Mandatory Auditor Rotation: a Way for Regulator to Prevent Audit Failures?

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MANDATORY AUDITOR ROTATION: A WAY FOR REGULATORS TO PREVENT AUDIT FAILURES? 1. Introduction Auditor rotation has long been a subject of debate as a measure to prevent audit failures, especially after the financial crisis. Two types of rotation suggested are firm rotation and audit partner rotation. Mandatory auditor rotation limits the number of consecutive years that a registered public accounting firm or audit partner can serve as the auditor of a company, and is claimed to be able to enhance audit quality and reduce market concentration. The purpose of this paper is to identify, consider and evaluate the impacts of mandatory auditor rotation on audit quality and market competition and, accordingly, conclude whether mandatory…show more content…
Audit quality really suffers when auditor lack a sound base of experience and understanding concerning a public company’s business (AICPA, 2011). Furthermore, while maintaining professional skepticism is of significance to auditors, the close relationship built up is also critical to the audit process. Hence, auditor-client communication may suffer from mandatory auditor rotation due to time constraints (Arel et al., 2005). In terms of audit committees, the rotation would consume a significant amount of time due to a “getting to know each other” stage (Arel et al., 2005). As a result, “the frequency of audit firm changes will distract management and audit committees from their core responsibilities during the proposal and on-boarding process, potentially reducing their focus on the effectiveness of internal controls and the quality of financial information provided to investors” (PwC, 2012). A study of Italy’s 20 year-experience of having mandatory auditor rotation in place concluded that audit quality tends to increase as audit tenure increases (stand). From a study of Spain’s experience, Emiliano et al. (2009) concluded that mandatory rotation not only fails to enhance auditor independence but may in fact harm independence because market-based mechanisms to safeguard independence, such as reputation concerns, are less

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