Longer auditor tenure positively affects the impact of the public audit

Friday, April 20, 2012
Independent research carried out by the Nyenrode Business Universiteit in the Netherlands shows that a longer client relationship between the external auditor and the audited company has a positive impact on the public audit of annual reports. The research, based on information drawn from the audit files of 147 Dutch audits, also shows that the impact of the audit decreases whenever accountants do more than 30% non-audit services for audit clients.  
Recently, there has been much debate about the relevance, performance and impact of the accountancy profession. Governments and politicians are busy devising extra safeguards for the accountancy profession in order to enhance its quality and credibility. However, due to the auditors’ duty of confidentiality, little is known about the impact of public audits by external auditors.
The objective of this research was to provide insight into the impact of the public audit on annual reports and the audited organizations. The majority of the audits (55%) in the survey concern Public Interest Entities (PIE: listed companies and financial institutions). The other 45% of the audits concern very large privately held companies and PIE-related institutions, such as pension funds. To study the impact of the public audit, Dutch external auditors were asked to fill in a questionnaire based on information from the audit file, including information on applied error-tolerance margins, audit differences and management letters. The unique information collected in this research allowed the researchers to closely examine the considerations made by external auditors.  
Overall, the researchers find that in 23% of the organizations the audit leads to corrections of the amounts involved in the balance sheet and profit and loss accounts prior to the issuing of the auditors’ opinion. The impact of the audit is even higher regarding the correction of notes to the financial statements and the directors’ report: about 77% of these sections were corrected because of the audit. 
According to the researchers, 25% of all audit differences discovered by auditors (which therefore imply inaccuracies in the financial statements) can be classified as important (defined as at least 5% impact of the net result or a critical limit). 
One of the researchers, Professor Leen Paape states: “The survey shows that 72% of these important audit differences were actually corrected in the annual report. The remaining 28%, concerning 14 organizations, are mostly non-corrected auditing differences that are related to important result-increasing and result-lowering auditing differences. That means that certain items are individually overstated or understated in the financial statements and are not in line with reality, but balanced, these items remain below 50% of the predetermined error-margins.”
Co-researcher Dr. Joost van Buuren adds: “In the case of accountancy firms, if the client relationship is longer than 10 years, more audit differences are being corrected than would be the case with a shorter client relationship. For individual external auditors, the positive effect on the processing of auditing differences is already there if he or she has been auditing for a client for longer than 5 years. These results lead to questions about whether obligatory rotation of audit firms, as proposed by the EU Commissioner Barnier, will enhance the positive impact of the public audit. Furthermore, the research shows that the impact of an audit decreases when an accountant provides more than 30% of non-audit services to audit clients. They have a three times lower probability of having their audit differences being corrected in the annual reports than auditors who provide less than 30% of non-audit services. However, non-audit services seem not to affect the correction of important audit differences.”
These survey findings raise some fundamental questions. What is the meaning of the results for financial statements users? Should financial statements users have more of a say in the determination of margin of error? What does the corrective role of the supervisory bodies entail? At the Nyenrode Business Universiteit in Breukelen, the Netherlands, on Friday 29 June 2012, a conference will be held on those matters, with stakeholders as well as the accounting profession. 
The anonymity of the respondents in the study as well as of the companies involved was fully guaranteed. The researchers are not affiliated with audit firms and the research is fully funded by the Nyenrode Business Universiteit, without external funding.
Research Report The Impact Of The Public Audit

Appendices Report The Impact Of The Public Audit

About Nyenrode Business Universiteit
Nyenrode Business Universiteit is the only private university in the Netherlands. It was founded in 1946 by leading Dutch companies. The motto 'by and for the business community' still applies today. Nyenrode Business Universiteit educates ambitious, creative and talented students to be global citizens and become sustainable leaders and entrepreneurs, and robust accountants and controllers in a future world with problems yet unknown. Nyenrode incorporates the core values of Leadership, Entrepreneurship and Stewardship.
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Note for the editors (not for publication):
For more information about the contents of this press release, please contact:
Nyenrode Business Universiteit, Helm Horsten, Corporate Communications Department, telephone number: +31 346 291 709. e-mail: h.horsten@nyenrode.nl, website: www.nyenrode.nl

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