Pension funds back mandatory auditor tendering every 15 years
The UK’s Institutional Investor Committee (IIC) is considering backing plans that would force firms to rotate their auditor amid divisions within its membership over the length and renewal procedures of auditor contracts.
The IIC, which represents the Association of British Insurers, the Investment Management Association and the National Association of Pension Funds (NAPF), says it is rethinking its call in a 2012 position paper for mandatory tendering of audit contracts every 15 years. In an update to the paper, the IIC says it is now considering a call by some of its members for mandatory auditor rotation every 15 years instead of a simple tender. The original paper was a response to debate in the UK and the European Union (EU) over auditor contracts.
‘Investors are concerned that, where auditors hold office for long periods, this can affect their independence and objectivity, which are vital to ensuring audit quality,’ the IIC says in the update on its website. ‘But the IIC has not reached a consensus on the merits of mandatory auditor rotation.’
The debate comes after the UK’s Competition Commission opted to back mandatory tendering every 10 years, while the EU has discussed regulations that could oblige companies to switch auditors every 20 years, with banks switching every 15 years.
In the 2012 position paper, the IIC states that a mandatory 15-year auditor rotation requirement ‘could mean companies are forced to change auditor at a time when the existing auditor’s familiarity with the business would benefit the audit, such as when there is a major acquisition or merger. It could also conceal the fact that an auditor has stood down for a particular reason and prevent an auditor being reappointed when [it is] the preferred choice of both management and investors.’
The paper notes that pension funds, on the other hand, support mandatory rotation because substitution would serve as a check on the previous auditor’s work and would ensure ‘the audit is not unduly influenced by historical judgments’.
The Guardian newspaper reports that a series of fund managers, including Legal & General, AXA and Allianz, have now come out in support of a mandatory rotation every 15 years, according to Will Pomroy, the governance lead at the NAPF.
