I have been quoted in the New York Times, Wall Street Journal, Chicago Tribune, Crain's Chicago Business, Chicago Magazine, Chicago Sun-Times, Financial Times, Reuters, Forbes, Harvard Business Review, BusinessWeek, American Lawyer, California Lawyer, American Banker, Columbia Journalism Review, The Times of London, The Guardian, the Financial Chronicle India and others. Otherwise, lower-cost auditing is the worst choice for auditors. Compared to the ratings agencies, the auditors have gotten away with murder. The practice of periodically changing, or rotating, your external auditor has been a topic of interest with our customers lately, and there are two schools of thought on this. The opinions expressed are those of the writer.
On the other hand, clients with short audit tenures believe they can persuade their position in case of a disagreement Iyer and Rama, 2004. Koss got substantially lower fees. For example, in this experiment, aggressive financial reporters were randomly assigned to rotation or no-rotation conditions, and so simply being an aggressive financial reporter could not artificially drive the relationship between rotation and audit quality. Both options go some way towards addressing the issues of effectiveness and cost, as well as potentially providing a fresh pair of eyes on the audit. The improvements made on the financial audit structure, as developed by policy makers and other groups of interest, includes the idea that rather than allowing companies to retain the same auditor forever, companies would be required to change auditors at least after seven years. You need to get a sense of how your audit relationship is going through some kind of auditor evaluation. Rather, it means that the inspection staff has determined that, because of an identified error or omission, the firm failed to fulfill its fundamental responsibility in the audit — to obtain reasonable assurance about whether the financial statements are free of material misstatement.
The mandatory audit firm rotation ensures that the firm does not please the auditors just for the case of maintaining the engagement. In this context, one should consider the research finding that audit quality tends to be particularly low in the first three years of the engagement, suggesting that three years at a minimum seem to be needed for an audit firm to achieve adequate knowledge of the audited entity European Commission, 2011b. Big question The continuing debate over mandatory auditor rotation raises the question: What is the actual impact of auditor rotation on auditor independence and professional skepticism? The scholarly conclusions on mandatory auditor rotation are mixed with no apparent depiction as to whether the auditor rotation is helpful. On the other hand, Kim et al. For instance, audit quality and auditor independence are extremely difficult to measure. Fora such as the AuditFutures initiative will develop new ideas to ensure that audit continues to best serve society. They do not, however, adequately deal with the issue of firm independence.
This research says that before implementing mandatory joint audit, regulatory bodies would need to determine how the audit work would be shared, and how the pair of auditors would be determined. You should have ongoing communication. Specifically, they have primarily examined whether long-term auditor-client relationships are correlated with better or worse earnings quality. . So far, the debate over mandatory auditor rotation has been framed as two competing arguments. With respect to independence in fact, auditors compromise independence most frequently in regimes that do not require rotation Dopuch et al. Finally, we will discuss analytical research on mandatory audit firm rotation.
The more detailed audit report is engaging and encouraging investors to be more involved, to ask questions, to get into dialogue with the business and its auditors. Given the lack of evidence associating mandatory audit firm rotation with an improvement on audit quality, regulators need to determine carefully the long-term objectives of a mandatory rotation requirement before implementing a costly measure. Throughout the period of review, examination, and introspection on the causes and solutions to the latest financial crisis, the auditors have stayed well above the fray. Because there is competition in the market the innovation will seep down — and that has to be a good thing. Stakeholders and other groups of interest have different take on the issue Investor Reaction to the Prospect of Mandatory Audit Firm Rotation. Some view it as advantageous while others deem it as a detrimental in the company operations and the corresponding flexibility. However, opponents to mandatory audit firm rotation argue that the potential costs of mandatory rotation exceed its benefits e.
You need to have some basis, so when you get proposals you have some measure to evaluate them by. However, it is equally likely that mandatory firm rotation will lead to higher market concentration because large corporations tend to choose one of the Big 4 auditors when switching their audit firm e. Europe requires mandatory audit firm rotation every ten years for public interest entities, but member states can reduce or extend this period. The current debate lacks a systematic and critical composition of arguments, practitioner experiences and opinions and research evidence regarding audit firm rotation effects. If you sacrifice one for the other, you diminish the value. Do you feel comfortable calling your auditor with a question? We find that the research evidence on the impact of mandatory audit firm rotation on audit quality and auditor independence is inconclusive. Research Evidence on Mandatory Audit Firm Rotation We structure our discussion of extant research in the area of auditor rotation on the basis of the methodology used.
Finally, many of the reviewed archival studies examine tenure effects rather than rotation effects, and voluntary switches rather than mandatory rotation. Or perhaps, as some leading auditors think, the changes to tendering rules have little to do with trust. Firms are taking a more holistic view across all their services, says Sue Almond, head of assurance at Grant Thornton. These requirements force the entity to switch auditing firms every so many years. You may not reproduce, store, transmit in any form or by any means, with the exception of non-commercial use i.
© 2006 Wiley Periodicals, Inc. Advantages It has been stated earlier that the mandatory audit firm rotation is aimed at periodically picking a different watchdog to replace the existing one. They cite cost, disruption to clients, and even higher vulnerability to fraud. This can increase the number of hours staff spend preparing for the audit and take their time and attention away from other important projects. However, neither Johnson et al. But it can not be achieved with rotating audit manager of the same firm because the audit team remains the same. Should auditor rotation be mandatory? However, mandatory audit firm rotation could significantly impact the relationship between the external and internal auditors; how their audits are planned, coordinated and performed; and how the external auditors leverage the knowledge, experience, and expertise of internal auditors to enhance overall effectiveness.
Hobson, University of Illinois at Urbana-Champaign; and M. If a firm is in the middle of a lengthy and costly contract, such as a systems review, then the company might not want that to be interrupted by asking the firm to tender for its audit. It is recommended that rotation should be done amongst different firms and not the partners. The problem with these correlational studies, though, is that this correlation could occur for completely different reasons. Even if it would be possible to motivate the auditor to plan a higher audit quality level for the last engagement period by increasing the penalty for audit failure in that period, such a strategy would result in reduced planned audit quality levels in all periods prior to the final one.