UK: APB publishes revised draft ethical standards for auditors

The role of external auditors within the corporate governance framework was one of the important questions addressed by the Cadbury Committee's 1992 report. The Committee observed that "[t]he annual audit is one of the cornerstones of corporate governance" but noted that "[t]he framework in which auditors operate, however, is not well designed in certain respects to provide the objectivity which shareholders and the public expect of auditors in carrying out their function".  

The Committee considered several proposals for strengthening the audit framework including the mandatory rotation of audit firms. This was rejected, the Committee noting that "any advantages which this would bring would be more than outweighed by the loss of trust and experience which are built up when the relationships are sound, and by the risk to audit effectiveness at the changeover".  The Committee did, however, recommend that in listed companies there should be a periodic change of audit partners in order to bring a "fresh approach" to the audit. 

Audit partner rotation is one of the matters considered by the Auditing Practices Board in a consultation paper published yesterday. The paper sets out revised draft ethical standards for auditors and considers whether the rotation period for the audit engagement partner should be five or seven years. Five years is the current requirement in the APB's Ethical Standard 3 - Long Association with the Audit Engagement (see paragraph 12). 

The APB notes in its consultation paper the concern expressed by some audit committee chairmen that a five year limit does not necessarily promote audit quality. For this reason, the APB seeks views on its proposal to permit the audit committee to extend the tenure of the audit engagement partner of a large listed company, where the company is complex or diverse, providing the committee is satisfied with the audit engagement partner's objectivity and considers that audit quality will be safeguarded by the extension to seven years. If an audit committee so decides, the APB proposes that this would require disclosure to the shareholders.