Mandatory rotation of auditing firms and engagement partners doesn’t necessarily foster greater professional skepticism, according to a new academic study.

The study polled 233 pairs of auditors and their contact persons at client firms (mainly CEOs or CFOs) on their attitudes towards mandatory rotation and found that trust and professional skepticism can work hand in hand.

In recent years the issue of mandatory audit firm rotation has been heavily debated in both the U.S. and Europe. The Public Company Accounting Oversight Board proposed mandatory rotation in 2011, but abandoned the proposal in 2014 after lawmakers in the House of Representatives voted to prohibit such a requirement. However, the PCAOB does require rotation of audit engagement partners every five years.

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Photo: PCAOB

While the U.S. does not require public companies to rotate their auditing firms after a certain number of years, the European Union adopted requirements in 2014 for both firm rotation and retendering of bids for audit services. Public companies are supposed to rotate auditing firms after 10 years, though they can extend the period to 20 years if they put out bids for audit services from other firms within the 10 years.

One of the main arguments in favor of auditor rotation is it prevents auditors from becoming too cozy with the companies whose finances they are supposed to scrutinize, putting them at risk of losing a healthy sense of professional skepticism. However, critics have pointed to the need for auditors to be familiar with the way a client’s business functions and the necessary degree of trust that grows over time. The new study argues that both professional skepticism and trust can co-exist.

The research, from Professors Ewald Aschauer and Matthias Fink of Johannes Kepler University Linz in Austria, Andrea Moro of Cranfield University in the U.K., Katharina van Bakel-Auer of Vienna University of Economics and Business, and Bent Warming-Rasmussen of the University of Southern Denmark, appears in the spring issue of the American Accounting Association’s journal Behavioral Research in Accounting. They sent questionnaires to auditors and their business clients asking about their attitudes and beliefs about one another, while controlling for factors such as the gender and age of the audit partners and their client contacts, the length of the partners’ and auditing firms’ relationships with clients, the size of the client firms, whether the audit firms were part the Big Four, and the amount of non-audit services provided by the auditing firms to clients.

“Superficially there seems to be a contradiction between being trusting and skeptical, but not if one thinks a little about it,” Aschauer said in a statement. “Wouldn't auditors, after all, tend to be trusting of clients that view them as properly skeptical? And to the extent that clients resist professional skepticism, the auditors will tend to become less trusting. What we found, in short, was a healthy balance at the heart of this interpersonal relationship that merits leeway from regulators. As for mandatory rotation, we found no significant relation between auditor skepticism and the length of companies' relationships either with audit firms or engagement partners.”

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