The adverse effects of compulsory audit firm rotation
This policy statement outlines world business views on the issue of compulsory audit firm rotation.
A number of recent, high-profile corporate failures have raised concerns about the accuracy and reliability of company financial statements. Although the prime responsibility for preparing financial statements rests with company management, as overseen by the Board of Directors, criticism also has been levelled at the quality of external audits and the independence of auditors. Some observers and regulators have suggested that auditor independence could be strengthened by a system of compulsory rotation of audit firms after a specified period of time. This system has been adopted or is under consideration by a number of national governments, even though there is little if any evidence to demonstrate its effectiveness.
ICC strongly supports the principle of auditor independence and recognizes that it is essential to maintaining confidence in audit quality and the quality of financial reporting. The integrity of financial reporting, of course, is critical to the effective and efficient functioning of the world’s capital markets.
However, ICC believes that compulsory rotation of audit firms is the wrong solution for correcting real or perceived weaknesses in auditor independence and that compulsory rotation would have several adverse consequences, including negative effects on audit quality. Regulators have a number of other policy options that could strengthen auditor independence without these adverse effects.