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Bryan Shaw, a jeweller who took tips from his auditor friend Scott London, pleaded guilty on Monday to securities fraud. London’s 29-year career at KPMG ended in his firing and arrest last month.SAM MIRCOVICH/Reuters

A new report on Canada's audit standards has come out against mandatory rules that would require companies to regularly replace their auditors.

A steering group that has spent the past 18 months reviewing ways to enhance audit quality in Canada has issued its conclusions about recommended reforms, and has rejected the idea of requiring firms to rotate their auditors. The proposal, which is under review around the world, is intended to ensure auditors remain independent from the firms they are scrutinizing by not staying for too long on an auditing assignment.

The Enhancing Audit Quality (EAQ) steering group, headed by former Ontario Securities Commission chairman David Brown, has concluded the preferred approach for Canada is to have boards' audit committees review their audit firms at least every five years. The committees could decide to keep or replace their existing audit firm, but would be required to publish the results of their review in their public documents, the report says.

The group said there is little evidence to suggest that automatically rotating audit firms will improve "auditor skepticism when questions management judgment and actions," and new auditors may not understand the company or the industry well enough to ask searching questions and exercise "informed skepticism."

"The decision to replace an audit firm should be an informed decision and not made merely because of a regulatory requirement to rotate audit firms whenever an arbitrary term limit is reached," the report says.

"Instead, a board of directors might arrive at such a decision when it determines that institutional auditor independence in reality or in perception has been compromised or that audit quality has not met the board's expectations."

The group says its proposed five-year reviews of audit firms would ensure boards formally review their auditors and consider issues of auditor independence without creating a "one size fits all" rule.

The EAQ group was set up by the Chartered Professional Accountants of Canada – which is the new group formed by the merger of Canada's Chartered Accountant and Certified Management Accountant associations – as well as the Canadian Public Accountability Board, which is responsible for monitoring the quality of work of Canada's audit firms. The committee included senior people from business and accounting.

The review was launched to consider regulatory developments that have been proposed in the U.S. and Europe in the fallout of the global financial crisis, and to assess which reforms proposed elsewhere are appropriate for Canada. The European Union, for example, has proposed mandatory audit firm rotation every six years, while Britain's regulator has proposed a requirement for companies to "retender" their audits every 10 years as a way of reviewing whether to change audit firms.

The steering committee said that while global markets are inter-related and harmonization of audit rules may be efficient, but it isn't necessary to have identical detailed regulations in every country.

"As long as clear and co-ordinated global objectives are established, how they are implemented could be left for jurisdictions to specify," the report recommends.

The recommendations in the report are not binding and do not create new policies, but are instead intended to be recommendations for policy makers from the business community.

(Janet McFarland is a Globe and Mail Business Reporter.)

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