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Mandatory External Rotation of Accountant Offices - Essay Example

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Mandatory External Rotation of Accountant Offices

The aim of these new audit policies was to resolve the financial crisis on a dynamic market, as well as to set out the objectives of auditing. In the U.S., the Securities and Exchange Commission is responsible for spelling out audit requirements. The SEC is more focused on internal audit as compared to external mandatory rotation of audit firms. Financial accounting reporting and auditing have been the key areas affected by the European crisis. In an attempt to resolve the predicament, both Europe and the U.S. have tried to come up with rotation. Rotation has been viewed as a solution to mitigate the threats associated with financial independence generated by developed nations (Mihaela et al., 2010). At a time when the world is facing a crisis new audit policy has to be a crucial factor in avoiding losses. Auditors usually find themselves in a fix due to the fact of being familiar with the management and being intimidated by their clients, which adversely leads to long-term client-audit relationship. Over the recent years, the subject of long-term audit and client relationship has raised eyebrows within public and social realms. Mandatory external rotation of accountants’ offices is believed to increase auditor independence and quality of audit and financial reporting (Velte & Stiglbauer, 2012). On the other hand, external auditing increases the cost of auditing in the first two years. This is because the risk of liability from auditors is significantly high in the first two years than within subsequent years. Due to the audit concentration of the four big companies, external mandatory rotation is almost not realized. The big four has a command on the number of companies they audit each year. In addition, the big four has vast experience in consultancy and have advisory services to attest to it. Therefore, this makes it hard for small and mid-sized accounting firms, which are looking forward to enter into a new market (Velte & Stiglbauer, 2012). In other cases, there have been arguments on the quality of auditing in regards to mandatory external rotation. Some circles believe that auditors conduct their reports poorly. This is because new auditors tend to ignore the going concern opinion (Velte & Stiglbauer, 2012). Rotation increases the rate of denying auditors approval due to fear of capital markets. Rotation has an impact on the capital markets and therefore management applies pressure on auditors. As a result, Companies make the auditors comply to avert the risk of losing their public image (Velte & Stiglbauer, 2012). In some cases however, the quality of audit can be explained by a lack of experience from the auditors. Such a situation cannot be resolved by mandatory external rotations. In this essay, the issue of implementing mandatory external rotation might be complex as was in Spain's case (Aguilar et al., 2006)., The examples of Corporations will be cited in discussing the effectiveness of mandatory external rotation by using the empirical research method. 2.0 Theoretical Framework External mandatory rotation has been a subject of debate in the accounting profession and in the public eye. The Spanish case for instance shows that regulation in accounting and auditing is a more precarious process than suspected (Forgaty et al., p. 181). Spain is a good example of how mandatory rotation ...Show more

Summary

Mandatory External Rotation of Accountant Offices Name Name of Institution Mandatory External Rotation of Accountant Offices 1.0 Introduction In the aftermath of When European financial crisis was over the European commission issued the Green paper as the aftermath of the crisis in order to analyze what happened and how to avoid the same kind of problems in future…
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