1071 Job Rotation

Jun-2018

Background

Auditors are expected to be independent and objective and apply professional judgment that is free of bias, conflict of interest, and the influence of others.

The use of the same senior personnel or quality reviewer on an assurance engagement for a long time period may give rise to a familiarity threat to independence. The job rotation policy is one of the key safeguards used to reduce the familiarity threat to independence.

This policy addresses the familiarity threat to independence by establishing rotational requirements for senior personnel and quality reviewers for all assurance engagements.

The term “senior personnel” in this policy means those individuals ultimately responsible for the conduct of the engagement and for signing the assurance engagement report, typically the engagement leader. The Auditor General of Canada, who is the signatory for performance audit reports and certain financial audits, is not subject to rotation policy due to the statutory nature of their appointment, which includes a maximum term of 10 years with no eligibility for re-appointment.

Rotation requirements for performance audit and special examinations are measured by the number of consecutive years senior personnel and quality reviewers have been associated with an entity.

Rotation, however, is not only a matter for senior personnel. All audit personnel should remain alert to familiarity threats to independence and openly discuss these threats and job rotation with their supervisor. Audit staff frequently rotate between audits and other assignments in part to ensure familiarity threats are reduced to an appropriate level. Job rotation is facilitated when it is considered and planned well in advance, both at the individual and team/group level.

Relevant ethical requirements

The ethical standard of independence and the OAG Code of Values, Ethics and Professional Conduct require the Office and its employees to be and remain free of any influence, interest, or relationship regarding the entity’s affairs that impairs the Office and its employees’ professional judgment or objectivity or that, in the view of a reasonable observer, would impair the Office and its employees’ professional judgment or objectivity.

Relevant ethical requirements of various provincial accounting bodies establish rules regarding the time period during which senior personnel and the engagement quality control reviewer may perform their duties. Following is an example from The Institute of Chartered Accountants of Ontario:

A member shall not continue as the lead engagement partner or the engagement quality control reviewer with respect to the audit of the financial statements of a reporting issuer or listed entity for more than seven years in total, and shall not thereafter participate in an audit of the financial statements of the reporting issuer or listed entity until a further five years have elapsed.

For purposes of complying with relevant ethical requirements, the Office has interpreted listed entities and reporting issuers to be those entities whose shares, stock or debt are quoted or listed on a recognized stock exchange, or are marketed under the regulations of a recognized stock exchange or other equivalent body. In addition, the Office has extended the long association of senior personnel requirements to all assurance engagements in order to demonstrate the importance it attaches to independence.

Familiarity threat to independence

A familiarity threat occurs when, by virtue of a close relationship with an entity, its directors, officers, or employees, the Office or a person on the engagement team becomes too sympathetic to the entity’s interests. Examples of circumstances that may create a familiarity threat include, but are not limited to, the following:

• a person on the engagement team having an immediate family member who is director or officer of the entity;

• a person on the engagement team having an immediate or close family member who, as an employee or shareholder of the entity, is in a position to exert direct and significant influence over the subject matter of the assurance engagement;

• a former senior member of the Office being a director, officer, or employee of the entity in a position to exert direct and significant influence over the subject matter of the assurance engagement;

• a senior person on the engagement team having a long association with the entity; and

• the acceptance of gifts or hospitality from the entity, its directors, officers, or employees, unless the value thereof is clearly insignificant.

When a familiarity threat to independence is identified, its significance should be evaluated by senior personnel on the engagement and the Office. If the threat is other than clearly insignificant, available safeguards should be identified and, where applicable, applied to eliminate the threat or reduce it to an acceptable level.

When considering the significance of any particular matter, qualitative as well as quantitative factors should be taken into account. A matter should be considered clearly insignificant only if it is both trivial and inconsequential. Senior personnel should exercise professional judgment in assessing the significance of a threat and in determining which available safeguard to apply.

The significance of a familiarity threat will depend upon factors such as

• the length of time that the particular individual has been on the engagement team;

• the role of that individual on the engagement team;

• the structure of the Office; and

• the nature of the assurance engagement, including the complexity of the subject matter and degree of professional judgment needed.

If a familiarity threat is identified as other than clearly insignificant, the engagement leader will complete and document an engagement Exception Report, according to the requirements of OAG Audit 1031 Ethical requirements relating to an assurance engagement.

Potential Safeguards for a Familiarity Threat. Available safeguards might include

• replacing the senior personnel on the engagement team;

• involving an additional Office staff member who is not, and never was, on the engagement team to review the work done by the particular individual, or advise as necessary; and/or

• assigning an engagement quality control reviewer.

Additional guidance

An individual may serve as the quality reviewer before or after service as the engagement leader; however, if the quality reviewer becomes the engagement leader, the number of years spent in the first role will reduce the number of years that the individual may serve in the second role.

If a person considered for the quality reviewer position on an engagement has previously been the engagement leader, at least two years must have elapsed before the person may be appointed as the quality reviewer, regardless of the length of timed the individual served as the engagement leader.

An individual rotated out of the role of engagement leader or quality reviewer should exercise caution in consulting with the engagement team during the period following rotation to avoid directly influencing or being seen to be directly influencing the outcome of the engagement.

Job rotation has to be considered and planned well in advance, both at the individual and team or group level. Job rotation opportunities should be openly communicated and, as a minimum, employees should discuss job rotation with their supervisors during the annual performance review process. Employees should also be assessed according to this policy if a familiarity threat is identified.

Rotations in the regions can present special challenges. As such, they may require more lead time and more consultations among senior management.

The need and decision to rotate senior personnel should be communicated to the entity.

Audit Services maintains documentation of the analysis, recommendations, and approval by the executive committee of the rotation of senior personnel and the analysis, recommendations, and approval by the Auditor General of the rotation of quality reviewers, including the documentation of exceptions to the quality reviewer rotation policy. Exceptions to the rotation requirements of this policy are expected to be rare.

In addition to being familiar with the principles and guidelines concerning job rotation, personnel share responsibilities for ensuring that these principles and guidelines are followed. Following is a list of the different personnel and how they contribute to making job rotation work: