How often should you rotate your auditor? Many board members from publicly-traded companies encourage the nonprofit boards they serve to explore audit firm rotation as a best practice. But is it a best practice?
Is There Guidance Regarding Auditor Rotation for Nonprofit Organizations?
The rise of audit partner or audit firm rotation policies, in large part, is attributable to the Sarbanes-Oxley Act of 2002. Curiously, with the exception of two very narrow provisions of the act dealing with document destruction and whistleblower policies, the act does not apply to nonprofits unless a nonprofit is also an issuer of publicly traded securities or has filed as a registrant to issue such securities under the Securities Exchange Act of 1934 or the Securities Act of 1933, respectively. So, if the Sarbanes-Oxley Act doesn’t apply to nonprofits, why have so many adopted its audit partner rotation policy, or gone even further and turned the policy into one of audit firm rotation?
The Sarbanes-Oxley Act has had effects—intended or otherwise—on the relationships between nonprofits and their auditors since its passage. Never was the act intended to apply to nonpublic entities such as private businesses, nonprofit organizations, governments or municipalities. Nonetheless, as the provisions of the act became better known and more widely understood after its passage, the merits of adopting some of its provisions began to make sense to managers and directors of nonpublic entities, and some of those provisions have evolved into “best practices” over time.
Perhaps the most ubiquitous of these “best practices” is that which has generally become referred to as “auditor rotation.” This broad term encompasses both audit partner rotation and audit firm rotation.
Contrary to widespread misconception, the Sarbanes-Oxley Act doesn’t require rotation of audit firms.
Review common practices for nonprofits to consider when evaluating policies to implement a smooth audit process.
What Are the Consequences of Audit Firm Rotation?
With audit firm rotation, disruption with a capital “D” occurs and affects everything, often to the detriment of the nonprofit. A study of auditor tenure conducted by professors at the University of Richmond and Texas A&M International University concluded:
The results do not support the arguments of those who propose mandatory auditor rotation and suggest that, contrary to the concerns expressed by the SEC, there is an inverse relationship between auditor tenure and audit reporting failures.
The AICPA opposes mandatory audit firm rotation, citing the often costly and unintended consequences that may result. Instead, the AICPA recommends the strengthening of audit committees and encourages them to be more proactive in their interactions with and supervision of the auditors.
Here’s how to achieve a successful nonprofit audit for your organization.
How Do You Determine What Is Best for Your Organization?
The arguments for rotation include:
The arguments against rotation include:
Consider Level and Quality of Service
If you are not receiving the level and quality of service you expect, discuss the issues with your auditors. If they are no longer able to meet your standards, a change may be in order. But it’s important to remember that change does not come without cost.
Ensure you’re getting the most out of your nonprofit audit.