Mandatory Auditor Of The New Rule

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

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 act is an exhaustive piece of legislation that contains eleven major section and some of the most important titles outline requirements on auditor independence, analyst conflict of interests, corporate responsibility, enhanced financial disclosures, internal controls assessment, and corporate fraud accountability (Bainbridge, 2007). One of the main benefits of the legislation is to establish auditor independence requirements and rules for the prevention of conflicts of interest in particular by prohibiting auditing firms from offering other services. Prior to Sarbanes–Oxley, the auditing professionals were self-regulated and the decisions that controlled the industry, such as violation of ethical standards, were made largely by auditors themselves (Verschoor, 2012). In order to prevent conflict of interests, the Sarbanes–Oxley Act grants the PCAOB authority to oversee and regulate auditing firms, conduct investigations, and impose disciplinary sanctions against accounting firms (McDonough, 2004). Another provision of the Act is requiring senior executives to be personally accountable and responsible for the financial information reports by certifying that the information is correct.(Welch, 2006). A byproduct of the law implementation is a significant quality improvement on accounting practices;

We find no difference in audit quality between these two samples. Second, we compare the mandatory rotation sample with itself one year earlier (2003) (the mandatory rotation sample in the prior year). We find that the audit quality of companies in the mandatory rotation sample under new audit partners is lower than the audit quality of these same companies one year earlier under old audit partners. Third, we compare our mandatory rotation sample with companies in years before 2003 whose audit partners were voluntarily rotated within the same audit firm (the voluntary rotation sample). We again find no difference in audit quality between these two samples. In sum, we find no support for the belief that mandatory audit partner rotation enhances audit quality. Our findings are robust to various sensitivity checks. Next, we examine the effect of mandatory audit partner rotation on investor perceptions of audit quality, using the earnings response coefficient (ERC) as a proxy for perceived audit quality (Teoh and Wong 1993; Ghosh and Moon 2005), After controlling for common determinants of the ERC, we find that the ERC of the mandatory rotation sample is not significantly different from that of the nonrotation sample or that of the mandatory rotation sample in the prior year, but is significantly larger than the ERC of the voluntary rotation sample. Overall, we find no consistent support for the belief that mandatory

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

This title consists of 9 sections that instruct in the behavior of auditing firms and establish guidelines for external auditor independence. It also sets restrictions for clients outside of auditing boundaries and requirements for audit partner rotation.

The rules regarding auditing can be viewed as a double-edged sword. Firms have to cannot be audited by the same auditors after 5 years of being audited by any particular firm. (SARBANES-OXLEY , 2006)This is intended to have the auditing firms be more independent of the firm it is auditing. In addition, provisions have been put in place regarding when and how an individual who worked at an auditing firm could work at a firm at which they participated in an external audit. This can lead to a significant cost increase at some

11. Periodic consideration of rotation of the audit committee chair. Corporations should evaluate the need to rotate the individual holding the audit committee chair approximately every five

An auditor needs independence to perform an unbiased audit. According to Iain Gray and Stuart Mason, an audit is an informed opinion, based on truthful and fair information provided by the interested party whom should be independent of the preparer/auditor (21). Based on this definition, an auditor must self-distance from the subject of the audit. An auditor must refrain to engage in other roles within the management of the company that is audited, in order to avoid intentional or unintentional interference, which consequently could jeopardize the independence of the auditor’s

If management can influence auditors during an audit by allowing them to use certain perks this topic is becoming more relevant. To stay competitive and attract talent more companies are shifting towards providing extracurricular benefits. This trend is exposing auditors to more on-the-job perks that can effect operational independence. Allowing auditors to use the on-site amenities provided does not hinder management and the expense would be a nominal one. The subtle use of pressure by management may force the auditor to rely on the clients situational perspective more and accept their interpretation of the

According to ICAEW, auditor independence mainly refers to the independence of the external auditor from parties that have an interest in the financial statements of the business being audited. It requires having both integrity and an objective manner to the auditing process. In order for the concept to be deemed effective the auditor needs to carry out their work freely. One of the main purposes of auditing is to increase credibility of the entity’s’ financial statements, as they have expressed their own professional opinion on the truth and fair view in accordance with the proper accounting standards used. This is only possible if the audit is made with reasonable assurance that it has come from an independent source and has not been influenced by other parties, such as managers, directors or by conflict of interest.

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.

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).

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.

This paper critically analyses the independence of the internal audit function through its relationship with management and the audit committee. Given the growing role of internal auditing in contemporary corporate governance and independence has gained renewed attention.