01-20-04 Regular Meeting - Laserfiche WebLink

Browse Search

Should auditors be "rotated"? Some argue that an effective way to enhance the financial statement auditor's independence is to require that the current audit firm be automati- cally replaced at the end of its contract term by a different audit firm. This practice is commonly referred to as auditor rotation. Mandatory auditor rotation can be effective only if a government has access to a sufficient num- ber of interested and qualified audit firms to ensure adequate competition. Unfortunately, governments sometimes have few audit firms available with the specialized expertise and ex- perience needed to perform effective public- sector audits. In such circumstances, a rule re- quiring mandatory auditor rotation could have the practical effect of forcing a government to se- lect aless qualified audit firm. Also, a policy re- quiring the mandatory rotation of auditors may significantly decrease the number of qualified audit firms wishing to participate in the audit procurement process. For these reasons, governments are advised not to institute a mandatory auditor rotation policy. Instead, at the end of each audit-contract term governments are encouraged to engage in a full-scale, aggressive procurement process that encourages competition from all qualified firms, including the current auditors. Who performs audits? Auditors are often divided into two separate cat- egories: external auditors and internal auditors. External auditors must be independent, both in fact and appearance, of the entities they audit. In the public sector, external auditors typically are drawn from one of two sources. Some are members of private firms of certified public ac- countants (CPAs). Others come from the ranks of organizationally independent government audi- tors (e.g., the office of the state auditor). Internal auditors, on the other hand, are employ- ees of the entities they audit and report to man- agement. Ideally, internal auditors enjoy a high degree of autonomy in their work and profes- sional standards require that they strive for ob- jectivity. All the same, they cannot be said to exhibit the same degree of independence as do external auditors. For this reason, the latter are commonly referred to simply as independent au- ditors. External auditors are most commonly encoun- tered in connection with the annual audit of a government's financial statements. This role is discussed in more detail in the section of this publication devoted to Financial Statement Au- dits. 4s AN ELECTED OFFICIAL'S GUIDE TO AUDITING 3