Auditor rotation policies of governmental entities.

• Author: Wendell, John P.

Auditor rotation is a subject that has periodically received a lot of attention, but little investigation. Recently, the International Federation of Accountants has encouraged accounting firms to rotate senior personnel who are involved in long-term engagements. For companies subject to securities exchange requirements, the American Institute of Certified Public Accountants (AICPA) requires partner rotation on audit engagements every seven years, but the AICPA has consistently opposed legislation introduced in Congress requiring the rotation of auditors.

The Government Finance Officers Association, in its Elected Officials' Guide to Auditing, explains this problem: "No clear consensus has emerged in favor of or against the concept of auditor rotation.... [U]nder current professional standards applicable to auditors, there is no ethical limitation on the number of consecutive years that an auditor may continue to audit a client."

The authors of this paper became interested in the question of the frequency of the rotation of auditors when asked by a member of the City Council of the City and County of Honolulu for data on the frequency of auditor rotation in other municipalities. In researching the question, the authors found that very. little useful information on the frequency of auditor rotation in governmental entities has been published. There has been much research in the private sector on auditor changes, and there has been considerable research on the determinants of fees for audits of governmental entities.

There are two relevant studies on auditor rotation for governmental entities.(1) These studies found that most experts believed that the ideal length of a multiyear agreement was from three to five years. The two principal factors that were associated with a change in auditor were: 1) the independent auditor reported material weaknesses in internal controls, or 2) the auditor violated nepotism, pecuniary interest, or competitive bidding laws. No studies were found that give data on the prevalence of auditor rotation policies for governmental entities in the United States.

Exhibit 1 LOCAL GOVERNMENT AUDITOR ROTATION ROTATION REQUIREMENT BY SIZE OF GOVERNMENT Size Rotation Requirement Total Yes No Small 59 (30%) 135 (70%) 194 (100%) Large 55 (32%) 115 (68%) 170 (100%) Total 114 (32%) 250 (68%) 364 (100%) Exhibit 2 LOCAL GOVERNMENT ROTATION POLICIES REASON FOR ROTATION Law Requires Formal Policy Informal Policy Total Small 15 (25%) 4...