Audit Firm Rotation Essay

3. Arguments on Whether Mandatory Audit Firm Rotation Enhances Audit Quality

There have been plenty of arguments both for and against that mandatory audit firm rotation can enhance audit quality, even though audit firm rotation is a quite new issue. This following part of the report will discuss those arguments from the perspectives of different relevant stakeholders, including auditors, audit clients, regulators and shareholders; and also it will discuss arguments from other specific aspects.

3.1 Perspectives from stakeholders

Auditors

According to the literatures of auditing firms’ views on mandatory audit firm rotation, majority of them are against it.

PwC (2012) points out that mandatory firm rotation causes massive costs which outweigh the receiving benefits from it for the audit firm. One significant cost is that there is a loss of cumulative knowledge which auditors have about their clients. This will lead to an ineffective audit working process and an unfamiliar working relationship with directors, audit committees and regular management of the companies. In this case, it will make auditors have too limited time to gain more specific and comprehensive information about the companies, which increases the audit failure risk and reduces the audit quality (Sakel et al., 2012).

KPMG (2012) stated that audit firm rotation reduces the interest in audit profession for auditors. For example, the frequent changes of audit clients can increase the uncertainty of the audit work that auditors should do. This will make it hard for auditors to use their best skills and for audit firms to employee the most proper auditors to deal with those uncertain events. Therefore, it makes it difficult to employee new auditors for audit firms, and t...

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Most of the regulators believe that the reason why the audit quality is reduced is that the auditors will get extremely familiar to and comfortable with their clients’ management, human resources and specific situation. According to Barbara et al. (2006), the auditors have a high probability to have a willingness to please the companies which makes the auditors loss attention to the real substantial problems behind the financial statements. Therefore, regulators give the suggestion to carry out mandatory audit firm rotation to enhance the audit quality, of course with auditor independence, and stimulate auditing professional scepticism (Barnier, 2011).

In addition, in terms of the study carried out by Lu and Sivaramakrishnan (2010), it is found out that mandatory audit firm rotation is quite helpful to stop auditors relying on past audit results in an extreme way.