Australia is collecting more empirical data on the subject to make a decision to make it mandatory or not. India recently envisaged that audit partner should be rotated compulsorily and there should be atleast 50% rotation of the audit team compulsorily. For listed companies, auditor rotation is made compulsory in Portugal on an explain or comply basis. Public companies in Slovenia are given a choice to choose either to rotate partner or audit firm rotation once in five years. Audit partner rotation instead of audit firm rotation is made mandatory by countries like Netherlands, Germany and UK. Administrators in Germany, US and UK are of the view that possible advantages of compulsory rotation of auditors do not overshadow its perils and costs. (Ewelt-Knauer, Gold & Pott 2012:5) The research study will analyse in detail whether the rotation of auditors improves the quality of auditing or not with available literature evidence on the subject. What is the problem? The main issue is whether mandatory auditor rotation will result in enhancing the auditor’s independence or not and does the rotation of auditors improve the quality of auditing? How are you going to answer it? For answering the research question, this research essay will make use of secondary research evidence available on the subject like information available in the books, journals, previous empirical studies, etc. Coherent development of arguments: According to Lee Metcalf report, it was a great concern that big audit firms lacked independence, which has created doubt about their certification of financial data to public and investors. Further, long association of an auditor and a company may result in aligning with company’s management and hence, the independence of such an auditor has become really doubtful. Thus, Metcalf report recommended to the Congress of USA to introduce mandatory auditor rotation to minimise the corporate frauds. (PCAOB 2011:10). What is audit quality? Some study suggests that there is a direct association between audit quality and audit tenure. According to Simon & France (1988), long run audit tenures enhance the audit quality, mainly because of auditee-specific knowledge benefited by the auditors over the time. Daly, Hamilton and Strokes (2003) investigated whether audit partner rotation is linked with transformation in audit quality and found that a partner change or rotation is not poignantly linked with a change in the audit opinion released. Further, rotation of a partner does not result in more chances to issue a qualified audit report. Thus, this study report suggests either the rotation of the firm or a partner does not have required audit quality advantages that supporters vehemently argue. (Campbell & Houghton 2005:78). Vanstraelen (2000) found that long-term audit tenures resulted in high audit quality. Deis & Giroux (1992) found that long run audit tenure lessens the adherence with GAAS. Copley & Doucet (1993) found the audit tenure, and the audit firm association has a direct effect on audit quality. Knapp (1991) exposed that audit committee members observed that long audit tenure erodes audit report quality and their independence. Dopuch, King and
Does the rotation of auditors improve the quality of auditing? Introduction: Recent corporate failures, global economic crisis and the recent global banking crisis have made many governments around the world to introduce auditor’s rotation as mandatory, mainly to achieve auditor’s independence and to increase the external audit’s ambit and quality, to minimise their market concentration and to minimise the peril of fraud…
Whitehouse suggested that this is only achievable through quality audit (par. 3). However, according to the U.K. Competition Commission, most audit firms and public companies in the country are too interdependent, thus compromising the objectivity and skepticism that is intended to safeguard interests of shareholders.
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
8 pages (2000 words)Essay
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