Current Accounting Theory Issue on Mandatory Rotation of Auditors
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The issue on mandatory rotation of auditors has been under discussion by many people. Some people believe that cases of compulsory liquidations of companies will reduce if external auditors are rotated frequently. Several articles have covered this issue. One of these articles is Auditor Rotation Debate Heats Up written by Michael Rapoport. The source of this article is from the Wall Street Journal. This paper talks on whether people support the move of the Congress to stop regulators from requiring the companies to change their external auditors regularly. Investors believe that their shareholding will be protected more effectively if external auditors are rotated frequently. This will ensure that auditors are independent, therefore giving free and fair view of the accounts’ books of companies.
The article talks about the bill brought by Michael Fitzpatrick that seeks to block boards of companies from requiring different auditors to audit company’s books on rotational basis. Initially, the Public Accounting Oversight Board (PCAOB) proposed the rotation as a way to
ensure that auditors are not too attached to their clients (Rapoport, 2012). Big accounting companies have supported the move by Congress to block the proposal of rotating auditors. Author Levit argued that blocking auditor’s rotation would be erosion of investors’ protection. PricewaterhouseCoopers denied claims that it asked Congress to block the support of auditors’ rotation. People have different views on whether boards have the power to seek the rotation of auditors. Tom Quaadman, an official of the chamber, gave a statement arguing that rotation of auditors fell under the jurisdiction of collective governance and thus PCAOB could not control it. However, PCAOB claim that Sarbanes-Oxley corporate-overhaul law permits authority boards to oversee the issues of auditors’ independence.
The author seems to support the rotation of auditors. He claims that enactment of compulsory rotation of auditors will help ruin auditor-client relationships that have lasted for decades in many companies. He also added that rotation of auditors would help to improve auditors’ independence thus leading to normal skepticism among auditors when they evaluate company’s books of accounts (Rapoport, 2012). In addition, he added that the main reason that Rep. Fitzpatrick supports the blocking of auditors rotation is that he received funding from PricewaterhouseCoopers and Deloitte for the 2012 election cycle. Big auditing firms do not support the rotation of auditors since they know that they will lose most of their clients. Earnest and Young, PWC, Deloitte and Touché and KPMG are among the first auditing firms in America. Due to this, they have been auditing books of account of big corporations in America for many years. If the rotation of auditors is adopted, they will lose their revenues from auditing fees, as their client base will reduce. In addition, the author argues that Rep. Scott Garret, the chair of the capital markets subcommittee, supports blocking of auditor’s rotation since he received financial assistance from the big auditing firms.
The issue of compulsory auditor’s rotation has several relationships with the current conceptual framework on external auditors’ independence. External auditors are required to report directly to an audit committee in order to ensure their independence. In addition, external auditors are not required to perform internal audit services for their clients, design financial systems or maintain the books of accounts of their clients (Strohm, 2006). Auditor’s scope should also be determined by the auditor to prevent the client from defining how the auditor should conduct his/her audit. If compulsory rotation of auditors is implemented in America, objectivity and independence of external auditors will be enhanced. It will reduce the level of familiarity between auditors and client helping in the reduction of collusion between auditors and clients to facilitate frauds. Reduction of familiarity between auditor and clients will help to improve verification of transactions thus improving the quality of audits. Mandatory rotations will also improve the quality of financial reporting. I support the issue of mandatory rotations of external auditors. I believe it will help in minimizing the cases of frauds in companies. Shareholders wealth will thus be protected as collusion between auditors and management will be minimal.