Soap box: James Barbour

When it comes to auditing, we love to think that British is best � and undoubtedly the UK auditing profession is at the forefront of global practice.

JAMES BARBOUR

When it comes to auditing, we love to think that British is best - and undoubtedly the UK auditing profession is at the forefront of global practice. On occasion, though, there is a need to listen, not just to the messages within the UK auditing profession, but from regulators in other parts of the globe.

According to a year-long research project by The Institute of Chartered Accountants of Scotland, there is little doubt that now is the time to consider international practices on the question of audit partner rotation - the time period after which a partner must come off an audit. Audit quality is a subject high on the Financial Reporting Council's agenda, and rotation provides an example where the UK audit regulation regime is out of step with many of its counterparts.

Why is rotation important? The main reason is the perception of the independence of the auditor. How long can the involvement of an audit partner with a particular client business be deemed to constitute a relationship independent enough to issue an opinion?

The Co-ordinating Group on Accounting and Audit issues set up to review the regulation of audit and accounting issues in the UK, post Enron, concluded that audit engagement partners of listed companies should be forced to rotate every five years. This rule was subsequently enshrined in the Auditing Practices Board's (APB) Ethical Standards which were issued in December 2004. The APB is currently reviewing these ethical standards. To assist them, Icas undertook research into the impact of the standards on both businesses and on audit firms.

Partner rotation was one of the key issues to emerge from the research. It showed that a clear majority of audit firms affected by the requirement on rotation of audit partners for listed clients experienced significant problems, in terms of succession planning, in order to meet this specific requirement. Cynics might say that this is the response that one would expect from those firms. However, the International Ethics Standards Board for Accountants (IESBA) recently proposed to retain its period of rotation at seven years, following a review of the provisions of its ethical code for accountants. The same length of time was also adopted by the European Parliament.

So is this piece of UK "gold plating" an essential part of the audit regulatory regime? The answer based on the research is "no" and this requirement is seen as potentially having a negative impact on audit quality, with the arbitrary removal of detailed expertise from a potentially complicated audit process.

One of the key ingredients of any audit is having audit partners who have a thorough knowledge of the business and the industry in which it operates. Coupled with this is the need for new audit partners in the early years to get fully up to speed with the demand of the client's business. Anything which detracts from retaining this essential knowledge of the business would appear to serve as a potential threat to audit quality.

However, there is obviously a perceived need for "independence" and this is where the wisdom of Solomon is required in arriving at the prescribed maximum term of office for an audit engagement partner on any particular audit client. In truth, no period can ever be properly substantiated as the "right" answer to solving this dilemma.

The available evidence, however, would suggest that five years is too short a period of rotation and puts considerable pressure on an audit firm. A period of seven years would be more palatable for audit firms and client businesses.

The above is not a criticism of the APB or of the decision made by the Co-ordinating Group on Accounting and Audit issues. The latter was charged with responding to the Enron crisis while the former was charged with implementing a recommendation from a government working party and was placed in the unenviable position of developing standards which met the demands of all of the various stakeholders in the audit process. The ethical standards have now been in place for nearly three years.

While most businesses in our research believed that they would either lead to auditors exercising higher standards of ethical behaviour, or would improve the public's perception of auditors, it is clear that it may be time for UK policy on audit partner rotation to fall into line with many other parts of the globe.