Mandatory Rotation of Auditors
Abstract
In light of a number of high-profile corporate failures during the first half of 2001, a number of studies have been performed to address the impact of mandatory rotation of audit firms to ensure the appropriate level of independence ' of auditors. Majority of studies conclude that the detrimental effects of firm rotation on the quality of the audit work by far outweigh its positive effects as a safeguard against various independence and quality threats.
Frequent changes of audit firms, whether resulting from mandatory rotation or otherwise, introduce threats to independence and operational difficulties that make audit failure more likely. Many studies have involved practitioners ' opinions on this issue, which have been based on their experiences and is therefore necessarily more subjective than from impartial, third party studies. There are differing opinions, as some audit firms wish to preserve the client bases, while others welcome more market volatility. Mandatory firm rotation has been concluded as an unnecessary step at present, whose main impact will be the auditing profession and its ability to attract talent for the future. At a time when the restoration of public trust in financial reporting is a key priority, such changes should be avoided.
Background
Following the failure of HIH Insurance and other listed Australian companies during the first half of 2001, concerns were raised about the adequacy of Australian rules governing audit independence. Auditor independence is fundamental to the credibility and reliability of auditors ' reports. Independence is defined to require " a freedom from bias, personal interest, prior commitment to an interest, or susceptibility to undue influence of pressure, any of which could lead to a belief that the audit opinion was determined other than by reference to the facts of the audit alone."
With the increasing globalistion of capital markets and the fact that that section 324 of the
In light of a number of high-profile corporate failures during the first half of 2001, a number of studies have been performed to address the impact of mandatory rotation of audit firms to ensure the appropriate level of independence ' of auditors. Majority of studies conclude that the detrimental effects of firm rotation on the quality of the audit work by far outweigh its positive effects as a safeguard against various independence and quality threats.
Frequent changes of audit firms, whether resulting from mandatory rotation or otherwise, introduce threats to independence and operational difficulties that make audit failure more likely. Many studies have involved practitioners ' opinions on this issue, which have been based on their experiences and is therefore necessarily more subjective than from impartial, third party studies. There are differing opinions, as some audit firms wish to preserve the client bases, while others welcome more market volatility. Mandatory firm rotation has been concluded as an unnecessary step at present, whose main impact will be the auditing profession and its ability to attract talent for the future. At a time when the restoration of public trust in financial reporting is a key priority, such changes should be avoided.
Background
Following the failure of HIH Insurance and other listed Australian companies during the first half of 2001, concerns were raised about the adequacy of Australian rules governing audit independence. Auditor independence is fundamental to the credibility and reliability of auditors ' reports. Independence is defined to require " a freedom from bias, personal interest, prior commitment to an interest, or susceptibility to undue influence of pressure, any of which could lead to a belief that the audit opinion was determined other than by reference to the facts of the audit alone."
With the increasing globalistion of capital markets and the fact that that section 324 of the
Bibliography: ‘Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 ', Canberra, 2004. ‘Corporate Law Economic Reform Program Paper No. 9: Proposals for Reform – Corporate Disclosure ', The Department of the Treasury, Canberra, 2002. Joint Committee of Public Accounts and Audit, ‘Review of Independent auditing by registered company auditors ', Canberra, 2002.