Magazine article Government Finance Review

Auditor Rotation Policies of Governmental Entities

Magazine article Government Finance Review

Auditor Rotation Policies of Governmental Entities

Article excerpt

Auditor rotation is a subject that has periodically received a lot of attention, but little investigation. Recently, the International Federation of Accountants has encouraged accounting firms to rotate senior personnel who are involved in long-term engagements. For companies subject to securities exchange requirements, the American Institute of Certified Public Accountants (AICPA) requires partner rotation on audit engagements every seven years, but the AICPA has consistently opposed legislation introduced in Congress requiring the rotation of auditors.

The Government Finance Officers Association, in its Elected Officials' Guide to Auditing, explains this problem: "No clear consensus has emerged in favor of or against the concept of auditor rotation.... [U]nder current professional standards applicable to auditors, there is no ethical limitation on the number of consecutive years that an auditor may continue to audit a client."

The authors of this paper became interested in the question of the frequency of the rotation of auditors when asked by a member of the City Council of the City and County of Honolulu for data on the frequency of auditor rotation in other municipalities. In researching the question, the authors found that very. little useful information on the frequency of auditor rotation in governmental entities has been published. There has been much research in the private sector on auditor changes, and there has been considerable research on the determinants of fees for audits of governmental entities.

There are two relevant studies on auditor rotation for governmental entities.(1) These studies found that most experts believed that the ideal length of a multiyear agreement was from three to five years. The two principal factors that were associated with a change in auditor were: 1) the independent auditor reported material weaknesses in internal controls, or 2) the auditor violated nepotism, pecuniary interest, or competitive bidding laws. No studies were found that give data on the prevalence of auditor rotation policies for governmental entities in the United States.

Exhibit 1


Size           Rotation Requirement            Total
               Yes             No

Small        59 (30%)       135 (70%)       194 (100%)
Large        55 (32%)       115 (68%)       170 (100%)
Total       114 (32%)       250 (68%)       364 (100%)
Exhibit 2


        Law Requires   Formal Policy   Informal Policy      Total

Small     15 (25%)        4 (7%)          40 (68%)        59 (100%)
Large     15 (27%)        5 (9%)          35 (64%)        55 (100%)
Total     30 (26%)        9 (8%)          75 (66%)       114 (100%)

This article provides information on existing auditor rotation policies in governmental entities based on a 1995 survey of 364 finance directors of cities and counties. This information can provide finance officials of governmental entities with data for comparing their own audit rotation policies with those of a number of other governments. Certified public accounting may find the information useful in their strategic decision making.

Pros and Cons of Auditor Rotation

Arguments in favor of auditor rotation are:

* Independence increased. If auditors continue to audit the entity for too long, they risk developing too close a relationship with the client and compromising independence.

* Fresh approach. A new auditor brings a fresh perspective to the audit and may discover problems that had been over looked by the previous auditor. …

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