Mandatory Auditor Rotation: a Way for Regulator to Prevent Audit Failures?
MANDATORY AUDITOR ROTATION: A WAY FOR REGULATORS TO PREVENT AUDIT FAILURES?
1. Introduction
Auditor rotation has long been a subject of debate as a measure to prevent audit failures, especially after the financial crisis. Two types of rotation suggested are firm rotation and audit partner rotation. Mandatory auditor rotation limits the number of consecutive years that a registered public accounting firm or audit partner can serve as the auditor of a company, and is claimed to be able to enhance audit quality and reduce market concentration. The purpose of this paper is to identify, consider and evaluate the impacts of mandatory auditor rotation on audit quality and market competition and, accordingly, conclude whether mandatory auditor rotation is the way to prevent audit failures. 2. Mandatory auditor rotation in the world
Different countries have different approaches towards mandatory auditor rotation. Some countries such as Australia, Canada, Denmark, Germany, Spain, etc. have adopted audit partner rotation rather than audit firm rotation. Some countries such as Pakistan, Italy and Oman have adopted audit firm rotation only for clients in specific areas such as listed companies, financial institutions, banks and insurance companies and governmental companies. On the other hand, a large number of countries previously implemented but have now abolished mandatory rotation. For example, Spain abandoned audit firm rotation in 1995 (Ewelt-Knauer et al., 2012). In August 2011, Public Company Accounting Oversight Board (PCAOB) issued concept release on auditor independence and audit firm rotation but still struggle to see if it will adopt a mandatory audit firm rotation requirement for the U.S. public company auditors. In September 2012, the European Parliament discussed a rotation period of twenty years, however no final decision has been reached so far. 3. The impact of mandatory auditor rotation on audit quality a. Arguments for mandatory
1. Introduction
Auditor rotation has long been a subject of debate as a measure to prevent audit failures, especially after the financial crisis. Two types of rotation suggested are firm rotation and audit partner rotation. Mandatory auditor rotation limits the number of consecutive years that a registered public accounting firm or audit partner can serve as the auditor of a company, and is claimed to be able to enhance audit quality and reduce market concentration. The purpose of this paper is to identify, consider and evaluate the impacts of mandatory auditor rotation on audit quality and market competition and, accordingly, conclude whether mandatory auditor rotation is the way to prevent audit failures. 2. Mandatory auditor rotation in the world
Different countries have different approaches towards mandatory auditor rotation. Some countries such as Australia, Canada, Denmark, Germany, Spain, etc. have adopted audit partner rotation rather than audit firm rotation. Some countries such as Pakistan, Italy and Oman have adopted audit firm rotation only for clients in specific areas such as listed companies, financial institutions, banks and insurance companies and governmental companies. On the other hand, a large number of countries previously implemented but have now abolished mandatory rotation. For example, Spain abandoned audit firm rotation in 1995 (Ewelt-Knauer et al., 2012). In August 2011, Public Company Accounting Oversight Board (PCAOB) issued concept release on auditor independence and audit firm rotation but still struggle to see if it will adopt a mandatory audit firm rotation requirement for the U.S. public company auditors. In September 2012, the European Parliament discussed a rotation period of twenty years, however no final decision has been reached so far. 3. The impact of mandatory auditor rotation on audit quality a. Arguments for mandatory
Bibliography: Ewelt-Knauer, C., Gold, A., Pott, C., 2012. How do we know about mandatory audit firm rotation?. [Online] Available at: http://icas.org.uk/mafr/ [Accessed 10 April 2013]. Auditing Practice Board (APB), 2008b. APB Ethical Standards Glossary of Terms. London: Financial Reporting Council. Elitzur, R., Falk, H. F., 1996. Planned Audit Quality. Journal of Accounting and Public Policy. 15. pp 247-269. Arel, B., Brody, R. G., Pany, K, 2005. Audit firm rotation and audit quality. The CPA Journal. January. PwC, 2012. Mandatory audit firm rotation: Why other changes would be better for investors. [Online] Available at: http://www.pwc.com/us/en/point-of-view/mandatory-audit-firm-rotation.jhtml [Accessed 10 April 2013] AICPA, 2011, Re: Request for Public Comment: Concept Release on Auditor Independence and Audit Firm Rotation [Accessed 10 April 2013] Ernst & Young, 2013