Audit rotation is the replacement of the public accountant or public accounting firm (KAP) that audits a company after a set period, to preserve auditor independence. In Indonesia, public accountant rotation is mandatory after 5 consecutive financial years for certain entities (PP 20/2015) and after 7 cumulative years for commercial banks, issuers, and public companies (POJK 9/2023).
Audit rotation is a policy of replacing auditors within a certain period in accordance with applicable regulations. This policy is believed to be an effective solution to prevent fraud and fair judgments made on company reports.
This policy allows auditor and the client is within the limits of professionalism without losing his independence. However, existing studies prove that this policy can have a positive or negative influence on the quality of audit results.
So, to what extent does this turnover affect audit quality? Is it within a certain period of time that an auditor is able to recognize and assess the company well? This article will discuss the definition, purpose, types, regulations, examples, and impact of audit rotation on the quality of its assessment.
What is audit rotation?
Definition Of Audit Rotation In General
In general, audit rotation can be understood as the rotation of auditors from a particular public accounting firm (KAP) assigned to a client. The rotation period follows the policy that applies in each country. By replacing the auditor who assesses the company, this policy is expected to reduce problem cases so that auditor independence is maintained.
Definition Of Audit Rotation According To Experts
According to Inas Aisyah Widyaningsih, Alumni of the Accounting Department of the Faculty of Economics and Business (FEB), Airlangga University, audit rotation not only refers to the replacement of auditors, but also refers to the replacement of audit offices that provide audit services.
Further, Alvin A. Arens in his book entitled Auditing and Assurance Services saying that, audit rotation is a rule of maintaining independence by rotating audit assignments after meeting a specified time limit. This auditor replacement is mandatory by the client company to increase the auditor's independence.
What Is the Purpose and Importance of Audit Rotation?
So, broadly speaking, the replacement of auditors or the creation of this system aims to promote or maintain the independence of auditors and the quality of audits made. That way, both the auditor and the client can get a good profit.
What Are the Types of Audit Rotation?
In the field of accounting and auditing, there are several types of audit rotations that are important for a company to know. The difference between the types of audit rotation is related to the actors who experience replacement and who replaces them. Further, here is the explanation.
1. Internal and external Audit rotation
On the type of rotation internal audit internal auditor replacement refers to the replacement of auditors from within the company. Internal auditors are usually tasked with evaluating the organization's internal control functions, governance processes, and risk management.
This audit replacement involves not only internal employees, but also the audited division. For example, si A initially audits reports in the Finance Division. Then it undergoes rotation and is transferred to audit in the operational division.
While external audit rotation refers to the replacement of auditors from outside the company, namely from the KAP who is working with the company (client). Replacement of auditors in this case, aims to minimize the auditor's proximity to clients that can affect the assessment and quality of audit results.
2. Partner rotation vs public accounting firm rotation (KAP)
Different from before, the replacement in partner rotation and KAP rotation in question is an external auditor (from outside the client company). Partner rotation refers to the replacement of an auditor or someone from a particular KAP who is tasked with providing an assessment of the company.
Meanwhile, KAP rotation refers to replacing the public accounting firm. For example, PT Sekawan Media Informatika has long used the audit services of KAP Lurus Terus. Current regulations do not limit a firm's engagement period, but a company may choose to change firms voluntarily, for instance to gain a fresh audit perspective. Replacing KAP Lurus Terus with another firm is what is called KAP rotation.
3. When Should Audit Rotations Be Performed?
Rotation is mandatory when the engagement with the same public accountant reaches the regulatory limit: 5 consecutive financial years for capital market entities, commercial banks, pension funds, insurance/reinsurance companies, and state-owned enterprises (PP 20/2015), or 7 cumulative years for commercial banks, issuers, and public companies (POJK 9/2023). The limit applies to public accountants, not to public accounting firms (KAP).
However, the company can still make replacements before reaching the maximum limit. This condition is referred to as voluntary rotation, since the decision on the replacement of Service services is in the hands of the company.
Examples of audit rotation
For example, public accountant ABD from KAP Lurus Terus has audited the financial statements of PT Bank Abadi Jaya, a fictitious commercial bank, for financial years 2021 to 2025. Under PP 20/2015, a public accountant may audit a commercial bank for at most 5 consecutive financial years.
So for financial year 2026, the bank must use a different public accountant, although it may be from the same firm. Public accountant ABD may audit the bank again only after a 2-year break. The rotation must comply with applicable regulations, including the handover of audit documents from the previous auditor to the new auditor.
How Does Audit Rotation Affect Audit Quality?
Audit rotation system, was originally created with the hope to maintain the independence of auditors. But in practice, this system reaps pros and cons from a number of parties. Existing studies provide results that, audit rotation can have a positive and negative effect on audit Quality.
The positive influence of the replacement of auditors arises on the basis that the policy can affect the quality of audits. As a party whose duty is to assess independently and reasonably, it is important for the auditor not to get too close to the client. That way, the rotation can maintain a professional relationship between the two.
On the contrary, negative influences arise, since there is no guarantee that the replacement of auditors can result in a quality audit. This is because investors do not care whether the auditor who expresses the audit opinion has ever made a rotation or not. As long as the reports are relevant and reliable, the auditor's tenure has no effect on investment decisions.
What Are the Audit Rotation Regulations and Policies in Indonesia?
An auditor's engagement period with a client in accounting and auditing cannot be set arbitrarily. Indonesia applies audit period policies for public accountants (AP) and public accounting firms (KAP) serving a company or client.
The regulation currently in force is Government Regulation (PP) No. 20 of 2015 on Public Accountant Practice. Article 11 limits the provision of audit services on historical financial information by a public accountant to a maximum of 5 consecutive financial years for capital market entities, commercial banks, pension funds, insurance/reinsurance companies, and state-owned enterprises. The public accountant may provide audit services again after a break of 2 consecutive financial years.
For the financial services sector, OJK Regulation (POJK) No. 9 of 2023, Article 7(1), requires commercial banks, issuers, and public companies to limit the use of audit services from the same public accountant to 7 cumulative years, with the cooling-off period following the public accountant code of ethics.
| Regulation | Who is limited | Limit | Applies to | Cooling-off period |
|---|---|---|---|---|
| PP 20/2015 Article 11 | The same public accountant | 5 consecutive financial years | Capital market industry, commercial banks, pension funds, insurance/reinsurance companies, state-owned enterprises (BUMN) | 2 consecutive financial years |
| POJK 9/2023 Article 7(1) | The same public accountant | 7 cumulative years | Commercial banks, issuers, public companies | Follows the public accountant code of ethics |
The old rule in Minister of Finance Regulation No. 17/PMK.01/2008, which limited public accountants to 3 years and public accounting firms to 6 consecutive financial years, is no longer used. Since PP 20/2015, there has been no engagement limit for public accounting firms (KAP).
What Ethics Apply in Implementing Audit Rotation?
As with other professions, both auditors or KAP and companies that become clients must behave properly according to the code of ethics. Here are the ethics that must be owned by the auditor or KAP.
- Integrity - be honest, straightforward, and professional
- Objectivity - provide professional assessment without being influenced by any party
- Competence and prudence - the auditor must achieve and maintain his / her professional expertise and act conscientiously and professionally
- Confidentiality - auditors must maintain confidentiality from professional and business relationships
- Professional - the auditor must comply with the law, behave and act in accordance with the moral responsibilities of his profession, and avoid behavior that could harm the profession
As long as the two parties work together, the company that acts as a client must also have professional and good ethics during the partnership. Ethical principles that can be applied by the company such as, honesty, openness, do not put pressure or influence on auditors, professional, and maintain confidentiality.
In practice, when a company rotates its auditor, it must do so transparently. The company needs to hand over from the previous auditor to the new auditor. This process also involves the previous auditor transferring information to the new auditor.
During this process, the company should not pressure the auditor to influence his assessment of the company's report at a later date.
FAQ About Audit Rotation
What is audit rotation?
Audit rotation is the rotation or replacement of auditors from a Public Accounting Firm for their clients within a certain period according to applicable regulations — aimed at maintaining auditor independence and audit quality.
What are the types of audit rotation?
Internal audit rotation, involving auditors moving between divisions within the company; external audit rotation, involving the replacement of auditors from the Public Accounting Firm (KAP); plus the distinction between partner rotation, which replaces the individual auditor, and KAP rotation, which replaces the public accounting firm itself.
When must audit rotation take place?
When the engagement with the same public accountant reaches the regulatory limit: 5 consecutive financial years for capital market entities, commercial banks, pension funds, insurance/reinsurance companies, and state-owned enterprises (PP 20/2015), or 7 cumulative years for commercial banks, issuers, and public companies (POJK 9/2023). Companies may still rotate voluntarily before reaching the limit.
What are the audit rotation regulations in Indonesia?
Government Regulation (PP) No. 20 of 2015 on Public Accountant Practice, Article 11, limits a public accountant to a maximum of 5 consecutive financial years for certain entities, with a 2-year break before returning. POJK No. 9 of 2023 adds a 7-cumulative-year limit for commercial banks, issuers, and public companies. The old rule in Minister of Finance Regulation 17/PMK.01/2008 (3 years for public accountants, 6 years for firms) no longer applies, and there is now no limit for public accounting firms (KAP).
How does audit rotation affect audit quality?
On the positive side, rotation keeps the relationship professional so auditors do not grow too close to the client. On the negative side, there is no guarantee that changing auditors automatically produces a quality audit — as long as reports are relevant and reliable, auditor tenure is not always a consideration for investors.
What ethics must be upheld during audit rotation?
Auditors must uphold integrity, objectivity, competence and due care, confidentiality, and professional conduct. The company as the client needs to be honest and open, avoid pressuring the auditor, and ensure the document handover from the old auditor to the new one is transparent.
Conclusion
Audit rotation is the replacement of an auditor or public accounting firm before or after the maximum engagement period under PP No. 20 of 2015 and POJK No. 9 of 2023. Its purpose is to preserve auditor independence and minimize overly close relationships between auditors and clients.
Replacement of the old auditor to the new auditor, must be in accordance with applicable regulations and meet the existing code of ethics. That way, the rotation can take place professionally.
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