the volume of transactions, information technology, globalization, and the constant increase in the complexity and number of laws, regulations, and standards governing entities and their auditors have all impacted drastically the evolving role of the registered auditing profession.

However, to our credit, the World Economic Forum's Global Competitiveness Index has once again ranked South Africa number one for the strength of its auditing and financial reporting standards.

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