Recently, the PCAOB has advocated for mandatory audit frim rotation. However, if implemented, this change would unduly burden many accounting firms. With the passage of Sarbanes Oxley in 2002, the coordinating audit partner and the reviewing partner are required to rotate off a particular audit every five years so that the engagement can be viewed more skeptically . This practice has been shown to work, and any deviance from it will surely produce negative consequences, such as a decrease in audit quality. In order to best serve the shareholders of any given organization, the system should remain as is.
Audit Firm Rotation Will Decrease Audit Quality
Mandatory Partner Rotation Works
Existing accounting literature shows us that mandatory audit partner rotation is an …show more content…
However, mandatory audit firm rotation would force audit committees to choose auditors that don’t necessarily specialize in that companies industry. According to a 2008 study, when a company is audited by a firm that does not specialize in their industry, the mean likelihood of them receiving a going-concern audit opinion is 18%. However, when audited by a firm that does specialize in their industry, the mean average increases to 28.4% . This shows that firms are much more conservative when auditing clients for which they are an industry specialist. Knowing that conservatism is an important aspect of the quality of accounting information, companies should be encouraged to select auditors that are specialists in their industry. However, If a company wants an audit firm with an in depth expertise in their industry, they usually only have one or two firms to choose from . If a company already uses one of these firms for consulting or tax services, choosing them as an auditor would violate independence. Therefore, mandatory auditor rotation would make it difficult for firms to consistently use auditors with industry
Audit Firm Rotation Will Decrease Audit Quality
Mandatory Partner Rotation Works
Existing accounting literature shows us that mandatory audit partner rotation is an …show more content…
However, mandatory audit firm rotation would force audit committees to choose auditors that don’t necessarily specialize in that companies industry. According to a 2008 study, when a company is audited by a firm that does not specialize in their industry, the mean likelihood of them receiving a going-concern audit opinion is 18%. However, when audited by a firm that does specialize in their industry, the mean average increases to 28.4% . This shows that firms are much more conservative when auditing clients for which they are an industry specialist. Knowing that conservatism is an important aspect of the quality of accounting information, companies should be encouraged to select auditors that are specialists in their industry. However, If a company wants an audit firm with an in depth expertise in their industry, they usually only have one or two firms to choose from . If a company already uses one of these firms for consulting or tax services, choosing them as an auditor would violate independence. Therefore, mandatory auditor rotation would make it difficult for firms to consistently use auditors with industry