Rotation of Auditors Improving Quality of Audits - Essay Example

?Table of Contents Introduction 2 Importance of Audit Quality 2 Regulations and Principals 3 Rotation of Auditors 4 Financial ments 4 Environmental Audit 5 Independence 5 Self Interest 6 Self Review 6 Familiarity 7 Undue Influence 7 Conclusion 7 References 9 Rotation of Auditors Improving Quality of Audits Introduction The rotation of auditors is one of the criteria that propose towards the quality of audit in most of the cases. The integrity of the financial statements is contingent upon the audit. Audit of the financial statements elaborates the dependability of the users of the financial statements upon the reliability of the information provided in the financial statement. Being faced by many of the threats the financial statements are deemed to provide true and fair view and audit of the financial statements depicts that whether the information provided in the financial statements are up to the standards upon which the financial statements are to be presented and issued. The quality of the audit is crucial for the integrity and reliability of the information provided and disclosed in the financial statements. With the continuous increase upon the integrity of the financial statements there are efforts made and put in to practice in order to provide high quality audit. Many of the legislations and regulations are formed to excel the quality of the audit so that the quality audit can enhance the integrity of the financial statements. There are many factors, which contributed towards the quality of the audit and their relation with the quality of financial statements, one of which is the rotation of the auditors. The independence of the auditors is one of the major factor which reflects the quality of audit. The impact of the rotation of auditors upon the quality of audit ensuring auditor independence and how the factors affecting the auditors’ independence are tackled with rotation of audit is discussed. Importance of Audit Quality The quality of the audit is crucial for every user as the financial statements fulfilling the information requirement, which is different in every case. The importance of the transparency of information is critical as the users are dependent upon the provided information and that information is needed to be completely free of bias and should present the true and fair view of the company (Zabihollah, et al., 2003). The quality of the audit of the financial statements is decisive for every user as it is the quality of audit that depicts the dependency and reliability of the information provided in the financial statement. Regulations and Principals The importance of the audit is of utmost important as it elaborates the transparency and quality of the information that the company provides in its financial and non-financial statements (Anna & James, 2009). The information that is scrutinized in the audit process depicts the quality of the audit. The quality of audit is measured upon various techniques where the relation of the auditor is one of the major factors that result in the rotation of the auditors. The ethical implication of the audit and the principals provided by the international auditing and assurance standard board are issued in order to guide through the quality of audit. There are various legislations imposed in various countries where the rotation of the auditors is set as compulsory for the company. The importance of the audit is realized and various regulations were made and implemented. The Public Company Accounting Oversight Board has implemented laws that are mandatory to be followed where the rotation of the auditors are set to be followed by the companies. Corporate governance failure caused many of the scandals that gave rise to many of the regulations (Francine, 2011). In the corporate governance the best practice principals denotes the quality of audit to be enhanced when the rotation of the auditor is made after every three years. The corporate governance best practice is dedicated towards the operations of the company, which depicts the excellence of quality in the operations. Rotation of Auditors The rotation of auditors is described as when the auditor is rotated after a certain period of time. There are regulations implemented that varies in every jurisdiction where the duration of the auditor is defined and companies are required to change the auditors. As per the guidance provided by the audit standard board and corporate governance principals the auditor period is affirmed as less then three years. For the quality of the audit to enhance the governance issued the principals of rotating the auditors as the rotation of auditor shall enhance the quality of audit because it will shield many of the threats facing the quality of audit such as to independence. The rotation of auditor shall enhance the quality of various audits. Financial Statements The financial statements of the company depict the financials of the company categorized as financial position and financial performance. The financial statement of the company is crucial for every stakeholder of the company as it satisfy the user requirement differently (Panagiotis & Dimitrios, 2009). The importance of the financial statements is crucial for every single user of the financial statement as it satisfy the information requirements of the users according to their needs. The rotation of auditor of financial statement shall enhance the audit quality as when the new auditor takes office then he/she shall neither have the previous knowledge of the company nor the previous audit working paper. Thus the new auditor shall perform the audit procedure in details and will expand the sample size thus enhance the quality of audit. Environmental Audit The environmental audit depicts the information regarding the environmental impacts of the company operations. The regulations implemented upon the company regarding the environmental impacts are to be necessarily followed so as to depict the implication of the regulation and intervention of the regulation upon the operation of the company. The rotation of auditor shall enhance the quality of the environmental audit as the new auditor shall reconfirm the liaison of company with the environmental laws which will be done from scratch and thus improving the quality of audit. Independence The independence of the auditors is of utmost importance considering the quality of the audit. The auditor needs to be independent in order to assure the quality of the audit. The independence of auditors depicts the quality of audit, as when the auditor is independent then there shall be no involvement of the staff of the company in the audit procedures. The rotation of auditors contributes a lot to the independence of the auditors and hence raises the quality of the audit. The commitment towards the independence of the auditors depict that the quality of audit shall enhance (Zaini & Dennis, 2009). The independence of the auditors erases many of the issues that reduce the quality of the audit such as role ambiguity. Various threats to independence of the auditors are mitigated when the rotation of the auditors is ensured within a specified time. There are various threats to the independence of the auditors which when mitigated will enhance the quality of the audit and hence provide the users of the financial and non-financial statements provided by the company. The rotation of the audit removes various threats to independence and hence enhances the quality of the audit. Self Interest Self-interest is one of the major factors that denote the quality of the service that is to be provided (Tom, 1995). When self interest is involved the quality of the service decelerate as for the interest of their own the service provider compromises upon the quality. It is the case with audit services that are provided. The self-interest of the auditors should be removed to the minimum so as to affirm the high quality of the audit services. In corporate governance the provision of high quality audit is confirmed where the self-interest of the audit committee and of the external auditors is removed by restricting the share holding in the company by the auditors, fee dependency of the auditors and not be the investor in the company share. The rotation of the auditors removes the threat of self-interest to the independence of the auditors as the auditors are rotated before the self-interest develops. Self Review The self review threat increases as the increase of the time period for which the auditor provide services to the same client. The increase in the self-review threat increases the dependency of the auditors upon the client and hence reduces the quality of the services that it provides. The self-review threat should be managed and should be minimized to the minimum level (MARTIN & ALAN, 2009). The ethical dilemma that causes the threats to the independence of the audit and reducing the quality of the audit is minimized by the rotation of the auditor over a specified time period. Familiarity The familiarity of the auditor with the client reduces the quality of the audit as the auditor is much aware of the procedures and norms of the client and thus reduces the level of audit procedures that ensure quality. The familiarity of the auditors with the clients should be minimized to an acceptable level (Roger, 2002). The rotation of the auditors within a specified time period reduces the familiarity threat when the auditor does not get much familiar with the client and is changed thus accelerate the quality of the audit. Undue Influence The undue influence is caused by the long-term relations with the client where one of the party, either auditor or client, can influence the decision of the other. Where one could control the decision making authority of other then the audit that is provided is not of high quality (OLADELE, 2010). The rotation of the auditors influences the quality of the audit, as the relation does not get strong enough to influence the decision of the other party. The continuous change in the auditors of the company does not enable the establishment of he relation between the client and auditor so strong that the undue influence occurs. Conclusion The rotation of the auditors is of much value adding phenomenon where the quality of audit services provides is improving. The contribution of the auditor is intense towards the user decision-making criteria where the dependency of the integrity of the information provided is upon the quality of audit. Audit of the statements whether financial or non-financial provides the information that is helpful for various users from different regards as the usage of the information is different. Due to the importance of audit in the corporate field the value of quality of audit was realized when corporate scandals emerged. Considering the reduction to corporate scandals various regulations and legislations where formed and implemented so as to reduce the threat of corporate scandals. The rotation of the auditor removed many of the threats towards the quality of the services that the auditors provide by eliminating various aspects of the dependence of auditors. The quality of audit is highly dependent upon the independence of the auditors as where the independent auditor is able to provide the service without any influence of the client. The rotation of the auditor enables the auditors to be independent from the client and thus enables the auditors to provide high quality audit services to the client. The mandatory rotation of the auditors in many of the countries local legislations depicts the importance of the rotation of the auditors towards the quality of the audit. The threats to the independence are increased by significant factor where several of the threats to independence are removed when the rotation of the auditor is done. References Anna, M. C. & James, L. B., 2009. The effect of performance feedback and client importance on auditors' self- and public-focused ethical judgments. Managerial Auditing Journal, 24(5), pp. 445-474. Francine, M., 2011. Auditor Rotation Proposal Just More Spin. Forbes, 8(1), pp. 1-5. Josephine, M., 1995. Environmental audit: theory and practices. Managerial Auditing Journal, 10(8), pp. 15 - 26. MARTIN, A. L. & ALAN, R., 2009. Help for Solving CPAs' Ethical Dilemmas. Journal of Accountancy, 1(1), pp. 1-10. OLADELE, O. K., 2010. Auditor's Independence and Accountability in Nigeria Public Enterprises: A Case of the Nigerian Ports Authority, Kaduna: papers.ssrn.com. Panagiotis, E. D. & Dimitrios, A., 2009. The value relevance of financial statements and their impact on stock prices: Evidence from Greece. Managerial Auditing Journal, 24(3), pp. 248 - 265. Roger, H., 2002. The Familiarity Threat and Auditor Independence. ??Corporate Governance An International Review , 7(2), pp. 190-197. Tom, L., 1995. The professionalization of accountancy: a history of protecting the public interest in a self-interested way. Accounting, Auditing & Accountability Journal, 8(4), pp. 48-69. Zabihollah, R., Kingsley, O. O. & George, M., 2003. Improving corporate governance: the role of audit committee disclosures. Managerial Auditing Journal, 18(6/7), pp. 530-537. Zaini, A. & Dennis, T., 2009. Commitment to independence by internal auditors: the effects of role ambiguity and role conflict. Managerial Auditing Journal, 24(9), pp. 899-925. Read More