Essay on Life Time of an Audit Idiot

Submitted By allegroridz
Words: 717
Pages: 3

The recent GAO study on audit firm rotation also reported that auditor tenure does not affect the manner in which auditors deal with material financial reporting issues. A GAO survey found that approximately 69% of the Tier 1 CPA firms (10 or more public clients) and 73% of the Fortune 1000 public companies surveyed did not believe long-term auditor relationships increase the risk of audit failures. Yet, 38% of these CPAs and 65% of the Fortune 1000 company respondents acknowledged that investor perceptions of auditor independence would increase under mandatory audit firm rotation. These two groups also indicated, however, that the costs of mandatory audit firm rotation would exceed the benefits.

The issue of audit firm rotation has not been limited to the United States, and considerable insight can be gathered from non-U.S. countries. Several countries (e.g., Spain, Turkey) have adopted and subsequently dropped mandatory audit firm rotation because it did not achieve public policy goals. In Italy, the Bocconi University Report concluded that audit firm rotation, which is mandatory in Italy, is detrimental to audit quality but does seem to have a positive effect on improving public confidence in the corporate sector.

Unanswered Questions

The net effect of audit firm rotation is uncertain. On the one hand, it is bothersome that auditors placed in a situation where no rotation is expected are more likely to agree with a client on a difficult accounting issue. Logically, an expected long-term stream of audit fees could also result in different decisions, due to either conscious or subconscious reasons. Despite these considerations, the research indicating high first-year audit failure rates suggests that rotations might result in auditors with higher perceived independence performing lower-quality audits. Many other potential effects of mandatory audit firm rotation remain unmeasured. For example, how will a much larger annual supply of possible new audit clients affect auditors? Will marketing ability trump technical competence in winning new engagements? Would CPAs staff their audits differently toward the end of the rotation period? In addition, there is no information on likely changes in the costs of audits due to rotation.

Even the high audit failure rates in the early years of an engagement are uncertain. Under mandatory rotation, would the increased number of first- and second-year audits lead to a higher level of auditor skill in these circumstances and to a lower level of audit failure? Or, could a closer working relationship with the predecessor auditor limit early-year audit failures?

Another issue relates to audit firms themselves. Given that the Big Four handle the bulk of the large publicly held corporations, will rotation involve only these four firms? Are non–Big Four firms able or willing to handle large SEC audits? Will audit firm incentives to specialize in specific industries be diminished because the possible…