A discussion to the question asked by Congressman Richard Shelby of the House of Representative about the independence of auditors establishing long-term personal and professional relationship with companies by auditing those companies. Respectively companies that retain the same auditors for long period of time may perhaps question their independence and objectivity. The failure of financial reporting at Enron, WorldCom, Lemon Bother and others, led to financial reporting reforms. Audit firm rotation is suggested to be a way of improving audit quality, hence limiting the number of years to five an auditor can audit the same firm. However the proposed solution introduces both benefits and costs to the audit market. The benefit of audit rotation is there will be fresh look in the company’s
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This is due to the auditors knowledge build during their term with company.
The proposed solution to reduce the independence of the auditors is to have mandatory audit rotation. However rotation can be costly and it could also undermine the audit quality. Therefore is it is beneficial to keep the same auditors as the auditors are familiar with business and will not be too disruptive. Auditing rotation hides the relationship between the auditor and the company. Thus fixed term appointments of the auditors could put profit before quality. Nicolaescu, E. (2014) stated “investors respond negatively to the discussion of mandatory rotation as they value the expertise of their current auditor.”
Extra cost will incur due to rotation cycle under mandatory audit rotation rule.
The benefit of mandatory audit is not certain as there is limited genuine information that the rotation will decrease costs. However, mandatory audit rotation may reduce audit – management independence. On the other hand evidence suggests that audit firm rotation incurs high cost that will outweigh the
This is due to the auditors knowledge build during their term with company.
The proposed solution to reduce the independence of the auditors is to have mandatory audit rotation. However rotation can be costly and it could also undermine the audit quality. Therefore is it is beneficial to keep the same auditors as the auditors are familiar with business and will not be too disruptive. Auditing rotation hides the relationship between the auditor and the company. Thus fixed term appointments of the auditors could put profit before quality. Nicolaescu, E. (2014) stated “investors respond negatively to the discussion of mandatory rotation as they value the expertise of their current auditor.”
Extra cost will incur due to rotation cycle under mandatory audit rotation rule.
The benefit of mandatory audit is not certain as there is limited genuine information that the rotation will decrease costs. However, mandatory audit rotation may reduce audit – management independence. On the other hand evidence suggests that audit firm rotation incurs high cost that will outweigh the