Mandatory Rotation of Auditors
In the interest of the general public, it is mandatory for the listed companies to perform and conduct an external audit each year. The companies listed on the stock exchanges, raise their funds from the general public by issuing the shares. Therefore, it is very important to keep a check and balance on the financial performance and funds of the companies by the independent and recognized authorities. The stakeholders of any business depend on the auditor’s report heavily and invest their money in the business on the basis of annual audit reports. Therefore, in these circumstances, it is very important for the directors of the business to maintain ‘International Standards of Auditing’ in the business. (Ewelt-Knauer, Gold and Pott, 2014)
According to the International Standards of Auditing (ISA), it is very important to rotate the audit firm after the specific period. In general, the businesses rotate their audit firm after four or five years. The main reason behind this rotation is to minimize the auditing risk and the independence of the auditor. The most obvious reason of the audit risk is the familiarity between the auditor and the employees or directors of the firm. Therefore, it is very important for the audit firms and the directors of the business to maintain a good rotation policy in the best interest of the general public to minimize the audit risks. (Groeninger, 2014)
It is in a general view that the management of the business tries to make friendly relations with the external auditors to hide the accounting manipulations in the financial statements of the business. The external auditors check the opening and the closing balances of the accounts in details to identify the over or understatements. For example, if the manager of the sales department is getting a bonus on the budgeted number of sales. Then it is highly probable that the manager of the sales department will generate the artificial credit sales before the end of the fiscal year. Therefore, in these circumstances, it is very important to have a mandatory rotation of the audit firm, so that the auditors feel no pressure from the management of the business to assist in the accounting manipulation. (Bhika and Francis, 2012)
In the mandatory rotation of the auditors and audit firm, it is very important for the audit form to appoint non-familiar individual for their clients. It is highly probable that the auditor from the audit firm is a friend or relative of any director. In these circumstances, the auditor must disclose the personal relations with the directors of the client company and reject the audit assignment. Moreover, the directors of the firms offer the high audit fee of the audit firm. The excessive audit fee is the signal of the interference of directors during the audit assignment. Therefore, when there is a mandatory audit rotation policy, the auditors will be in a position to counter these tactics from the directors of the businesses. (Mirando-Gould, 2014)
The mandatory audit rotation policy allows the auditor to plan the audit according to the allotted period. For example, it the auditor is assigned an auditing assignment of the business for five years, then, the auditor can spend more time in the detailed investigation of the core departments of the business in the first year of the audit. Moreover, the detailed testing in the first year of the audit will reduce the workload for the remaining period before the rotation. (Murrey and Faust, 2014)
There are few benefits of hiring the same audit firm for a longer period of time. The first benefit is that the audit becomes easy for those auditors who are performing it every year because they are familiar with the working of the organization. On the basis of their past experience, the audit firm knows the weaknesses and strengths of the business. After completing the detailed audit in the first year, the audit firm can reduce the paperwork in the audit for coming years. Moreover, an audit from the same audit team reduces the auditing time. The knowledge and experience of the specific organization create ease for the auditors to select the random number of transactions for auditing. Furthermore, the long term auditors can understand the controls of the organization and it becomes easy for them to identify the weaknesses in the system. The audit firm must rotate their auditors after two to three years in a long term audit contract to keep maintain low levels of audit risks.
Bhika, R. and Francis, A. (2012). Corporate Secretary | Will rotating accounting firms enhance audit quality?. [online] Corporatesecretary.com. Available at: http://www.corporatesecretary.com/articles/regulation-and-legal/12224/will-rotating-accounting-firms-enhance-audit-quality/ [Accessed 7 May. 2014].
Ewelt-Knauer, C., Gold, A. and Pott, C. (2014). What do we know about mandatory audit firm rotation?. [online] Icas.org.uk. Available at: http://icas.org.uk/mafr/ [Accessed 7 May. 2014].
Groeninger, K. (2014). PCAOB Weighs Pros and Cons of Mandatory Audit Firm Rotation « NACD Blog. [online] Blog.nacdonline.org. Available at: http://blog.nacdonline.org/2012/03/pcaob-weighs-pros-and-cons-of-mandatory-audit-firm-rotation/ [Accessed 7 May. 2014].
Mirando-Gould, D. (2014). The Future of Public Company Audits: Pros and Cons of New PCAOB Releases | Tax & Accounting content from Business Finance. [online] Businessfinancemag.com. Available at: http://businessfinancemag.com/tax-amp-accounting/future-public-company-audits-pros-and-cons-new-pcaob-releases [Accessed 7 May. 2014].
Murrey, D. and Faust, Q. (2014). PCAOB Floats Possibility of Mandatory Audit Firm Rotation: Andrews Kurth LLP. [online] Andrewskurth.com. Available at: http://www.andrewskurth.com/pressroom-publications-825.html [Accessed 7 May. 2014].