23 Apr 2012 08:41am

Research raises questions over mandatory audit rotation

Long-lasting relationships between auditors and their clients do not lead to a loss of independence on the part of the auditor, with independent research suggesting the opposite

Independent researchers at the Nyenrode Business Universiteit in the Netherlands have discovered that auditors are more likely to ensure that corrections are made to financial statements if they had had a relationship with the client for at least five years.

However, their research also revealed that the impact of the audit decreases where the firm provides more than 30% of non-audit services to the audit client – although the “important” audit differences were always corrected.

In a survey of information drawn from the audit files of 147 Dutch listed companies, pension funds and very large privately held companies, the researchers found that in 23% of the organisations, the audit led to corrections of amounts involved in the balance sheet and profit and loss accounts before the audit opinion was issued.

The audit also impacted positively on the notes to the financial statements and the directors’ report where corrections were made in 77% of cases.

Professor Leen Paape said that 72% of the important audit differences were corrected in the annual report, while the remaining 28%, concerning 14 organisations, were below the pre-determined error margins.

According to his co-researcher, Joost van Buuren, more audit differences were being corrected where the client relationship was longer than 10 years than when it was shorter.

However, the positive effect on the processing of auditing differences was already there if the auditor had been auditing for a client for longer than five years.

“These results lead to questions about whether obligatory rotation of audit firms, as proposed by Commissioner Michel Barnier, will enhance the positive impact of the public audit,” van Buuren said.

Julia Irvine