Auditing is an essential process in the accounting specialization. It involves evaluating and verifying a company’s financial statements and records to ensure accuracy. In recent years, there have been calls for Mandatory Audit Rotation (MAR) which requires auditors to change after a certain period (Keyser 16). This practice requires companies to change their external auditor regularly after some years. The main aim of MAR is to improve the quality and independence of audit reports by reducing the possibility of auditor-client relationships becoming too comfortable and avoiding any potential conflicts of interest. However, this practice has been debated in the accounting industry. While some argue that mandatory audit rotation is a necessary safeguard against accounting fraud, this paper maintains that mandatory audit Rotation is an unnecessary burden for the accounting profession and companies by examining the potential problems associated with mandatory audit rotation, such as increased cost, decreased accuracy and quality, and potential shopping opportunities.
Increased Cost and Time-Consuming Process
Many accounting professionals and firm managers argue that MAR promotes auditor independence. It should be understood that this policy increases the cost and time-consuming process for the company or the firm that performs the audit (Horton et al. 6). Selecting a new auditor, developing a relationship, and bringing them up to speed with the company’s business operations can be expensive and time-consuming, especially for large and complex organizations that require significant time and resources to audit(Fathi and Rashed 4). For example, a company that needs to switch auditors every five years will spend significant money and time on the selection process. When auditors are rotated frequently, there may be a need for more consistency in the audit approach and methodology, leading to a less efficient and more costly audit process (Fathi and Rashed 8). The new auditor may need more time to familiarize themselves with the company’s operations and audit history.
Potential Erosion in Accuracy and Quality of Audit
Mandatory audit rotation leads to a potential erosion in the accuracy and quality of the audit. Auditors develop deep knowledge of the company and its operations over time, which can be valuable in conducting an effective audit (Horton et al. 13). When auditors are rotated frequently, this knowledge is lost, and the new auditor may have a different understanding or expertise, leading to a lower quality of audit and reduced accuracy (Keyser 20). For example, a new auditor may need to be made aware of specific nuances and complexities of the company’s operations that the previous auditor needed to be more familiar with, leading to missed opportunities for identifying potential risks or errors (Horton et al. 18). While others argue that the policy increases competition in the audit market, leading to better quality audits, Mandatory audit rotation creates many opportunities for potential shopping, which is the practice of selecting an auditor who is more likely to provide a favorable opinion or overlook issues (Fathi and Rashed 13). When companies are required to rotate auditors, they may be tempted to choose an auditor who is less rigorous or more accommodating, leading to an erosion of auditor independence and a lower audit quality.
Potential for Lower Audit Quality
While the ones in favor may argue that MAR improves audit quality by constantly adapting new clients and accounting systems, mandatory audit rotation lead to lower audit quality by forcing inexperienced auditors to take on complex audit assignments (Horton et al. 21). When auditors are rotated frequently, the new auditor may have a different level of expertise than the previous auditor, causing an increased risk of errors, omissions, or oversights, ultimately leading to a lower-quality audit (Horton et al. 26). Mandatory audit rotation can create conflicts of interest between auditors and clients. When companies are required to switch auditors, they may be tempted to select an auditor who is more accommodating or less rigorous in their assessments, cause to a lower quality of audit and an erosion of auditor independence (Fathi and Rashed 16). Moreover, the new auditor may have relationships with the company or its management that can compromise their objectivity.
Conclusion
Mandatory audit rotation is not preferable for most firms due to an increase in the cost and time required to complete an audit and a potential decline in the accuracy and quality of the audit. It also offers many chances for potential shopping, leading to lower audit quality by forcing inexperienced auditors to take on challenging audit tasks, raising audit fees and costs, and developing conflicts of interest between auditors and clients. Therefore mandatory audit rotation is an extreme measure, and there are better courses of action for companies and firms undertaking an audit.
Works Cited
Fathi, Esraa, and Ahmed Sayed Rashed. “Exploring the impact of mandatory audit firm rotation on audit quality: an empirical study.” Academy of Accounting and Financial Studies Journal 25.6 2021: 1–18. https://tinyurl.com/2p8fuztt Accessed on 25th April 2023
Horton, Joanne, and Angela Pettinicchio. “Empirical evidence on audit quality under a dual mandatory auditor rotation rule.” European Accounting Review 30.1 2021: 1–29. https://doi.org/10.1080/09638180.2020.1747513 Accessed on 24th April 2023
Keyser, John D. “The Recurring Debate in the United States over Mandatory Firm Rotation.” Accounting Historians Journal 48.1 2021: 15–29. https://doi.org/10.2308/AAHJ-19-012 Accessed on 25th April 2023
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