Mandatory Rotation of Audit Partners †Free Samples to Students

Question: Discuss about the Mandatory Rotation of Audit Partners. Answer: Introduction: As per the Journal by L.T Williams and W.M. Wilder, in recent times the Public Company Accounting Oversight Board (PCAOB) has issued number of standards which has focused on improving the auditing process. However, there has been constant controversy when it comes to an auditors independence. The board has tried to improve this situation by incorporating a situation where the auditor needs to constantly revise the auditors-client engagement by the use of certain time period. The solution which has been suggested to the board is that the auditor must be mandatorily be rotated in order to maintain the independence principle of an auditor. Audit firm rotation refers to the rule which limits the auditing firm from carrying out audit for the same firm on the basis of years. The rule was introduced in Sarbanes-Oxley (SOX) Act with the hope of improving the overall quality of audit and also promote auditor independence. The independence of the auditor is one of the fundamental requirements of the auditor (Blay Geiger, 2013). As per Aubin, 2013 the companies in the United States are of the view that audit firm rotation will lead to increase in the regulatory costs of the companies and also lower the quality of audit which is being performed. As per the upgrade which was introduced by Sarbanes-Oxley (SOX) Act 2002 in audit rotation principle were related to the time period for which the audit partner was allowed to conduct audit on a firm and also on the cooling off period of an audit partner. The audit engagement partner rotation period was changed from seven years to five years and the cooling off period which is mandatory changed from two years to five years as per the new requirement. A research show that the most of the audit firms are of the view that continuing audit tenure with the same client does not diminishes the quality of the audit which is performed by the auditor. The impact of audit firm rotation on the independence of the auditor is still being considered. As per PCAOB, the board will be looking out for alternative which can improve the independence principles and also the quality of audit for the business. The alternative approaches which can be adopted by the by the firm to strengthen the independence principle of the auditor are given below: The appointment of an audit committee which can be independent and also supervise the process of audit (Holland Lane, 2012). The effectiveness of the audit committee will be helpful in strengthening the audit of financial statement and thereby benefit the shareholders of the company. The audit committee will look into the appointments of the auditor and also supervise the audit process and the terms of engagement of the auditor. Another alternative is firm quality control which states that the audit firm themselves should strive for an independent approach for the process of audit and maintain integrity and objectivity of the audit process. Another alternative can be audit firms should not be providing non-audit services to the client as it can hamper the independence principle of an auditor. Reason and Motivation for Changes The main reason for the various changes which have been taking place due to audit rotation can be attributed to the fact that such improvements are likely to bring about improvements in the principle which related to the independence of the auditor. The principle of independence of the auditor states that the auditor should be free from the financial interest from the firm and also ensure that the process of audit is conducted in a smooth and efficient way (Tepalagul Lin, 2015). In addition to this the independence principle of the auditor also focuses on whether the process of audit is being conducted following the principles of integrity and objectivity. The stakeholders of the company along with the general public who are general users of the financial statement are dependent on the opinion of the auditor in order to make investments decisions. If the independence of the auditor is compromised the opinion of the auditor may not be appropriate. Thus, various changes are being made in the field of auditing to ensure that the quality of audit is not compromised and moreover, the independence principle of the auditor is not affected in case of audit of the same client over the years. The changes which are being made in the field of auditing is aimed at improving and maintaining the quality of the audit. It is expected that the principle of Audit Firm Rotation will bring about a change and also ensure that the independence of the auditor is maintained (Lennox, Wu Zhang, 2014). Alternative suggestions are also suggested which can be used to improve the overall quality of the audit. Impact of Audit Firm Rotation The main objective of the principles of audit firm rotation is to ensure that the independence principle of the auditor is not compromised and also improve the overall quality of the audit (Mostafa Mohamed Hussien Habib, 2013). Audit firm rotation is done the assumption that the auditor when conducting audit for the same client for a long period then there might develop a situation where a relationship may develop between the auditor and the client which in turn will be hampering the principle of independence of the auditor. Another impact of the rotation of the auditor is that continuous changes of client does not allow the auditor to develop a sense of familiarity which is favorable for the process of audit as in this case the auditor will be able to perform better and will be able to develop a clear opinion on the financial statement of the company. Another impact of the audit firm rotation is that the auditor needs to learn and gain an understanding of every new business which t he auditor is supposed to audit (Bowlin, Hobson Piercey, 2015). Therefore, for every new company the auditor needs to plan separately the audit program for each new audit engagement the auditor enters. This makes the work of the auditor a bit difficult however, the overall audit procedure becomes more efficient as the auditor will carry out audit procedures more effectively in order to collect necessary audit evidences. Thus, from the above arguments it can be concluded that auditor or audit firm rotation is an effective technique which can be used to improve the quality of audit carried out and also ensure that the principle of independence of the auditor is not endangered. Reference Blay, A. D., Geiger, M. A. (2013). Auditor fees and auditor independence: Evidence from going concern reporting decisions.Contemporary Accounting Research,30(2), 579-606. Bowlin, K. O., Hobson, J. L., Piercey, M. D. (2015). The effects of auditor rotation, professional skepticism, and interactions with managers on audit quality.The Accounting Review,90(4), 1363-1393. Harris, K. (2012).Mandatory audit rotation: An international investigation. University of Houston. Holland, K., Lane, J. (2012). Perceived auditor independence and audit firm fees.Accounting and Business Research,42(2), 115-141. Lennox, C. S., Wu, X., Zhang, T. (2014). Does mandatory rotation of audit partners improve audit quality?.The accounting review,89(5), 1775-1803. Mostafa Mohamed, D., Hussien Habib, M. (2013). Auditor independence, audit quality and the mandatory auditor rotation in Egypt.Education, Business and Society: Contemporary Middle Eastern Issues,6(2), 116-144. Tepalagul, N., Lin, L. (2015). Auditor independence and audit quality: A literature review.Journal of Accounting, Auditing Finance,30(1), 101-121.