To: Professor Moffit
From: Lloyd Johnson
Date: February 26, 2015
Re: Should Companies be required to rotate their auditing firms on a regular basis?
As an accountant entering the modern business world, a case instilled in our minds is the Enron Scandal. For accountants, this was an embarrassing scenario and by effect brought numerous reforms, laws, and regulations. Many of these rulings are apparent in the present corporate setting. The division of accounting most affected by this scandal was the role and function of the external auditors. Auditors by trade serve in the public and stockholders interest. Furthermore, the independence of auditors is essential in performing their duties ...view middle of the document...
” The CFO further stated, “We believe the current five-year rotation requirement of lead audit partners captures substantially all the benefits of mandatory audit-firm rotation in a cost-effective manner”(2014 Vincent). The cost-effective manner appears to be the main benefit of not requiring publicly traded companies to rotate their audit-firm. Many fear the frequent changing of audit firms will increase redundancies in performing an audit. This is due in part of the publicly traded companies having to explain their corporate structure; thus requiring more time to execute an audit. Also, retaining an audit firm for years provides an understanding of the entity that may require several years to develop. Many aspects of performing an audit efficiently are intangible and are difficult to replicate when engaging with new audit firms. An example of an intangible aspect is the lead auditor’s knowledge and their ability to properly inform the staff level auditors of the business environment.
To require companies to rotate their audit firms every five years increases the likelihood of performing an ineffective audit. For instance, would one believe a first time audit would be more effective than the fifth or perhaps the eighth year? This question is the largest factor arguing against the rotation of audit firms on a routine basis. Rotating audit firms periodically may appear to achieve more independence on paper, but this does not necessarily provide for more effective audits. If an effective audit to ensure the reasonable presentation of financial statements, requiring a fresh set of eyes may not accomplish this task. Independence is obtained by abiding by the rule of ethics and professionalism. Enforcing new audit firms to engage with publicly held companies will not guarantee independence if the auditors do not abide by these codes. Furthermore, the issue of independence may not exist in what firm is performing the audit but reside in the professional conduct of those performing the audit.
If a company is being exposed to more audit firms, this may reduce the degree of independence in actuality. If an audit firm has previously engaged with a public company to provide financial services and now are performing an audit, they will technically not be independent. With the rulings already in place from SOX, lead audit managers go through an intense review process whenever leaving an audit. The new lead audit partner has to essentially create the audit all over, which diminishes any longstanding relationship held previously. An idea mentioned by Mr. Doty, who became chairman of the PCAOB in 2011, “require that the engagement partner sign the audit…partners might be more hesitant to sign off on dubious accounting if they knew their name would be publicly attached to audit if problems were later discovered”(2011 Norris). Mr. Doty is implying that if lead audit partners were held to a higher accountability with their engagements, these lead auditors will...