Does The Rotation Of Auditors Improve The Quality Of Auditing? As the economy of the United Kingdom struggles to recover from the recent financial crisis marked by mortgage defaults, high rates of unemployment, corporate scandals and overall lack of investor confidence, there has been a growing debate on the need to improve transparency, accountability, trust and credibility…
In the provisional report released by the panel, it was proposed that, for there to be audit quality, audit firms must be rotated periodically (Whitehouse par. 4). This proposal by the U.K. Competition Commission is in line with the United States Public Company Accounting Oversight Board’s (PCAOB) concept, which proposed compulsory rotation of audit firms. According to PCAOB, the proposed regulation would set a threshold on the number of years that a registered public audit firm could act as the auditor of a public company, noted Bhika and Francis (par. 2). This proposal came about out of the increasing need to improve audit quality in both the U.K. and the U.S. Audit quality, according to Arter (3) is a process involving a systematic examination of internal and external auditor’s quality system. Audit quality is seen as an important part of quality management system in an organization. Quality audit ensures that audit companies perform their duties objectively, and independently. Therefore, the U.K. Competition Commission and PCAOB believe that rotation of auditors of public companies will help increase competition among audit firms, which will also increase the quality of audit. This will be of great benefit to the shareholders since it will help safeguard shareholders interests by increasing the managers’ accountability. A report released by the U.K. Competition Commission showed that about 31% of top 100 public companies in the U.K. and 20% of the top 250 had been sharing the same audit firm for more than two decades. This raises concern since it does not promote the spirit of competition, thus resulting in lower quality, higher prices and less innovation. In addition, this results in failure of audit firms to protect the interest of shareholders (Whitehouse par. 5). The U.K Commission is also concerned that the audit market, subjugated by the Big 4, is constrained by factors that prevent companies from changing auditors. In addition, these factors allow auditors to focus more on satisfying the needs of managements than those of shareholders. A study also established that most companies find it difficult in comparing alternative audit firms with their existing auditors, as they prefer continuity. As a result, they incur significant costs in hiring and terminating the services of auditors. Therefore, the reluctance of these companies to change auditors limit reduces their bargaining power. All these problems, according to the U.K. Commission can only be addressed effectively through mandatory rotation of auditors (Whitehouse par. 6). Audit rotation, according to PWC (par. 2), pertains to setting a limit that ensures that a particular auditor does not overstay as an auditor for a particular client for too long. Instead, the auditors are required to move to terminate their services with the firms they have been working for after the expiry of the set time limit to find other clients. Perceived advantages One of the perceived advantages of audit firm rotation is that it increases audit quality (Bhika and Francis par. 6). Those in support of proposed rotation of audit firms in the country claim that the establishing term limit for audit firms will help in eliminating some of the “chumminess” that might exist between companies and audit firms, thus promoting increased skepticism, independence and objectivity. ...
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Further, it is expected that the mandatory auditor rotation will result in higher audit quality, results in auditor’s independence, a downturn in audit costs and to lessen big audit firms market concentration. It is to be noted, in the recent past, Italy, India and Brazil have made the auditor rotation as mandatory whereas Canada and Spain have revoked their earlier decision, whether to make auditor rotation as mandatory.
It is also used by the investors in their decision making process, related to purchase or sell of the securities. The auditors guide the investors and owners in their decision making process. The effective utilization of financial statements requires understanding of the functions of auditors as well.
There are those that argue that long-term relationships (auditor tenure) build more knowledge about the firm and its accounting procedures which, in turn, translates into more effective auditing practice and skills. Other stakeholders in the business world believe that audit quality is reduced when rotating auditors due to the lack of familiarity about business processes and accounting, thus impacting the ability of auditors to do a thorough job in assessing best practice within the organisation.
In this context, the Sarbanes-Oxley act was implemented in the US that aimed at bringing back public faith in financial reports. The Sarbanes-Oxley Act made it mandatory for the auditor to be replaced after every five years in the US. The European Commission, however, did not mandate a compulsory auditor rotation, and recommended in its proposal implementation of audit firm rotation and change of audit firms every six to nine years (European Commission, 2010).2 Globally, mixed approaches have been adopted as regard MAR, and in many countries such as the UK, audit partner rotation is given preference over firm rotation, while the regulators in Germany, the US and the UK have derived that pote
The rotation of auditors is one of the criteria that propose towards the quality of audit in most of the cases.The integrity of the financial statements is contingent upon the audit. Audit of the financial statements elaborates the dependability of the users of the financial statements upon the reliability of the information provided in the financial statement.
In general, auditing is fundamentally described as the systematic evaluation and the authentication of financial along with accounting records of a specific business organisation (Rathore, 2008; University of Mumbai, n.d.). It can thus be affirmed from a broader perspective that the auditing ensures the financial reports and the business finances of a specific organisation are appropriately reported and most vitally, effectively utilised (BMQR.org, 2011; Kumara & Sharma, 2011).
It has also challenged numerous businesses, in the event of economic crisis by translating into high systemic risks and financial instabilities. Over the past, numerous corporations collapsed because they worked on wrong assumptions that failed to fully reflect the condition of their finances.
This provision principally attempts towards ensuring that auditors are provided with better independence in their auditing operations as well as towards assuring that investors are offered with better confidence on the financial reports published following the auditing process.
From this definition the basic understanding of the purpose of audit is that auditors verify the financial information companies prepare and provide reasonable assurance to the shareholders and other stakeholders that this financial information is free from material
Other stakeholders in the business world believe that audit quality is reduced when rotating auditors due to the lack of familiarity about business processes and accounting, thus impacting the ability of auditors to
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