Financia Longer Audit Rotation

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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 financial statement, hence potentially improved audit quality. On the other hand, it is argued that audit rotation could be costly and outweigh the benefits and furthermore loss of client knowledge if the auditors are changed frequently, as a result they may put cost before quality. Audit is an assurance service that is provided by the auditors. Companies that audit their accounts must present true and fair view of its financial statements and information provided the must be reliable and trusted. Therefore the auditors form an opinion on the financial statements of a company based on the evaluation of the conclusion drawn and hence express their opinion on written report and the reason for the report presented. Therefore it is the role of the auditors to provide an opinion on the truth and fairness of the accounts presented. (FRC, 2013, online, p.3) states the auditor’s report on company’s financial statement must contain clear opinion and providing an expression based on report generated. The failure of financial reporting at Enron, WorldCom, Lemon Bother and others, led to financial reporting reforms. Thus long term audit tenure create closeness and auditors independence and also reduces audit quality. The auditors tests the financial statements and provide and opinion on whether they think the financial statements are true and fair. One of the risks of the independence is familiarity thread. It arises when an auditor is having contact with its client for long period of time. The Auditing Practices Board (APB) points out that an auditor is too familiar with their client and may not explore to examine the business at a level to reduce quality control and detection risk. Consequently, there must be audit rotation within five years to reduce familiarity threads. (FRC, 2009, Online) stated “audit firms will make arrangements for changes of audit engagement partners over a five-year period so that that the familiarity thread is avoided, whilst taking into consideration factors that affect the quality of the audit work”. Mandatory audit firm rotation is argued to be the way of improving auditing quality and reduce audit - client relationship. The mandatory audit rotation was introduced, which provides that an audit partner must rotate within five of engagement with client. However, audit firm rotations introduces both positive and negative ways of maintaining quality. Audit rotation is enabling an audit firm to remain independent, however retaining the same auditors for long period of time could result in representation of dishonest financial reports. …show more content…
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

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