Mandatory Audit Firm Rotation – a Literature Review Essay

1338 Words Sep 1st, 2010 6 Pages
Mandatory Audit Firm Rotation – A Literature Review

Introduction
Since the passing of the Sarbanes-Oxley Act of 2002, much debate has occurred concerning mandatory auditor rotation for publicly held companies. Most corporate scandal involves dishonest or questionable accounting. This realization has brought about the priority to take more measures are taken to assure companies disclose the most reliable financial information. It is believed that a lack of auditor independence may be to blame for fraud as we have seen in recent years. The Sarbanes-Oxley Act of 2002 ordered an investigation of whether or not implementation of a mandatory auditor rotation policy could be beneficial. If this were to take effect it would require that
…show more content…
Changing auditors can be very costly for companies. Research has shown that when companies change auditors, they also often end up filing a restatement shortly after. Possibly this is because it has a new set of eyes looking at the information. At any rate, these restatements are shortening the money supply of companies (Daniels, 2009).
Conversely, there are many research based arguments that support mandatory auditor rotation. Some claim that this is simply because extensive auditor tenure allows room for both auditor and clients to become lenient with policies. There has also been an ongoing concern that true auditor independence cannot be achieved because auditors are chosen and paid by the client company’s management (Raiborn, 2006).
Additionally, many times the auditors are dealing directly with those in management while conducting their audit. This relationship is thought to create a conflict of interest which makes this type of reform much more complex than a requirement to change audit firms at regular intervals. Some also believe that increase turnover of auditors could affect the quality of companies’ audits.
As stated earlier, there are increased restatements with an increase in auditor turnover. However, it is believed that if auditor rotation were adopted, over time the number of restatements should decrease as auditors will become more…