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Does the rotation of auditors improve the quality of auditing - Essay Example

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Does the rotation of auditors improve the quality of auditing

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. ...Show more
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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…
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