Non-financial firms Condition to change auditors goes
By Dilawar Hussain
KARACHI, April 5: With the Enron debacle behind us, the Securities and Exchange Commission of Pakistan (SECP) has decided to withdraw the condition of rotation of external auditors after every five years for non-financial listed companies. That settles the long standing argument between the SECP and the Institute of Chartered Accountants of Pakistan (ICAP) on whether or not the law would bring benefits to the profession. The accounting community was vehemently against the condition of rotation of external auditors of listed companies imposed in 2002, vide the ‘code of corporate governance’, saying that it would increase audit costs and create significant practical problems.
The new SECP order - reversing the earlier decision - that came in mid-March specified that it did not apply to the companies in the financial sector, which include banks, non-banking finance companies, modarabas and insurance companies. Those would have to change external auditors every five years. Listed companies, other than those in the financial sector would, at a minimum, rotate the engagement partner (of audit firm) after every five years, the SECP said.
Whether or not auditors should go through the mandatory change over five years became a subject of debate all through the world, following the fall of the fifth largest accountancy firm — Arther Andersen, which bore the brunt of the blow for the Enron and WorldCom debacle. A number of such high profile corporate failures had raised concerns about the accuracy and reliability of company financial statements. Although, the prime responsibility for preparing financial statements rested with company management, as overseen by the Board of Directors, criticism had also been levelled at the quality of external audits and the independence of auditors.
Many critics thought that mandatory rotation of auditors would be healthy for the profession as a way to counter the perception that long-term relationships between auditors and their clients impair auditor independence and increase the risk of audit failures.
But in a new policy statement, experts from International Chamber of Commerce’s (ICC’s) Commission on Financial Services and Insurance warned that compulsory audit firm rotation would have adverse effects on companies, investors and audit firms, alike.
ICC conceded that compulsory audit firm rotation had been adopted or was under consideration by a number of national governments, “even though there was little, if any evidence to demonstrate its effectiveness”.
It had been suggested that such a system would enhance the market for audit services by opening up opportunities for new providers of audit services. ICC experts, nonetheless, thought that was not the case.
