Mandatory Audit Firm Rotation – a Literature Review Essay

Exceptions can be approved by the Board and are made in cases where the revenue paid for such services contributes less than 5% of revenues paid to the auditing firm. Also, a public accounting firm may provide these non-audit services along with audit services if it is pre-approved by the audit committee of the public company. The audit committee will disclose to investors in periodic reports its decision to approve the performance of non-audit services and audit services by the same accounting firm. This requirement to disclose to investors is likely to inhibit auditing committees from approving the performance of auditing and non-auditing services by the same accounting firm. Other sections outline audit partner rotations, accounting firm reporting procedures, and executive officer independence. Specifically, subsection 206 states that the CEO, Controller, CFO, Chief Accounting Officer or similarly positioned employees cannot have been employed by the company's audit firm for one year prior to the audit.

The arguments for and against mandatory rotation of audit firms fundamentally revolves around the issues of auditor independence, audit quality and increased audit costs. Compromising either auditor independence or audit quality will adversely effect the accuracy of audits performed and hence effect the shareholders ' future.

Legitimacy in accounting practices is ensured by the check and balance of having independent auditors from registered public accountant firms reviewing financial practices. The report features eleven sections and these sections pertain to accounting overview, independence of auditors to reduce interest conflicts, corporate responsibility, financial disclosures, tax returns, criminal fraud and various elements of white collar criminal activity (107th Congress

the auditors of publicly traded companies and to ensure that corporate financial statements are subject

Under the Security Act of 1933 and 1944, any individual that willfully filed untrue statements should be penalized. Auditors acting behalf of the public’s interest should make sure the company’s financial statements are not misleading. All the testing and auditing procedures are to verify that the number on the financial statements, and audit testing should be supported by substantial evidence. When auditors took their responsibility for and but did not show their competence for work, they should be heavily fined because their carelessness resulted the investors making a bad decision. Furthermore, if the auditors did not take their responsibility and showed no work to support their opinions should be charged as gross negligence with a heavy fine and license taken away. If it comes down to fraud, auditors should definitely face criminal charges along with their auditing company, and their license should be taken away

This frequently puts the auditor in the position, in effect, of deciding whether a company is able to obtain the funds it needs to continue operating. Thus, the auditor’s qualification tends to be a self-fulfilling prophecy. The auditor’s expression of uncertainty about the company’s ability to continue may contribute to making it a certainty.

In October 2001, Enron Corporation which was one of the world major energy, commodities and service companies with claimed revenues of nearly 111 billion dollars during 2000 collapsed under the weight of massive fraud in that it has become largest bankruptcy recognition in the US economy. Enron’s earning report was extremely skewed that losses were not represented in their entirety, prompting more and more wishing to participate in what seemed like a profitable company. After collapse of Enron, Auditor independence has become a social issue that weather auditor has to be independent or not. In addition, while auditing must consider matters objectively with dispassion, there were still doubts whether it implemented well. Further, there has been much speculation about the need for the mandatory rotation of auditors or audit firm rotation to warn false accounting between audit firm and client. By examining Enron case, this essay will discuss about advantages and drawbacks of the mandatory rotation of

Sec. 207. Study of mandatory rotation of registered public accounting firms, requires the Comptroller General of the United States to conduct a study on the potential effects of the mandatory rotation of auditors and submit a report within one year to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives on the results of the study and review required by this

Auditing is one of the most critical fields where the external auditors are always subjected to criticism and legal regulations which are mostly directed against them. Mostly this criticism arises because of lack of sufficient understanding of how the company law and auditing standards work and also due to related misconception about the actual role of an auditor (Porter, 1993). This lack of understanding is called expectation gap where the outcomes of the audit expected and its actual purpose varies. One solution to this fundamental issue is to reduce this expectation gap by providing a clear definition of auditor's role and also the audit function that is required to be performed by him. However, during this defining phase, it is necessary to consider whether an audit rotation would reduce this audit expectation gap.

The lack of independence for external auditors will lead to the neglect of auditing risks (William R.K., 2003), which are the main reasons for the failure of certified accountants and professional accounting organizations. The consequence of the external auditors deprived of independence would be very serious. And there are many cases, which aroused by the failure of external auditors and most are related to the lack of independence. One famous example is the bankruptcy of Enron and the role played by its external auditor, Arthur Andersen (Todd, S., 2003). Arthur Andersen was once one of the biggest accounting companies in the world, and was canceled for the involvement in the Enron bankruptcy scandal.

The mandatory audit partner rotation was also one of the aspect targeted by SOX and requires that every lead partner or reviewing partner must be rotated every five years in order to bring a fresh look to each engagement. A particular aspect of all this rotations is the possibility to impose mandatory rotation of registered public accounting firms. The SOX requested to the Comptroller General of the United States to conduct a study addressing this issue and the implications of this requirements. Although the PCAOB has expressed the importance of having some type of rotation in the registered CPA firms and in 2011 issued a concept release proposing mandatory audit firm rotation, some congressman like Republican Robert Hurt have taken steps in order to avoid this type of regulations and the Audit Integrity and Job Protection Act was passed by the House of Representatives in 2013. These act prohibit the mandatory rotation of registered CPA firms arguing this decision correspond to the audit committee and the shareholders of the corporation and no to regulators. In my opinion, the mandatory registered CPA firm rotation is an unnecessary burden to impose to companies, especially small corporations, that would be force to be changing constantly and without any justification of CPA firm. The current audit partner rotation in CPA firms grant that each partner is liable for the work performed by him and his team which ensures the transparency and reliability of the audit they do.

Although the existing evidence on the impact of mandatory audit-firm rotation on audit quality and auditor independence is scarce, conclusions may be drawn from the arguments provided. Advocates of mandatory audit-firm rotation suggest that there is a negative relationship between the auditing objectivity and passage of time, resulting in an increased likelihood of fraud and material misstatements. Contrastively, opponents of mandatory rotation underline the higher costs and risk of material misstatements in the first years of audit tenure. Motivating that a lack of client specific knowledge may be associated with lower financial-reporting quality, opponents suggest that mandatory rotation results in an increased likelihood of audit failure and audit costs. To conclude, it is uncertain whether mandatory audit-firm rotation enhances auditor independence. In order to assess the advantages and disadvantages of mandatory rotation further research must be

An important function of the accounting field is to provide external users of financial statements with assurance that the financial information being presented is both reliable and accurate. This basic function of accounting is so important that there is an entire field of experts, called auditors, dedicated to assuring its proper performance. Throughout history there have been many instances in which the basic equilibrium between an institution and current/potential investor has been threatened due to a lack of accountability and trust between the two parties. This issue has been the catalyst for many discussions regarding the proper procedures a firm should follow in order to provide

It is important to realize that the work as an auditor has been created in this world in order to give a fair and view on audited financial statements. A layman who wanted to make an investment will invest based on what auditor said in his report. Thus, if something bad happen in the company later, the reliability of the auditor is the first to be questioned.

Since reliable financial information is essential for investors and other stakeholders to take adequate decisions, this reliability must be backed by independent review performed by independent and certified auditing firms, which are supposed to verify and certify financial statements issued by a company’s management. If the auditor is not competent and independent from management, the audit of the financial statements loses its credibility (Schelker, 2013, p.295). According to Impastato (2003), because of audit failures, accountants are to blame for investors losing billions of dollars in earnings in addition to market capitalization (as cited in Grubbs & Ethridge 2007).