...Mandatory Audit Firm Rotation Mandatory audit firm rotation has been discussed by different accounting boards numerous times since the 1970s. Mandatory audit firm rotation would cause auditing firms to change clients after a certain amount of years with the client. The Public Company Accounting Oversight Board (PCAOB) has recently opened a discussion on audit firm rotation because the Board is concerned about the many problems that have come up on different auditing reports made by top auditing firms. PCAOB is concerned with auditor independence because they feel that it is being compromised as different firms continue to stay with particular clients for extended periods of time. This paper is going to discuss auditor independence and its effect on audit opinion, the history of audit firm rotation, and the advantages and disadvantages of audit firm rotation because it is a solution that is being considered. According to the PCAOB auditor independence is a description of the relationship between auditor and client and the mindset with which the auditor must approach his or her work. A measure for the mindset is the auditor’s ability to exercise professional skepticism, which is an attitude that includes a questioning mind and a critical assessment of audit evidence. For the last eight years the Board conducted annual inspections of the largest audit firms and found that more than 2,800 of the firm’s engagements were audit failures. An audit failure is a failure to obtain reasonable...
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...academicjournals.org/JAT Journal of Accounting and Taxation Full Length Research Paper Auditors’ perceptions on impact of mandatory audit firm rotation on auditor independence –Evidence from Bahrain Kousay Said* and Hussein Khasharmeh Department of Accounting, College of Business Administration, University of Bahrain, P.O. Box: 32038, Kingdom of Bahrain. st th Received 21 November 2013; Accepted 13 February 2014; Published April 2014 The current study examined several issues regarding auditor independence from the perspective of an emerging market such as Bahrain. Factors affecting the ability of auditors to remain independent include long audit tenure, financial dependence on a single audit client, non-audit services provided to audit clients, ex-auditor employment with an audit client and the existence of audit committees. It is therefore timely to examine the importance of auditor independence in the provision of reliable and credible financial information. The current study uses a questionnaire survey to examine auditors’ perceptions of the impact of mandatory audit firm rotation on auditor independence. The results of the study revealed that the majority of auditors agreed that MAR could safeguard auditor independence. The results also reveal that there is a significant relationship between mandatory audit firm rotation and auditor independence. Analyses of variance (ANOVA) were also conducted to test for the possibility of confounding effects...
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...Mandatory Auditor Rotation Policy Through the course of an audit, auditors are constantly faced with pressure from the client regarding financial reporting and other issues that may arise. Clients can threaten to terminate the auditor, resulting in lost fees and tarnished reputations as the firm tries to pursue future clients. In these cases, partner evaluations can be negatively affected since they are judged based on hours billed and the number of clients they are able to secure. Mandatory auditor rotation is defined as the obligation to limit the number of years during which the accounting firm may be the auditor of record for a client. The Public Company Accounting Oversight Board (PCAOB) is a strong advocate in favor of mandatory auditor rotation, while a majority of accounting firms are opposed to the idea. Problems are more likely to develop in the initial years of the audit relationship (fraud and bankruptcy) when the auditor tries to gain as much knowledge as possible about the client. According to an American Institute of Certified Public Accountants (AICPA) study (Church and Zhang 2006, page 3), audit failures are three times more likely to occur in the first two years of the auditor-client engagement. Auditor rotations have never been mandated in the United States, and I believe this should continue in the future due to the high costs and decreased auditor effectiveness that would result from continual changes in the auditor-client relationships. There...
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...Mandatory Firm Rotation Background With the fast advent of globalization, countries, regions and governments have become more interdependent. Companies all over the world including small- and medium-sized entities work together and across geographies to attain sustainable growth. With the world becoming more borderless, it is then imperative that a strong financial planning must be made available for universal adoption. The international business environment relies on unbiased, clear, consistent, relevant and high quality standards. The task to develop and review internationally accepted standards was given to accounting councils and organizations such as IFRS Advisory Council and the Public Company Accounting Oversight Board (PCAOB). With the shared thoughts for a better and universally applicable accounting, accounting-related boards and councils, managers and accountants all over the world constantly review existing standards and examine its implementation. One issue that has been a hot topic of recent debates is the concept of Mandatory Audit Firm Rotation that was released by the PCAOB (TYSIAC, 2012). The Issue The conception of mandatory firm rotation is not fresh and was even considered by the U.S. Congress in the Sarbanes-Oxley Act. The Congress however dismissed the concept in favor of the mandatory engagement partner rotation (Point of View, 2012). However, years after the conception of mandatory firm rotation was revived. Last August 16, a concept release...
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...I. Audit Quality The primary role of accounting is to reduce information asymmetry by providing investors with relevant and reliable information in order to create an efficient allocation of resources. However, there is often a tradeoff between relevance and reliability that needs to be considered when imposing regulations (Scott, 2012). When information asymmetry is present, investor faith decreases, compromising the efficiency of the market. In order to prevent market failures, it is critical to maintain investor confidence; this can be done by achieving high audit quality. Definition The PCAOB defines audit quality as providing “independent and reliable audits” regarding management’s financial statements, internal controls and potential threat for going concerns (PCAOB, 2013). Four key aspects of audit quality include independence, objectivity, skepticism, and competence. Maintaining and improving the four elements is critical to increasing audit quality and the usefulness of the information provided. Independence According to the PCAOB Auditing Standards, auditors should maintain independent mental attitudes. Independence is defined by the AICPA Code of Professional Conduct as independence of both, mind and appearance. Independence of mind requires the auditor to act with integrity, free of outside influence whereas independence of appearance requires the avoidance of situations leading to potential conflict of interests. Unless, the auditor is truly independent, the...
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...Mandatory Audit Rotation Introduction In 2002, Enron became the largest case of fraud in history. It caused it investors to lose sixty billion dollars, two million two hundred thousand in pension plans, and five thousand six hundred jobs (Enron Sentences Will Be Tied to Investor Losses). This all could have been avoided if public companies were forced to changed independent auditors every five years. Throughout this paper, I will be talking about mandatory audit rotation and why I think it is a great idea. First I will talk about the Sarbanes Oxley act and what it requires when it comes to partner rotation. It is important to know what the current rules and requirements are before we discuss how they should be changed. The next item I will discuss is auditor independence and how it is affected by audit rotation. After I talk about the current rules and independence, I will discuss the advantages and disadvantages of mandatory audit rotation. Sarbanes-Oxley Act In 2002, President George W. Bush signed the Sarbanes-Oxley Act of 2002 to protect investors from the possibility of fraudulent activities by corporations. This act was aimed to improve financial statements of corporations and prevent fraud. In section 203 of the Sarbanes-Oxley Act, it gives the requirements of partner rotation. “The new rules provide that an accounting firm will not be independent if either the lead audit partner or the concurring partner performs audit services for more than five consecutive...
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...Position Paper I agree that audit partner rotation is necessary and sufficient to best serve the accounting/audit profession and investors. Based on the downfalls of companies such as Enron, WorldCom, Tyco International, and a few others, it is essential companies have a rotational auditing system. In the past, companies have had minimal financial regulations, which probably contributed to companies rearranging numbers so nonchalantly. However, that all changed in 2002 with the introduction of the Sarbanes-Oxley Act (SOX). The act was introduced in response to continuous financial scandals that affected numerous investors. Companies were faced with harsher regulations which required each auditing committee to have one financial expert and that auditors rotate from the audit every five years. During the audit, Auditors must interact with management on a daily basis. Some sort of relationship has to form no matter how long the audit takes place. A client must feel comfortable with an auditor and be willing to share information and discuss the problems that exist. While auditors must always maintain a level of professional skepticism, this auditor-client communication is often a function of mutual experience. This is could be beneficial for both parties. If an auditor has familiarity with a company it makes the audit a smooth and understanding process. Having performed the prior-year audit often produces significant benefits that increase audit effectiveness. It is very difficult...
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...1666 K Street, NW Washington, D.C. 20006 Telephone: (202) 207-9100 Facsimile: (202) 862-8430 www.pcaobus.org ) CONCEPT RELEASE ON AUDITOR ) INDEPENDENCE AND AUDIT FIRM ) ROTATION; ) ) NOTICE OF ROUNDTABLE ) ) PCAOB Release No. 2011-006 August 16, 2011 PCAOB Rulemaking Docket Matter No. 37 Summary: The Public Company Accounting Oversight Board ("PCAOB" or "Board") is issuing a concept release to solicit public comment on ways that auditor independence, objectivity and professional skepticism could be enhanced. One possible approach on which the Board is seeking comment is mandatory audit firm rotation, which is explored in detail in this release. However, the Board seeks advice and comment on other approaches as well. The Board will also convene a public roundtable meeting in March 2012, at which interested persons will present their views. Additional details about the roundtable will be announced at a later date. Public Comment: Interested persons may submit written comments to the Board. Such comments should be sent to the Office of the Secretary, PCAOB, 1666 K Street, N.W., Washington, D.C. 20006-2803. Comments also may be submitted by e-mail to comments@pcaobus.org or through the Board's Web site at www.pcaobus.org. All comments should refer to PCAOB Rulemaking Docket Matter No. 37 in the subject or reference line. Comments should be received by the Board no later than 5:00 PM EST on December 14, 2011. Board Contacts: Martin F. Baumann, Chief Auditor...
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...Audit – a long-term investor position paper on proposed EU reforms 22 November 2012 Context The signatories to this paper are large institutional investors and investor associations. The institutions manage approximately EUR 1.66 trillion on behalf of their members / investors. We are all long term investors who take our ownership responsibilities seriously, investing significant resources and time in securing, monitoring and voting our assets. Financial reports provide vital information for us to be able to monitor executives’ use of our capital, and the audit of annual statements offers an essential assurance that information in company accounts is ‘true and fair’ (as required by the 4th and 7th Accounting Directives of the EC). The quality of the audit is, therefore, of utmost importance. We believe there are a number of worrying features of the audit market. At a very fundamental level, we are concerned about auditor independence and professional scepticism. Potential conflicts of interest have always been present in the system of auditing, so the challenge is how these are managed. We believe the current system is not delivering, as evidenced by: The failure of auditors to provide adequate warnings prior to the collapse of a number of banks and insurers in the financial crisis. In the EU alone, between September 2008 and the end of 2010, 182 banks received liquidity aid and/or debt guarantees, and 114 banks received either capital injections or asset relief aid1. None of...
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...auditors are not independence. The whole audit progress would be argued that the auditor had given the bias opinion to the client if there was no independence. Therefore, the accounting profession such as auditor and qualified accountant has faced the pressure for improving the quality of the audited reports. Jackson, Moldrich and Roebuck (2008) view the audit quality from perceived and actual quality. Actual quality shows the material errors risk level in financial statements and it can be reduced by the auditor. While perceived quality is the users confidence level in financial statements and effectiveness of the auditors in reducing the misstatement in financial statement done by management. However, there are variety of factors might affect the audit quality, but only 4 identified factors which is size of audit firm, auditor’s tenure, auditor’s experience and pricing pressure will be discussed in this paper. 2.1 Independent Variable 2.1.1 Auditor’s Tenure and Audit Quality The studies on auditor tenure cannot be separated with the auditor switching studies which formally known as auditor rotation. Auditor rotation can either is mandatory or voluntary. Voluntary rotation is the clients have option to switch auditors while mandatory rotation is pushes clients to change auditors after a fixed period (Mohamed & Habib, 2013) Previous researches had indicated that auditor’s tenure is related to the impact on audit quality. According to Geiger and Raghunandan...
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...Partner Rotation: Direct and Indirect Consequences to Audit Quality Key Points: * In order to improve audit quality by making auditors more independent, regulators mandate partner rotation and cooling-off periods. Specifically, partners would be required to rotate off to another client every five years. As stated in the article, rotation improves independence resulting in a positive impact on audit quality. * However, more often than not, partners would much rather enter a new industry than relocate to preserve their quality of life. Most partners opt to retrain rather than relocate, thus affecting audit quality negatively. Based on the findings described in the article, 93% of audit partners reported needing at least two years to become fully effective in a new engagement. Even partners who stay within the same industry line need some time to get used to differing information technology and other processing systems, client personnel, corporate governance characteristics, and the time it takes to gain client trust at the senior management and board levels. * There are some costs related to rotations, and a cost-benefit analysis should be performed. With that said, it might be hard to quantify the costs and benefits of this situation. How do you weigh the improvement in audit quality due to independence against its decline due to a lag in audit effectiveness (resulting from either a change in client or a change in industry altogether)? * Rotations would...
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...auditor in making investment judgement and increase the productivity of financial markets. Financial statements provided by the auditors are often reviewed as credible, unbiased opinion that truly reflects the company financial positions. There’s no doubt that auditor independence is the core of auditing profession when establishing its objectivity and integrity. Auditor independence, in particular, indicates the ability of an auditor to disregard any influence or control when conducting an opinion (AAA, 1973). Therefore, auditor must be, and must be seen to be independent of company management. Lack of independence causes audits to be considered to have little value (Johnstone, Sutton, & Warfield, 2001). This is further supported by Elliott and Jacobson (1998) that a particular interest may trigger a risk that could weaken the outcome of the audit which in turn impairs the auditor independence. Hence, independence is fundamental to the purpose served by auditors (Moore et al., 2002). This study is limited to only four variables as to keep the task manageable. Prior years, various studies are being carried out by scholars in examining the effect and significance of the concerns. For instance, Abu Bakar, Abdul Rahman, and Abdul Rashid (2005) studied the factors that influence auditor independence in Malaysian-owned commercial banks loan officer’s perceptions. Furthermore, Abu Bakar and Ahmad (2009)...
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...and reliability of corporate disclosures made pursuant to the securities laws and other purposes (Jennings, 2012, p. 212). Provisions under SOX affected organizations’ processes and changed how financial information was released to the public. The act highlights the importance of information system controls by requiring management and auditors to report on the effectiveness of internal controls over the financial reporting component of the organization’s management information systems (Li, Peters, Richardson & Weidenmier Watson, 2012, p. 179). Activities and Issues covered under SOX Many issues and activities should have been handled ethically and resolved voluntarily prior to establishing SOX. Companies should have already established audit report standards and rules to protect internal and external stakeholders. A system of principles-based accounting for compliance with the securities law is another...
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...This assignment is worth a total of 30 points allocated as indicated. Please complete your answers in a Word document and submit it using the Assignment 2 dropbox. This course is geared toward research and communication. That means you will be researching the appropriate standards and communicating your answers. Support answers with facts and/or examples. Your answers should be original – do not just copy or paraphrase the lecture notes, books, articles, or your classmates. All composition-type responses will be evaluated based on responsiveness to requirements, coherent organization, conciseness, clarity, grammar, and quality of presentation. For researching your answers, keep in mind that different rules may apply for nonpublic and public companies. SOX, SEC, and PCAOB rules apply to public companies. Links on the readings page may help you answer some of the questions. Use the new online AICPA Code of Professional Conduct that is linked on the readings page. There are 3 parts to this assignment. 1. (12 pts) Case 1.1 Enron Corporation (the high profile disaster that changed the face of auditing!) Watch the video Bigger Than Enron. Use this address to access the site outside of WTClass: http://vimeo.com/61053538 Read ENRON Ten Years Later: Lessons to Remember, CPA Journal http://viewer.zmags.com/publication/94edbcee#/94edbcee/18 a. After reading the case, watching the video, and reading the CPA Journal article, what do you believe...
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...Date: February 26, 2015 Re: Should Companies be required to rotate their auditing firms on a regular basis? As an accountant entering the modern business world, a case instilled in our minds is the Enron Scandal. For accountants, this was an embarrassing scenario and by effect brought numerous reforms, laws, and regulations. Many of these rulings are apparent in the present corporate setting. The division of accounting most affected by this scandal was the role and function of the external auditors. Auditors by trade serve in the public and stockholders interest. Furthermore, the independence of auditors is essential in performing their duties properly. As a result, which practices are needed to achieve total independence? Moreover, how do we weigh the cost of financial misstatements with the cost of redundancy due to rotation of audit firms? Demanding public companies to rotate their audit firms may appear reasonable on paper, however, this rotation brings more concerns than answers. Currently in the auditing of publicly held companies, lead audit partners are required to rotate of audits every five years. This ruling was enacted from the Sarbanes- Oxley Act of 2002 (SOX). Also, SOX requires a 1-year cooling off period if the Chief Executive Officer (CEO), Chief Financial Officer (CFO), controller, etc. was previously employed by and participated in the audit one year prior to the start of the audit. These laws were passed to promote auditor independence, yet some professionals...
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