A New Spin on Audit Partner Rotation

Source: The CPA Journal

The authors surveyed audit partners to learn about their views on the impact of mandatory partner rotation on audit quality and methods they use to minimize the impact. Before the Sarbanes-Oxley Act (SOX), lead engagement partners on public company audits could serve for up to seven years, with a minimum two-year “cooling-off period” before they could return to the engagement. SOX reduced the maximum service period to five years and increased the cooling-off period to five years. It also expanded mandatory rotation to include concurring/quality control partners.

Respondents' views on mandatory partner rotation were neutral: Rotation can have a negative impact in terms of lost client-specific engagement knowledge, but it also provides several benefits, including improved auditor independence and a “fresh look” at audit risks and issues. Because of these benefits, nearly a quarter of respondents have adopted mandatory partner rotation for private companies (with an average rotation period of nine years).

Respondents did acknowledge, however, that the stricter SOX requirements had increased the burden on their firms. To ease the burden, most firms involve an audit partner's successor in the engagement for one or two years before rotation, and at many firms the former audit partner continues to be involved in the quality control process for the audit following rotation. Respondents also reported that audit quality is enhanced when the lead and concurring/quality control partners' rotations are staggered.

The authors observed that these practices reduce the negative impact of partner rotation, but that the practices also tend to negate the benefits of a fresh look and, therefore, “may not be in the spirit of the SOX rotation mandate.”

For the complete article, read “Reducing the Potential Negative Effects of Mandatory Partner Rotation.”

From The CPA Journal, A Publication of the New York State Society of CPAs, August 2011.