Small and mid-sized audit firms will come under increasing pressure to merge or restructure their business after the Australian Securities and Investments Commission adopted a hard-line interpretation of its auditor rotation policy.
Small and mid-sized audit firms will come under increasing pressure to merge or restructure their business after the Australian Securities and Investments Commission adopted a hard-line interpretation of its auditor rotation policy.
ASIC plans to write to audit firms seeking details of how they intend to manage the rotation policy, which states that individuals can audit a listed company for a maximum of five years before having to take a two-year break.
The policy means that audit firms will need a team of audit partners if they want to provide continuity of service to their clients.
Smaller audit firms have applied to ASIC for relief from the rotation provisions but their requests have been rebuffed.
ASIC said audit firms would have to demonstrate an “unreasonable burden” before it would consider granting relief.
The loss by an audit firm of fee income or audit clients would not be sufficient to justify granting relief.
“These costs are part of the ordinary cost of complying with the rotation requirements,” ASIC said in a policy statement.
Similarly, ASIC would not grant relief simply because a company lost its preferred auditor or incurred an increase in audit costs.
“We consider that changing to a new auditor will generally not impose an unreasonable burden on the audited body,” ASIC said.
With more than 5,000 registered company auditors in Australia, ASIC believes that, in most cases, companies will be able to find an alternative auditor capable of providing satisfactory services.
ASIC’s executive director of regulation, Malcolm Rodgers, said auditors should be well-placed to comply with the rotation requirements, which were introduced in 2004 with a two-year transition period.
“However, we have identified a number of instances where auditors of publicly listed entities must rotate in the current year to meet the requirements of the act,” Mr Rodgers said.
“Rotation is a key aspect of the independence provisions aimed at enhancing the reliability and credibility of financial reports and ASIC will be writing to selected auditors requesting their auditor rotation succession plans for listed companies and schemes in the near future.”
The new policy is good news for the big four accounting firms – Ernst & Young, KPMG, PricewaterhouseCoopers and Deloitte.
The larger second-tier firms should also be able to cope with the new rules.
BDO partner Brad McVeigh said his firm would have five audit partners in Perth following its merger with Horwath, due to take effect in April, while Bentleys MRI partner Geoffrey Hick said his firm has four audit partners after recruiting Hall Chadwick’s Perth audit team in 2005.
Audit firms likely to feel the squeeze include Stantons International, Rix Levy Fowler and Moore Stephens.
“I see it as a real issue,” Stantons director John van Dieren said. “It is going to have quite a large effect.”
Mr van Dieren believes the changes will almost certainly add to the cost of audit services and create inconvenience for audit clients.
Audit firms may give up audit work or merge their practices, which he said could lead to concentration in the market.
Mr Stanton said audit firms may hire external auditors on a contract basis to be the review partner.
