Does the Rotation of Auditors Improve the Quality of Auditing - Essay Example

?Does The Rotation Of Auditors Improve The Quality Of Auditing? Table of Contents Introduction 3 Discussing the Principle Need for Rotation of Auditors 4 Impact on Auditor’s Independence 4 Mitigation of Conflict of Interests 4 Eradicating Chances for Unconscious Intrusion of Bias 5 Evaluating the Effects of Rotation on Audit Quality 6 Advantages 6 Disadvantages 8 Conclusion 9 References 11 Introduction Prior to determining whether the rotation of auditors play an imperative role in enhancing the quality of audited financial reports, it is quite indispensable to acquire a brief understanding about the aspect of auditing. In general, auditing is fundamentally described as the systematic evaluation and the authentication of financial along with accounting records of a specific business organisation (Rathore, 2008; University of Mumbai, n.d.). It can thus be affirmed from a broader perspective that the auditing ensures the financial reports and the business finances of a specific organisation are appropriately reported and most vitally, effectively utilised (BMQR.org, 2011; Kumara & Sharma, 2011). It is worth mentioning that the role of audit rotation in improving the standards and the efficiencies of audit is duly considered as one of the major determinants of audit quality. It is strongly believed that longer tenure of an auditor links with lower quality of audit and in this context, it can be affirmed that the rotation of auditors require to be taken into concern in order to enhance audit quality on the whole. In this present day context, misrepresentations and frauds have emerged considerably that eventually imposes extensive impacts upon audit quality. The misrepresentations along with the frauds have been arguably caused owing to the augmenting interests of the stakeholders and also the owners belonging to various business organisations. Apart from this, the intention of acquiring more profits and strengthening financial positioning are certain other reasons that impose greater impact upon audit quality, necessitating rotation of auditors towards improving auditing quality at large (MIT Sloan School of Management, n.d.). With this concern, the essay intends to discuss whether the rotation of auditors enhances the quality of auditing or otherwise. Discussing the Principle Need for Rotation of Auditors Impact on Auditor’s Independence It is quite evident that the periodic rotation of auditors plays a decisive role in enhancing the auditing quality of the client company by a considerable extent. It can be apparently observed that the rotation of auditors can be conducted both internally and externally. The auditor’s rotation in both of these forms is duly considered to be one of the chief determinants of enhancing audit quality. This is owing to the reasons of preventing the auditor’s depending relation with the management team of the client organisations and differentiating between the auditing process conducted by non-capital market and capital market oriented corporations. In order to determine the impact of auditor’s rotation on the independence of the auditors, it can be affirmed that the sovereignty of the auditors remains much limited in the context of auditing due to the existence of a special trust affiliation prevailing between them and the management team of the client organisations. Thus, with this concern, it can be affirmed that the independence of the auditors largely rely upon the interrelation, which prevail between the auditors and the management team. Specially mentioning, the principle need for rotation of auditors impose considerable impact on auditor’s performances, making them perform both auditing along with consulting services and preserving the auditing process ethically, irrespective of having close interrelation with the management team of diverse organisations (Velte & Stiglbauer, 2012). Mitigation of Conflict of Interests Apart from depicting the principle need for rotation of auditors in limiting the independency of the auditors, it can also be affirmed that there lays the necessity of rotating the auditors in mitigating the conflicts of interests, particularly of the auditors and the audit clients. It can be apparently observed in this regard that the conflicts of interests mainly arise between the aforesaid two parties due to the deliverance of non-audit services to the audit clients by the auditors. Apart from this, the conflicts of interests also arise at the time when the auditors do not prepare the financial reports in accordance with the preferences of the owners and the stakeholders belonging to various organisations. Therefore, it can be affirmed from a broader understanding that the emergence of conflicts of interests due to the above discussed activities or conducts, eventually hampers audit quality in the form of raising the chances of frauds and misrepresentation of financial statements, therefore inhibiting the transparency interests of the investors and other users of the reports. Specially mentioning, mandatory rotation of the auditors could mitigate conflicts of interests by a considerable extent. In this regard, as the auditors would realise that their term has come to an end after the defined period, they would act less towards favouring the management team of the organisations in presenting their illegitimate preferences while making the financial statements. Moreover, obligatory auditor’s rotation would certainly encourage the auditors towards performing their functions thoroughly, resulting in mitigating conflicts of interests and most vitally, enhancing auditing quality at large (CPA Canada, 2012; Pozen, 2012). Eradicating Chances for Unconscious Intrusion of Bias While discussing the principal need for rotation of auditors, especially in eradicating chances for unconscious or conscious intrusions of bias, it can be apparently observed that there lay certain prominent determinants that eventually contribute in making the opinions of the auditors partial or most likely, prejudiced by the viewpoints of the client company’s managers. In this regard, these determinants comprise personal affiliation with the management team of the organisations or the audit clients and financial incentives among others. The contingent financial incentives and personal interrelation induces conscious and unconscious bias respectively. The emergence of such biases eventually impose unfavourable impacts upon auditing quality in the form of depicting untrue and unfair financial reports or statements.Thus, it can be affirmed that there exists the principle need for rotation of auditors in eradicating the possibilities for such intrusion of biases in the reports published. In this similar concern, the development of certain significant aspects, such as the objectivity, independence and the scepticism of the auditors might certainly remove the chances for intrusion of bias and therefore, enhance the quality of audited reports. Apart from these, the advancement of certain other imperative factors, such as accounting education, corporate governance, expertise of the auditors, liability and auditor’s discipline also might eradicate the probabilities of forming an extensive level of bias in the audited reports. Hence, it can be affirmed that the chances for conscious or unconscious intrusion of biases can be eradicated through performing rotation of the auditors in terms of looking after the issues that might have not been taken into concern by the existing auditors or not settled properly being influenced due to the existing interrelation with the audit clients (Harris & Whisenant, 2012; Ball & et. al., n.d.). Evaluating the Effects of Rotation on Audit Quality Advantages While evaluating the effects of auditor’s rotation on enhancing auditing quality, certain advantages of the policy can be duly taken into concern. It can be apparently observed in this regard that the rotation of auditors possess certain limited benefits towards enhancing the auditing quality. In this regard, both internal along with external rotation of auditors can be viewed as a vital determinant of enhancing audit quality, as it tends to limit the depending relationship of the auditors with the management team or the audit clients. It is strongly believed that this particular practice would certainly assist in enhancing audit quality through preparing and presenting true, reliable and fair financial statements. Moreover, the practice would also enhance the auditing quality in the form of restricting any sort of fraudulent activities, which is often conducted while preparing any financial report or statement. It is worth mentioning in this regard that certain critical factors, such as increased level of mortgage defaults, corporate scandals in performing fraudulent activities and shortage of investors’ confidence among others have eventually raised the need for enhancing transparency along with quality of auditing (Cameran &et. al., n.d.). One of the prime benefits of auditor’s rotation, in the context of auditing quality, can be apparently observed as eliminating any sort of disagreement or conflict of interest prevailing between the auditors and the audit clients. This would eventually promote various facets to perform auditing with proficiency, such as scepticism, objectivity along with independence that are typically regarded as the major elements for appropriate operative of capital business markets. Another benefit of the rotation of auditors in the context of enhancing the quality of auditing is raising the confidence of the investors, in the audit procedure and the audit profession as well. This can be justified with reference to the fact that the investors often have been unfavourably affected by audit failures, which arguably resulted from the shortage of auditor’s scepticism. In this regard, the rotation of the auditors would eventually develop auditor’s independence along with audit quality, resulting in raising greater level of investors’ confidence in the audit procedure and their professional obligations (Bhika & Francis, 2012). Disadvantages After acquiring a brief idea about the advantages of auditor’s rotation towards enhancing the quality of auditing, certain disadvantages of this practice, i.e. auditor’s rotation can also be apparently observed. In this similar concern, one of the demerits of auditor’s rotation can be viewed as increased level of operational along with transactional costs. This is owing to the reason that the rotation of the auditors generally comprises greater monetary value relating to auditing expenses and audit fees that eventually raises extra costs to be incurred by the client company. Apart from this, the concentration of audit market is regarded as the other disadvantage of auditor’s rotation in the circumstance of enhancing the quality of auditing. In this context, the major reasons of audit market concentration can be apparently observed as decline in the auditing quality owing to the limited transparency in the services provided by the audit firms, a reduction in the steadiness of the capital business markets and shortage of investor’s confidence among others (Velte & Stiglbauer, 2012). Correspondingly, while determining the disadvantages of auditor’s rotation in lieu to enhancing auditing quality, it is quite apparent that the limits in the auditing terms might result in losing major clients along with declining revenue sources particularly for the auditing firms. Specially mentioning, to gain efficiency, auditors require understanding the businesses of their respective clients in order to conduct a quality assured audit functions. As the procedure of auditor’s rotation consume considerable amount of time and require substantial resources, the approach might hamper the auditing quality by a certain degree. Moreover, the time, which is required to understand a new audit client, might raise the probability of audit failure in the initial period due to the rotation of the auditors. This can be duly considered as one of the prime reasons for affecting auditing quality, when implementing the policy of auditor’s rotation as an unfavourable one (PricewaterhouseCoopers LLP, 2012). Thus, based on the above discussion, it can firmly be admitted that the rotation of the auditors would not only inhibit the overall audit quality, but would also make the financial reporting less consistent in nature and most vitally, will raise a considerable level of additional costs particularly for the investors. These critical factors will certainly cause greater risk for the auditors towards non-compliance of the requirements of the audit clients (Coyle, 2004). Conclusion Based on the above analysis, it can be affirmed from a broader understanding that the rotation of the auditors not only tends to cause a strong impact on auditing quality but also on strengthening auditor independence, lowering chances of conflicts of interests and chances for intrusion of biases to a substantial extent to make the reporting standards viably legitimate. In addition, it can be apparently observed that the rotation of the auditors fundamentally enhance auditing quality through the prevention of continuing interdependent and reward based relation with the audit clients and also through preparing along with presenting fair and true financial disclosures. Certain significant facets, such as professional scepticism, objectivity and independence of the auditors are regarded as the fundamental constituents of auditing quality. Hence, the development of these facets through the policy of audit rotation after a certain period ensures the improvement of auditing quality by a considerable extent. However, it has been viewed that the rotation of auditors does not enhance audit quality due to increased level of operational along with transactional costs and also for the formation of audit market concentration among others. By taking into concern the disadvantages of auditor’s rotation in the context of enhancing auditing quality, it can be affirmed that the rotation of the auditors would eventually decrease auditing quality and most significantly, will make financial reporting less consistent at the initial phase of auditing, in every interval of audit rotation. Nevertheless, it can be observed that as these shortcomings of the policy measure to rotate auditors after every certain period of interval is limited only in the initial stage, its long-term benefits in terms of augmented auditor’s independence and scepticism overpowers its weaknesses. Thus conclusively, it can be stated that rotation of auditors help in the enhancement of the overall audit quality. References BMQR.org, 2011. What is Auditing. Downloads.[Online] Available at: http://bmqr.org/what-is-auditing/ [Accessed December 12, 2013]. Ball, T. C. &et. al., No Date. Rotation and Auditor Objectivity. Audit Firm Rotation: A Joint Academic and Practitioner Perspective, pp. 1-4. Bhika, R. & Francis, A., 2012. Will Rotating Accounting Firms Enhance Audit Quality?Articles. [Online] Available at: http://www.corporatesecretary.com/articles/regulation-and-legal/12224/will-rotating-accounting-firms-enhance-audit-quality/ [Accessed December 13, 2013]. CPA Canada, 2012. Introduction. Enhancing Audit Quality: Canadian Perspectives—Auditor Independence, pp. 2-28. Coyle, B., 2004. Risk Awareness and Corporate Governance. Global Professional Publishi. Cameran, M. &et. al., No Date. Introduction. Mandatory Audit Firm Rotation and Audit Quality: Evidence from the Italian Setting, pp. 1-53. Harris, K. & Whisenant, S., 2012. Introduction. Mandatory Audit Rotation: An International Investigation.[Online] Available at: http://pcaobus.org/Rules/Rulemaking/Docket037/634_Harris_Whisenant.pdf [Accessed December 12, 2013]. Kumara, R. & Sharma, V., 2011. Auditing : Principles and Practice. PHI Learning Pvt. Ltd. MIT Sloan School of Management, No Date. Introduction. Events.[Online] Available at: http://mitsloan.mit.edu/events/asia-conference-in accounting/pdf/Mandatory_Audit_Partner_Rotation.pdf [Accessed December 12, 2013]. Pozen, R., 2012. Search For Auditors; Don't Rotate. Article. [Online] Available at: http://www.pionline.com/article/20120514/PRINT/305149960/search-for-auditors-dont-rotate [Accessed December 12, 2013]. PricewaterhouseCoopers LLP, 2012. Mandatory Audit Firm Rotation. Assets.[Online] Available at: http://www.pwc.com/us/en/point-of-view/assets/mandatory-audit-firm-rotation.pdf [Accessed December 12, 2013]. Rathore, S., 2008. International Accounting. PHI Learning Pvt. Ltd. University of Mumbai, No Date. Definition. Introduction to Auditing. [Online] Available at: http://www.mu.ac.in/myweb_test/study%20TYBCom%20Accountancy%20Auditing-II.pdf [Accessed December 12, 2013]. Velte, P. & Stiglbauer, M., 2012. Introduction. Impact of Auditor and Audit Firm Rotation on Accounting and Audit Quality: A Critical Analysis of the Regulation Draft, pp. 1-8. Velte, P. & Stiglbauer, M., 2012. Audit Market Concentration and Its Influence on Audit Quality. International Business Research, Vol. 5, No. 11, pp. 146-161. Read More