Mandatory Audit Partner Rotation, Audit Quality, and Market Perception: Evidence from Taiwan

Arthur Anderson Limited Liability Partnership (LLP) was established in 1913 into the Accounting industry. They offered tax, consulting, and, auditing services to large corporations everywhere. Their headquarters were located in Chicago, Illinois and eventually had over 85,000 employees in 84 different countries (Collins, 2016). By the 1990’s Arthur Andersen had become one of the largest accounting firms, and was recognized as one of the “big five.” Along with being one of the largest accounting firms Arthur Andersen was also one of the most reputable. There were many factors that distinguished Arthur Andersen from other accounting firms, and the most notable were the honesty and integrity Arthur Andersen had established for the company (Moore & Crampton, 2000). Andersen set high standards which in turn resulted in the growth of their prestige. Many companies came to Arthur Andersen because of the trust it had established in the public and in the accounting Industry. One of the ways Arthur Andersen established their reputation was through their organizational structure and the culture of the company.

The audit of financial statements is mandatory for publically listed entities throughout the world. The auditor conducts various tests and based on the results forms an opinion on the truthfulness and fairness of the financial statements of the company and whether or not they are prepared in accordance with the financial reporting standards and are free from any material misstatement (Freedman, 2013). The purpose of auditing is to enhance the confidence of investors and to add credibility to the truthfulness of company 's true financial performance. However, there are some dos ' and don 'ts that an auditor must take care of. For instance, anything that threatens the independence of the auditor must be avoided as it adversely affects the truthfulness and objectivity of the opinion formed.

External auditors play important roles in delivering credibility of public financial statements to stakeholders outside of the audited firms (The Institute of Chartered Accountants in Australia, 2008). Published financial statements can be used by stakeholders as a basis for evaluating the financial position of firms, analyzing the performance of management, or making investment decisions (International Organization of Securities Commissions, 2002). Published financial statements will also be used by institutions such as rating agencies to decide the worthiness of the firms, and by banks, to decide the amount of loans that banks are willing to lend to (International Organization of Securities Commissions, 2002). Thus, the public is significantly influenced by the examined financial statements by external auditors (International Organization of Securities Commissions, 2002).

However, the application of SOX has brought on regulations that public companies must put in place and follow to prohibit these unethical occurrences. One major advantage for associated with SOX is that more thorough audits are being conducted by auditing firms. Audits being conducted more thoroughly will provide accuracy and an increased reliability of financial data. This will affect taxes in a positive way and provide firms with an advantage. Causholli, Chambers, and Payne (2014) suggest that prior to the implementation of SOX in 2002, “an auditor’s opportunity to sell additional non-audit services in the subsequent year, coupled with the client’s willingness to buy services, intensified the economic bond between auditor and client, in turn reducing auditor independence and the quality of financial reporting” (p.681). The regulation of auditor provided non-audit tax services has increased the reliability of tax and financial reporting within companies. Seetharaman, Sun, and Wang (2011) explain that “in a post-Sarbanes-Oxley environment, the benefits of auditor-provided non-audit tax services (NATS) seem to manifest themselves in higher quality tax-related financial statement management assertions” (p. 677).

Proper conduct and ethical behavior are important, because auditors are party to confidential information and it is important this trust not be abused. This essay discusses the purpose of the American Institute of Certified Public Accountants (AICPA) and delves into the definitions of the six principles of the Code. It explores to whom this Code applies and what should be considered its key principle. The next

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 goal of the Sarbanes-Oxley Act was to deter and prevent corporations from committing financial fraud, protect shareholders and regain the confidence the public had in financial statements that the released (Ferrell, Hirt, Ferrell, 2009). The act did put additional duties on the corporate accounting departments as well as the auditing firms that monitored these corporations. Prior to the law’s enactment, corporations largely had auditors and financial monitors on staff. The law requires that an external auditing firm review not affected by conflict of interest, audit and monitor the financial records of the corporation. While audits are largely seen in a negative manner, having an annual audit done by an outside firm will allow for

Carcello, Hollingsworth and Mastrolia tested whether PCAOB annual inspections result in higher quality financial reporting (Carcello, Mastrolia, & Hollingsworth, 2011). They compare abnormal accruals reported by audit clients before and after initial inspections by PCAOB (Carcello, Mastrolia, & Hollingsworth, 2011). If the inspections result in improved auditing, they expect to see less earnings management after the initial inspection (Carcello, Mastrolia, & Hollingsworth, 2011). For comparison purposes, they make the same observations before and after AICPA peer review inspections made prior to SOX (Carcello, Mastrolia, & Hollingsworth, 2011). They find a significant decrease in income-increasing abnormal accruals in the first and second years

This research paper analyzes the degree of an auditor's liability to clients and third parties under applicable law.

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

The AICPA Code of Professional Conduct provide guidance and rules for certified public accountants’ professional and ethical responsibilities. The code establishes standards for auditor independence, integrity and objectivity, responsibilities to clients and colleagues and acts discreditable to the accounting profession. The AICPA has established a conceptual framework for issues and threats that are not otherwise address in the code. The AICPA Conceptual Framework is a four-step approach consisting of identifying threats to compliance with the rules, evaluating the significance of the identified threats, identifying new and existing safeguards, and evaluating safeguards to determine if threats are reduced to an acceptable level.

I was first introduced to the world of business through a book called Pipe Dreams: Greed, Ego, and the Death of Enron. At the time, though I had difficulty understanding all the complicated underlying causes for the energy giant’s collapse, I was struck by the fact that Arthur Andersen, Enron’s auditor, failed to fulfill their obligations to conduct proper audits, and ultimately lost their CPA licenses. This made me interested in the role of auditors and the reasons behind their significant—though not always positive—influence. It also motivated me to learn accountancy at the University of Hong Kong upon graduating from high school.

The survey found that companies with $4 billion or more in revenues are spending an average of $35 million to comply with the act (Henry et. al, p. 28). In a separate survey, Financial Executives International found $3.1 million in additional costs for companies with average revenues of $2.5 billion. According to Koehn and Del Vecchio (2004), significant increases in salaries may be attributed to the cost of compliance (p. 36). In 2003, a 6% increase in finance and a 10% increase in management salaries were noted (Koehn & Del Vecchio, p.36). Audit fees assigned by the top four auditing companies climbed by 25% to 33% since the enactment of Sarbanes-Oxley. A May 2003 survey by Financial Executives International forecasted an additional 35% increase in audit fees by mid-2004. There should be no doubt about why private companies are dodging SOX. The expense of compliance is becoming astronomical. For a private company that is trying to keep its head above water, compliance may be the factor that sinks the ship.

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

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).