The Task Force formed to ponder over the question of 'rotation of auditors' should have come up with its recommendations by May 31. The date has been extended to sometimes this week.

Whatever the reason, it is understandable that in handing down its verdict on whether or not audit firms should be subject to compulsory rotation (after every five years), the Task Force has a difficult decision to make.

The issue stirred up a debate all around the world, following the fall of Enron and World Com-billed as the biggest financial failures in the US history. The blame for those disasters were placed fairly and squarely at the door of Arthur Andersen, one of the world's big five audit firms and the statutory auditors to both Enron and World Com.

The global big accountancy firms do not like the idea of rotation of auditors, but the smaller firms do. The argument, nonetheless, is not new. It has been debated for over 25 years. The one country that has consistently adopted it, is Italy.

Khalid Mirza, the previous Chairman, Securities and Exchange Commission of Pakistan (SECP), forced through the clause xIi into the 'Code of Corporate Governance', which states: All listed companies are required to change their external auditors every five years.

If for any reason this is impractical, a listed company may at a minimum, rotate the partner in charge of its audit engagement after obtaining the consent of the SECP. The regulation became effective for companies holding their Annual General Meetings (AGMs) after December 31, 2003. Now, there is a bee-line of companies applying to the SECP to seek its consent for the change in audit partner, instead of the audit firm.

The chairman, SECP, Dr.Tariq Hasan, says that the commission decides on 'case-to-case' basis. What criteria does the SECP apply in sifting the deserving from non-deserving has yet to be made public.

But the idea of audit partner rotation instead of audit firm rotation is just silly. That can bring no benefits whatsoever. In our setting, there are no 'Chinese Walls' that may prevent the flow of information from one partner to the other.

So the moot point is whether it is progressive or retrograde step to rotate audit firms. Big firms are all thumbs down for auditor rotation. The report of the Task Force on the subject of rotation of auditors-when it is released and brought into public view- would be discussed, debated and deliberated.

At a seminar on corporate governance in Lahore University of Management Sciences (LUMS), some time ago, the chairman SECP, Dr. Tariq Hasan perhaps put forth his personal view that the rotation of auditors was impractical in our country, because of the small market size.

But in doing so, the SECP chief echoed the sentiments of the US SEC's ex-chairman, Harvey Pitt, who also had earlier spoken against the rotation of auditors to the House Committee on Financial Services.

The main argument for rotation is that over a long period of time, auditors develop familiarity with the client and can lose their independence. But those who argue against change contend that the threat of loss of auditor independence comes more from high non-audit fees than audit fees, as was witnessed in the case of Enron, where fee for consultancy job, far exceeded the sum paid for audit of accounts. Following the Enron debacle, Regulators here asked accountancy firms to separate audit & taxation from consultancy.

That was a step in the right direction. But what good did that do? Big firms formed their own consultancy arms and passed on the non-audit jobs to them. Some professional accountants contend that distinction has to be made between tax work, which is acceptable and large consulting contracts, which are not.

Members of the Institute of Chartered Accountants of Pakistan (ICAP) hold the legal right to audit accounts. Compared to India, where there are more than 100,000 members, ICAP has produced a total of 3408 members to this date.

On average, the Institute added 170 new members in each of the previous five years. There are 393 audit firms and 95 firms have been qualified by the ICAP's Quality Control Board to audit accounts of listed companies.

Smaller firms are sour that the big 8-10 firms take the cake and hold nearly 60 per cent of the audit and taxation jobs of big and multinational clients. It really is the international 'branding', which industry sources admit is a valuable asset in securing deep pocket and multi-national clients.

Pakistan's biggest firms are already in affiliation with the world's big four: A.F. Ferguson & Co. is affiliated with Price water house Coopers; Taseer Hadi Khalid & Co. with KPMG; M.Yusuf Adil Saleem & Co. with Deloitte Touche Tohmatsu (DTT) and Fordes Rhodes Sidat Hyder & Co. with Ernst & Young.

ICAP, the front-line regulator for the accountancy profession details a host of measures to keep in check the quality of audits. It has been made mandatory on listed companies to adopt International Accounting Standards (IAS)-issued by International Accounting Standards Board, UK in preparation of their financial statements and the Commission has made it obligatory for auditors of listed companies to ensure compliance with IFAC's "Guidelines on Code of Ethics'.

The SECP made it compulsory for auditors of listed companies to obtain satisfactory rating from the Institute under Quality Control Review (QCR) programme. Those who do not favour the mandatory rotation of audit firms suggest that it would have a negative impact on audit quality. It has been argued that audit quality depends on a thorough understanding of business and the management and frequent changes would adversely impact it.

Compulsory rotation of audit firms would tend to reduce audit quality and increase the risk of audit failure in the early years of a major new company audit due to the time it takes to become familiar with an often complex and geographically widespread business.

Under the 'Code of corporate governance,' the work load of auditors has increased mani-fold. Gone are the days when the auditor would merely certify that profit & loss account and the balance sheet presents a "true and fair view" of the company's state of affairs.

The auditor must now also express his opinion on the "cash flow statement" and "statement of changes in equity together with the notes forming part thereof". The auditor also has to present "Review Report to the members (shareholders) on statement of compliance with best practices of code of corporate governance".

But let's look at what is happening in our neighbourhood. In July last year, the Institute of Chartered Accountants in India (ICAI) passed a resolution making rotation of auditors mandatory for listed companies and for those companies in which public is substantially interested. But a year later the Institute is taking a re-think on the issue.

The idea of rotation had come up several times in the council of the ICAI over the last 13 years but was invariably put off because many of the council members were also partners in large audit firms and the rotation rule would have meant uncertainty in their revenue flows from long-standing clients.

An idea was floated of a joint auditor system, where every listed entity should have two independent audit firms appointed as statutory auditors. The two firms would act as check on each other and take turns in auditing different functional areas of a company.

Perhaps the days of sole proprietorship and small partnership firms in accountancy are numbered. Many smaller firms are known to be struggling even to pay running expenditures and at least one audit firm was reprimanded by ICAP when a pupil complained that the firm he was serving articles with was not even paying few hundred rupees in stipend.

If compulsory rotation was put into effect 'which quite clearly looks unlikely to happen-mid-tier firms could expect to gain. But most realists believe that the largest auditing firms would not take a hit on their bill books. Such mandatory rotation of auditors if enforced 'would be just job-swapping between the Big Four or eight'.

But let this discussion on a very lucrative but extremely dry subject of accountancy be closed on a happy note. On the cover of the August 17th-23, 2002 issue of 'The Economist'-the prestigious UK magazine- a company boss is seen signing an oath that reads: "I swear that, to the best of my knowledge (which is pretty poor and may be revised in future), my company's accounts are (more or less) accurate. I have checked this with my auditors and directors who (I pay to) agree with me.'