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Accountancy group under fire for research on audits

THE Institute of Chartered Accountants of Scotland has come under fire after publishing research it said showed there was no conclusive evidence that the mandatory rotation of audit firms improves the quality of the checks they complete on company accounts.

Leading commentator Prem Sikka, professor of accounting at Essex University, described the research as a poor document and said he was not surprised by the conclusions apparently drawn by a body he described as a trade association for auditors.

"My undergraduate students could do better," Mr Sikka said.

He was commenting as the debate about whether accounting firms should only be allowed to audit company accounts for a limited period is set to enter a crucial phase.

ICAS published a paper called "What do we know about mandatory audit firm rotation" in the month before the European Parliament is due to discuss such a reform of the EU's audit market.

Calls for mandatory rotation of audits intensified amid the fall out from the banking crisis.

Critics of the profession have seized on the fact some big banks came close to collapse months after receiving clean audit reports to suggest the current system is not working.

Some have noted that auditors can make huge amounts from additional fees for work in areas such as tax.

Champions of reform believe rotation will help ensure the independence of auditors.

The institute said it commissioned independent European academics to identify, consider and evaluate the existing evidence on mandatory audit firm rotation to inform future policy making.

It concluded: "Existing evidence on the impact of mandatory audit firm rotation on audit quality and auditor independence is inconclusive."

Noting that countries including India and Italy have introduced mandatory rotation in the past, the report published by ICAS said: "The main argument in favour of mandatory audit firm rotation is an increase in auditor 'independence in fact', ultimately leading to higher audit quality.

"In other words, long tenure of the auditor might lead to excessive familiarity between auditor and client."

It added: "This argument is largely supported by experimental research evidence with auditors behaving more independently in regimes that require rotation.

"Most analytical research also confirms a positive effect of rotation on independence, especially in cases of high market concentration."

However, the report said a substantial proportion of the reviewed archival studies support the notion that mandatory rotation might heighten the risk of audit failure since auditors are unable to develop in-depth client-specific knowledge.

The report added: "There is wide agreement that mandatory audit rotation would result in an increase in costs."

The authors noted experiences from Italy and South Korea suggested rotation might decrease rather than increase market competition.

"Further empirical research to directly investigate the (potential) effects of mandatory audit firm rotation is required," the report concluded.

Mr Sikka said the report failed to look at counter evidence in academic literature.

He said: "It does not look at even one example of a real audit failure. There's no real world event that's examined."

"This is really a trade association trying to protect the niches of its members," concluded Mr Sikka, who wants audits of banks to be entrusted to a designated regulator.

Asked about Mr Sikka's criticim, David Wood, executive director of technical policy and services at ICAS, said the institute was in some respects a trade association that represents its members. However, he said ICAS acted according to an over-riding requirement to serve the public interest.

Mr Wood said the paper was a thorough review of the available research evidence completed by experts from across Europe.

ICAS said its Research Committee had been happy to support the project but the views expressed in the report did not necessarily represent those of the institute.

A separate review commissioned by ICAS concluded the full impact of joint audits was still not known.

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