Jessica Fino 12 Jun 2017 01:27pm

Audit rotation could increase client dissatisfaction

Pressure to rotate auditors more often will push firms to add value beyond their traditional remit and lead to overall levels of satisfaction falling, according to Source Global Research
Caption: Reforms which came into effect last year mean listed companies have to rotate their auditor every 20 years.

It found that a third of US executives that re-tendered their audit work around two years ago were not satisfied with their auditor.

It also warned that, with audit rotation set to increase in the UK due to new regulations, the percentage of clients becoming unhappy with their auditors will likely increase.

This will lead to a vicious circle in which clients put their audit out to tender more frequently, but become increasingly dissatisfied, the consulting firm warned.

Edward Haigh, director of Source Global Research, said, “The irony here is that changing auditor is designed to increase client satisfaction, but our research shows that more frequent tendering of the audit will actually reduce it.

“It will also lead to more scepticism about value because it makes it harder for firms to move into a long-term, stable relationship in which clients’ views are positive because their needs are being met.”

The reforms proposed by the European Parliament, which came into effect in June last year, mean listed companies will have to tender their audit contract every 10 years and rotate their auditor every 20 years.

There is also a list of non-audit services that the external auditor will not be able to carry out.

While 48% of the respondents said their external audit adds value to their companies, 50% said the value added is in line with the fees they pay, meaning the audit work is seen purely as a transaction rather than a value-added activity.

Moreover, although an auditor’s reputation is still the most important factor determining their choice of firm, three quarters of dissatisfied clients said they would put value for money at the top of their agenda when choosing their next audit firm.

Haigh added, “There are a lot of pressures in the audit market — from regulators, clients, and audit firms — that create inertia here, but investment in innovation is going to become critical as organisations change auditors more often.

“We think audit firms need to do more to convince clients that they’re using technology to be genuinely innovative, not simply to automate the status quo. Central to this will be to demonstrate tools that represent a paradigm shift in the quality of insights auditors can produce.”

A study carried out by EY last year warned that 20% of UK companies were “woefully unprepared" for the audit regulatory changes and face significant cost implications.

Last week, KPMG announced it had secured the BT Group audit after fighting off stiff competition during the formal audit tender.

PwC and its predecessor firms had been BT’s auditors since the telecoms company listed on the London Stock Exchange in 1984.

Also last week, PwC lost the audit of Hunting Group to Deloitte after 28 years. Hunting decided to establish a formal audit tender following implementation of the EU Audit Regulation and Directive into UK law last year.