Disclosure of audit tenure: Gaining momentum in the U.S.

Disclosing audit tenure is a good first step toward generating interest in the audit process. However, it must be complemented by comprehensive reviews to address the impact of auditor tenure on audit quality.

A recent article in the United Kingdom Financial Times notes that the U.S. Securities Exchange Commission (SEC) is exploring the idea of compulsory disclosure of audit tenure, having already rejected mandatory firm rotation (which goes into effect in Europe next year).

But will such disclosure drive improvements to audit quality?

The Financial Times quotes U.S. research indicating that a large number of Standard & Poor’s 500 companies have used the same auditor for over 50 years. Some commentators believe this leads to auditors losing their objectivity. Investors are beginning to ask tough questions at company meetings about auditor nominations but, so far, over 99 per cent of nominations are approved.

Greater transparency about audit tenure can generate heightened interest in the audit process and attention to audit matters. But it will only drive audit quality if it results in greater focus by audit committees on familiarity threats to the auditor’s independence, arising from long audit tenure. This is where I think Canada’s non-regulatory solution of encouraging audit committees to perform periodic comprehensive reviews of the auditor really hits the mark. These reviews go beyond the limited annual auditor assessments because comprehensive reviews specifically look at trends. As such, they are designed to address the impact of audit tenure on audit quality.

A comprehensive review is also deeper and broader than an annual review. Further, public disclosure by the audit committee can inform stakeholders about the process and help them understand the basis for the audit committee’s conclusions about whether to recommend retention or tendering of the audit.

Seeking greater transparency about audit tenure is a good step but it shouldn’t be the goal. What really matters is that familiarity threats be addressed through robust periodic comprehensive reviews and disclosure of the outcome of these reviews. This is what investors should be really asking for when assessing the quality of an audit.

KEEP THE CONVERSATION GOING

Do you think there should be more attention on audit tenure in Canadian proxy statements? Will such disclosures enhance audit quality?

Post a comment below; or email me directly.

CPA Canada’s Audit Quality Blog is designed to create an exchange of ideas on developments and issues in global audit quality, as well as their impact in Canada.

About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada

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