Audit rotation and audit ‘independence’ – what are the challenges and risks for you and Global Mobility?
Audit rotation and auditor independence is a hot topic right now. In this article we therefore discuss what this could mean to you and Global Mobility. We try to explain this confusing subject and explain what you can do about it.
With the collapse of Carillion in the UK, and other recent high profile corporate failures, there is a big debate raging at the moment about whether corporate governance is adequate and why auditor independence is so important. There are also concerns around a lack of competition and conflicts of interest.
What is ‘independence’ – what are the rules?
Independence is the requirement for accountants and advisors to be independent of their clients. Both the EU (including the UK) and the US have introduced significant rules that are designed to ensure independence really exists in practice.
The US position
Legislation for instance prohibits the provision of tax services by auditors to individuals in a Financial Reporting Oversight Role – e.g. CEOs, CFOs. In addition, it requires audit committees to pre-approve the provision of non-audit services by the company’s auditor.
The EU/UK position
The EU/UK have introduced automatic auditor rotation for listed companies and other public interest entities such as banks; they have also restricted the non-audit services that an auditor can now provide to its listed audit clients (and local rules can be even tighter in some EU countries e.g. France). For example, the audit provider is only allowed to provide non-audit services where such activities represent no more than 70% of the group audit fee. Moreover, certain non-audit services are now prohibited on the part of the auditor including certain HR advisory, payroll, technology and tax advisory services.
Whilst well intended the independence rules create challenges for organisations and their in-house tax and HR teams. Negative consequences can include the time and financial costs relating to the following:
- Forced changes to your current adviser and the problems associated with disruption
- Significantly reduced choice of Global Mobility adviser (e.g. it can’t be your auditor and you probably wouldn’t choose the firm(s) that might become your auditor to avoid forced changes again)
- More frequent changes of adviser
- Forced change or restrictions to the HR/GM technology you choose
What should you do?
It is important that companies affected by these rules:
- Understand what can and cannot be provided by their auditor – both according to todays rules and circumstances; and also, what might the future might look like
- Find out if and when your company needs to rotate auditors; and learn about the plans of your audit committee
- Keep your options under review and subject to ongoing planning and analysis
- Review their requirements closely and consider ALL the options and not just look at their traditional advisors there are often suitable alternatives
- Don’t panic!
Conclusions and next steps
Does independence really matter? Yes! For many organisations it is a legal requirement and for others it is critical that they consider their options and requirements closely. The ICAEW say that auditors are expected to give an unbiased and honest professional opinion to avoid self-interest, self-review and compromised objectivity.
If you have been thinking about changing your Global Mobility adviser now is the time to consider all your options, see our previous article here.
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