Any firm with a not-for-profit niche has likely lost audit clients because of audit rotation. This is primarily because of two closely related issues that impact the effectiveness and efficiency of not-for-profit audits. First, the definition of audit rotation is often misunderstood. Second, audit pricing has become commoditized.
There is great value in keeping the same audit firm for the long-term. With clear, ongoing communication, you can help clients understand why audit rotation isn’t always the best option.
Changing auditors does not mean changing audit firms
The Sarbanes-Oxley Act of 2002 (SOX) contained new rules concerning the auditor-firm relationship as it relates to publically-held companies. Among other things, SOX requires public companies to rotate their auditors. The rationale behind this rule is fair: periodically changing auditors makes the organization’s management and financial statements more transparent.
It’s understandable why many private companies reacted by proactively following SOX’s mandates even though they were not legally required to do so. Many not-for-profits, guided by boards of directors largely drawn from the business community, complied as well. These organizations even changed their operating documents to require a change in auditor every three to five years. As a result, CPA firms with not-for-profit niches found themselves losing audit clients despite having performed excellent work. The trend has increased with the PCAOB’s recent push for mandatory auditor rotation for public companies.
It’s not necessary for not-for-profits, or many private businesses for that matter, to switch auditors. Rather, this stems from a general misunderstanding of the legal definition of auditor rotation. According to the law and its regulations, it is the actual personnel on the account and not the firm itself that has to change. Many prominent public companies recognize this. Reuters recently reported that P&G has used the same firm since 1890, GE last changed audit firms in 1901 and Coca-Cola has been with its audit firm since 1921.
These large public companies recognize the major benefit of staying with a firm that understands how it operates: increased auditor effectiveness. They choose to maintain the deep and enduring relationships they have formed with their auditors. It’s this familiarity that permits an auditor to recognize changes that have occurred between audits and delve into areas that are not reviewed annually.
When developing an audit plan for a client Rea & Associates, Inc. had audited for years, we included time to look at the client’s investments. During the audit, it was revealed the client was violating its own investment policy by having more than a set percentage in a single equity. The equity in question was one that had, and will likely continue to have, a large return. No one had an issue with that, so the client amended its policy. Had new auditors come in at that point, they probably wouldn’t have found the discrepancy, which could have resulted in a major problem for the organization down the road.
This article was originally published by the Ohio Society of CPAs, 10/19/2012.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.