European firms benefit from audit rotation, says former Heineken CFO

The introduction of mandatory audit firm rotation has worked out advantageously for European companies, says René Hooft Graafland, who recently stepped down as global CFO at the Dutch brewing giant Heineken. He says that benefits include lower audit fees, a more efficient audit plan and new insights, as the new audit team approaches the company with fresh eyes. “But I do believe the rotation period should be at least twelve years.”

René was initially "strongly against" mandatory rotation of audit firms, but has changed his mind "in hindsight". However, he doesn't believe that the mandatory audit firm rotation has benefited smaller firms like Mazars or BDO, as none of the companies listed on the Dutch main stock market index AEX have moved away from the Big Four. He also warns that rotation requires a lot of investment from companies and auditors. He says:

"The process demands a lot of time from the CFO, but that is part of the job."

René became Heineken's first real CFO in 2005. Until then former chairman Freddy Heineken had maintained that finance chiefs should not be part of the executive, as they tend to introduce unnecessarily complicated schemes. Last year René stepped down, but he still serves as non-executive on the board of three multinationals and is a board member at African Parks, the conservation agency with headquarters in Johannesburg that helps African governments manage their most important nature reserves.

The Independent Regulatory Board for Auditors (IRBA) plans to implement mandatory audit firm rotation in South Africa and started a "second phase of engagement" with the industry on implementation of the new requirements. Audit firms and listed companies in South Africa are generally not in favour of the change - it is often argued that it will take years before new audit firms can start delivering value.

According to René the sentiment in Europe was largely the same before the compulsory rotation was introduced. "You have to realise what enormous impact it has, especially for a big corporate like Heineken. We have many local subsidiaries across the world, which then also need to change auditors. For the company and the auditor, it is a massive investment."

Still, the regulation change yielded many benefits:

"A new auditor looks at your business with fresh eyes. Whereas an existing auditor will change the audit plan incrementally every year, a new auditor can take a step back and look at the most efficient way to execute the audit. It can also grab the opportunity to make use of its latest internal control frameworks and shared services."

According to René audit fees have decreased between 5 percent and 25 percent after the introduction of the mandatory firm rotation in Europe. "One reason for this is that the firms need to pitch their plan and compete during a tender process. They go out of their way to land attractive clients like Heineken. Secondly, and to me this is more important, the fees go down because of the fresh eyes they use to look at the work required."

An example is the way Heineken's new auditor treated the brewer's new shared services centre in Kraków. Where the previous auditor had increased their fee, as it had to check an additional legal entity, the new firm streamlined the entire audit by doing much of the audit work at the source of the data in Poland. Most existing audits are tied to individual partners in the different countries and firms won't be keen to shift work to colleagues abroad, whereas a new audit firm can build a new audit plan without any legacy issues.

The Netherlands initially introduced mandatory rotation after eight years, but this will be harmonised with the European period of ten years. René feels this is still too quick and fears the short mandatory period will limit the investment audit firms make to serve a client. "For me the minimum should be twelve years, with a shorter mandatory rotation for partners. In the first year, the new auditor adds value by asking critical questions, but only after a few years can they start making useful suggestions."

In South Africa, IRBA hopes to stimulate diversity among auditors by opening up the tender floor for firms other than the Big Four, notably black-owned businesses SizweNtsalubaGobodo, Nkonki and SekelaXabiso. René warns that the smaller audit firms have barely benefited in Europe. "Multinationals like Heineken need the network of one of the Big Four, so there are only three candidates outside your current auditor. I don't think smaller global firms like Mazars or BDO have benefitted much. Perhaps it is different for locally-operating firms, but on the Dutch AEX no company has left the Big Four."

One of the trickiest parts of firm rotation is the untangling of consultancy services, as the same firm is not allowed to audit and advise a client.

"The rule makes sense, as auditors should not check their own advice, but the reality is more complex than many realise. Companies need to assess which consultants they might have to withdraw when they pitch for a new contract and take a hard look at the ramifications."

When Heineken went out to tender to replace KPMG in 2014, it did not invite PwC for this very reason, as the brewer was engaged in an extensive advisory partnership with that firm around the introduction of shared services. Deloitte was eventually chosen as new auditor. "We were given three years to rotate, which was a very short period - as everyone went through the process at the same time. At Heineken we decided to go out to tender as soon as we could, so we still could pick and choose from the best partners."

Although Heineken never quantified the cost of the rotation, René says time and attention are the biggest resources needed. "But those are well-spent, as the new auditor asks many questions, which forces you to write new position papers to elaborate on certain decisions. That is a healthy process, which the business can learn a lot from." All the same it is an elaborate process, René says. "Several auditors come and visit you for a due diligence. The process demands a lot of time from the CFO, but that is part of the job."