Based on all conjecture about such rotations and research studies on auditing tenure versus rotation, it would appear that the quality of auditing is actually improved by rotating auditing firms. The evidence Pozen (2012) argues that when an organisation decides to rotate auditors, there is the need for significant investment on behalf of the new auditing firm to gain important institutional knowledge about the industry which has already been learned by the incumbent auditing firm. Research studies have illustrated that there is reduced quality in auditing practice and competency during the initial years of appointment as the new auditing firm attempts to familiarise itself with specific business practices (Pozen 2012). Especially apparent in multi-national firms, new auditing companies must learn highly extensive information about corporate finance and accounting in a complex, global accounting environment. This requires time and perhaps even training, however once this information is gleaned, the auditor can provide better quality audits even though this quality took considerable time to develop and enhance. The International Federation of Accountants sees the situation from a rather different perspective outside of the time and labour investment in learning business processes. Elongated and long-standing relationships with existing auditing firms are recognised as becoming too cosy with their corporate employers which changes the dynamics of how incumbent auditing firms view business practices and ideologies. When long-standing relationships are developed with existing auditing firms, auditors tend to give favourable opinions, rather than unbiased opinions, about the corporate-mandated auditing processes. Existing auditor relationships that have endured over time leads to trust-building between business and auditor which, in turn, creates a situation where the auditor handles investigations carelessly and are more willing to accept business written statements rather than inspect the situation to ensure that the business is actually performing compliance-based activities to general accounting standards (IFA 2010). Boxer (2008) absolutely agrees with the aforementioned notion of corporate cosiness developed over time and in the face of trust that endures through familiarity with business leaders. This author representing the Office of the Comptroller of the state of New Jersey refers to this scenario as familiarity fatigue stating that such familiarity with management leaders of the business leads to a lack of independence where professional ties create a complicity that reduces auditing effectiveness and lack of unbiased auditing support (Boxer 2008). When this type of relationship is developed, the auditor loses their scepticism about the oral and written information that is provided to the auditor by the company leadership and, therefore, begins to overlook important facts and figures associated with financial statement production during the auditing processes. Boxer (2008) indicates yet another scenario that occurs, potentially, when maintaining enduring relationships with existing auditing firms. Auditors will have the tendency to desire corporate approval in the hopes of maintaining a continuous revenue
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Does the rotation of auditors improve the quality of auditing? BY YOU YOUR SCHOOL INFO HERE DATE HERE Does the rotation of auditors improve the quality of auditing? Introduction It is a highly contested issue as to whether rotation of auditors actually maintains the ability to improve auditing quality…
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.
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.
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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