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Compulsory Audit Firm Rotation the “Wrong Solution”


Paris and New York, March 16, 2005 – The International Chamber of Commerce today said that compulsory rotation of audit firms is the “wrong solution” for correcting real or perceived weaknesses in auditor independence.


Recent high-profile corporate failures have raised concern about the reliability of company financial statements.  While most agree that primary responsibility for preparing accurate financial statements rests with company management and boards, questions have also been raised about the quality and independence of external auditors.


Some have suggested strengthening auditor independence by mandating rotation of audit firms after a specified period of time.  But in a new policy statement, experts from ICC's Commission on Financial Services and Insurance warn that compulsory audit firm rotation would have adverse effects on companies, investors and audit firms alike.


Compulsory audit firm rotation is likely to restrict the freedom of boards, shareholders and audit committees, according to ICC


With more than 8,000 member companies in over 140 countries, ICC is the largest, most representative private sector association in the world.   The United States Council for International Business (USCIB), based in New York, is its American national committee.


“Compulsory audit firm rotation is more likely to restrict rather than to enhance the freedom of boards, shareholders and audit committees of companies across the world,” according to Victor Chu, chairman of First Eastern Investment Group, a highly successful China based investment firm, and chair of the ICC Commission on Financial Services and Insurance.


The new ICC paper outlines business concerns about compulsory rotation from a global cross-sectoral point of view including users, providers and intermediaries of financial services.  One of its main objections is that the quality of auditing would be at risk.


"Audit effectiveness depends upon the audit firm's accumulated knowledge of, and long-term experience with, the client's operations, transactions and complex reporting issues,” stated USCIB Chairman-elect William G. Parrett, CEO of Deloitte Touche Tohmatsu, one of the world's leading professional services firms.  “Compulsory rotation undermines this and could adversely affect the quality of audits."


Compulsory audit firm rotation has been adopted or is under consideration by a number of national governments, even though there is little if any evidence to demonstrate its effectiveness. It has been suggested that such a system would enhance the market for audit services by opening up opportunities for new providers of audit services, but according to ICC experts that is not the case.


"Compulsory rotation does not appear to have these claimed benefits,” said ICC Secretary General Maria Livanos Cattaui.  “In fact, recent studies suggest that it increases concentration among the largest firms.”


"Market forces frequently help promote auditor independence,” she added.  “Companies are able to re-tender their audits and engage new firms if they so desire.  If the audit market for listed companies is concentrated or limited, it may be difficult to identify an audit firm that is willing, able and qualified to accept the engagement.  Such regulations could give rise to a whole host of problems.”


Another point put forward by ICC is that compulsory rotation acts as a disincentive to the auditor to make investments that enhance quality. Knowing that the client relationship will be of fixed, usually rather short, duration, increasing resources and attention will be focused on new client development.  No matter how much is invested in improving engagement quality, the rewards are lost with the next rotation.


The ICC document proposes a number of other policy recommendations that would strengthen auditor independence without the adverse effects of compulsory rotation.  These include:


  • The appointment of auditors based on a qualified evaluation of their performance by experienced and competent board members (including audit committee members or members of other appropriate bodies).


  • Strong professional rules on auditor independence, especially with regard to financial, business or familial relationships with clients, backed by monitoring and enforcement systems.


  • Restrictions on certain types of non-audit services that can be provided to audit clients also help safeguard independence.  (Examples of those that may create conflicts are bookkeeping services, management functions, or internal audit outsourcing.)


  • Effective audit committees of the board, with independent, financially-astute members.


  • Periodic rotation of the engagement partner and/or senior members of the engagement team to address the threat of over-familiarity with the client, without causing the loss of accumulated knowledge and experience.


USCIB promotes an open system of global commerce.  Its membership includes some 300 leading U.S. companies, professional services firms and associations whose combined annual revenues exceed $3 trillion.  As American affiliate of the leading international business and employers organizations, including ICC, USCIB provides business views to policy makers and regulatory authorities worldwide and works to facilitate international trade.



Stephen J. Canner, VP Investment & Financial Services, USCIB

(202) 371-1316 or

Jonas Astrup, Policy Manager, ICC

(011-33-1) or


ICC Policy Statement: The adverse effects of compulsory audit firm rotation


ICC corporate governance website


William G. Parrett Elected Chairman of USCIB (press release, March 15, 2005)


More on USCIB’s Committee on Financial Services