Describe The Mandatory Rotation Of Audit Firm Accounting Essay

Describe The Mandatory Rotation Of Audit Firm Accounting Essay baseFrom the 2008 pecuniary crisis, the weakness of analyse system has exposed in several aspect. European Parliament and public insure that the analyzeors fail to play during the financial crisis. The European consignment said that the scrutinizeed accountors only consider bulk of banks had exposed a great quantity of loss from 2007 to 2009 in both on and off agreement sheet in the financial crisis, however, it is a hard take a leak for the public and stakeholders to know how the inspectors to give the flashy auditing reports to their principal. In addition, the European Commission takes into account preventing the concentration in the audit industry, which including restricting the choices and competition. Further, they also consider the independence of the audit family and the reduction of the expectation gap. All things the European Commission do is to development the quality of audit, so they think that the current auditing system should be reform.According to KPMG (2012), because of the failure of tenders in financial crisis, the lobby of small squares and the US has taken action on the independent emergence. Meanwhile, in order to conform to the environments, which contain changes to financial reporting and increasing the risk and going concern issue for the companies. The European Commission came up the projects on 30th November 2011 to address the matters that appeal in the financial crisis and rebuild the confidence of the audit system. The proposals define the role of auditors and propose more than restrict provisions for audit houses. It aim at change the independence and jobal skepticism of auditors, making the audit industry more diversification, enforcing the regulation, promote the cross-border stipulation of audit services and relieving the burden of the small and medium-size enterprise. To enhance the independence of audit firm and prevent the concentration of the audit industry is the main purpose of the proposals.The Elliott and Jacobson (1998) suggested that audit independence is an absence of interests that create an unacceptable risk of corporal bias with respect to the reliability of financial statements. The basic goal of audit is to assure the information which stub to shareholders are reliable. Further, as for audit independence, the direct role is to provide auditing serve and contrive the follow of working capital market more efficiently. Consider ab appear preventing the concentration, should perform the audit industry more dynamic, such as decreasing the power of the Big Four audit firm (KPMG, Deloitte, Pricewaterhousecoopers and Ernst Young). In addition, the dynamic of audit market give the opportunities for small and medium-size enterprise to benefit from the internal market.In order to build up the independence of audit and contribute the audit market more dynamic, the European Commission brought up the proposal s to perfect the audit system, the mainstay elements of the proposals is mandate revolution of audit firms, mandatary tendering, non-audit services, and European supervision of the audit sector, Enabling auditors to exercise their profession across Europe, Cutting red tape for smaller auditors. This essay is aim at discussing the issue of required rotary motion of audit firm, one of the key elements to enhance the independence of audit industry. The essay provide carve up into three parts, firstly, it allow for describe the mandatory rotary motion of audit firms secondly, it giveing analyses the argument for and against this issue finally, it will come to a conclusion.Describe the mandatory rotation of audit firmIn order to strengthen the auditor independence, the European Commission is considering introducing mandatory external rotation. In the previous long time, only internal rotation is required, which means only auditors should be rotated, because they think that a uditors whitethorn make less suggestions because the routine activities of audit. However, the internal rotation can non enhance the independence of the auditors, because the audit firm and audited entity build up partnership, no matter which auditors engage in the audit procedure, they have closely relationship, the independence of auditors cannot be enhanced. Therefore, current environment has suggest that the internal rotation is not sufficient, the external rotation should be taken in account to achieve the independence of audit.The proposal required the audit firm should be rotated after at most six years (with some exception). In addition, it should be after at least four year before the same(p) audit firm can be entrusted again by the client, this is stated as the alter period. The chill period ensure the mandatory rotation can be implemented effectively, because if there is not the cooling period, the client can entrust the same audit firm after a short time, so that the c losely relationship cannot be ward offance. There is a exception that the period of rotation can be extend to nine years if joint audits are engaged. This means that if an audited entity entrust at least twain audit firm, it can extent the period of rotation to nine years, because the joint audit can make each audit firm work harder to avoid another audit firm find out their failure, this can increase the quality of the audit, so called four-eye principle. Hence, the joint audit is encouraged.According to Bocconi, which do a hatful of the effect of mandatory rotation in Italy. The investigate shows that 69 % of managers of listed companies approve of rotation. 14 % consider it negatively. The passel presents a positive result, because they consider that in previous years, auditors focus on routine activities rather than making improvement. The people including in the survey agree the mandatory rotation in Italy can strengthen the independence. parole of the mandatory rotationThe argument for the mandatory rotation of audit firmFirstly, the mandatory rotation of audit firm can inhibit the risk of familiarity threat. If there is not mandatory rotation, the audit firm may have closely relationship with the audited entity, which would lead to several problems. For instance, the proposal (2011) of the European commission suggests that the audit firm tend to know well about the management of the audited entity, so that they may think the audit work as a routine work, which just repeating the work annually, and they pay less attention to make an improvement and find out the mistake the audited entity made. In addition, the auditor may be less umbrageous of the audited entity, instead, they may decrease the difficulties so as to maintain the good relationship with the partner. The long period of battle will cause routine, which may affect the competence and the quality of audit, hence, the mandatory rotation is necessary for trim back the familiarity threat.S econdly, according to Hoyle (1978), short term engagement will encourage the auditors to do better. If the audit firm fails to make the improvement in their auditing period, however, the next audit firm detects the unreported information, the reputation of the previous audit firm may be affected, so that the auditor will minimize the errors for managing the reputation. Further, the mandatory rotation can avoid the mistake or unreported information continue, because the next audit firm will scrutinize the enumeration provide by the former audit form. Also, the long term engagement of the same auditor may cause the auditor trust the previous auditing procedure, so the rotation can reduce the risk of the auditor regards the engagement as the repetition of the at locomote years work. Therefore, the mandatory can improve the quality of audit.Thirdly, the rotation provide the small and medium-size entities good opportunity to enter the competition in the segment of market. Although, th e Bocconi study (2002) showed that the mandatory rotation did not provide the small and medium-size entity opportunity to compete in the audit market, they cannot compete against the titanic audit firm for the public-interest entities. However, take the mandatory tendering into account, the situation can be changed, the chances allow the small and medium-size entity to arouse in the tendering, so that the rotation and joint audit enlarge the choice of audit firm for the audited enterprise. Therefore, have with the mandatory tendering, the mandatory rotation can encourage the competition of the audit firm and provide more opportunity for small and medium-size entity to enter the audit market.Last but not least, the rotation can reduce the risk of fraud, which the audited entity collude with the audit firm. If both of the audited entity and audit firm fraud the public, when rotation implement, the fraud will be exposed by the coming reinvigorated audit firm. The scandal of Enron can give a good example of this, if the rotation enact, the deceptive accounting may be found early or the audit firm will not collude with Enron in order to prevent the impairment of the reputation. So the mandatory rotation can reduce the risk of fraud.The argument against the mandatory rotation of audit firmAccording to the Bocconi study (2002), the opinion the audit firms and managers argue is that the cost of auditing fees as well as man-hours will increase downstairs the mandatory rotation. It takes time for the incoming audit firm to read the sufficient enrolment to know the audited entitys business. If the incoming audit firm do not know the audited entity enough, the quality of audit will decrease. Further, because there are many kinds of industry, it is difficult to maintain the industry specialization and may cause wishing of choice of audited entity.According to Chi et al. (2004), they do not agree the mandatory rotation, they hold the opinion that the rotation may ha ve negative concussion on the quality of audit. They show the explanation that in the last year of audit before the rotation, the auditors may abandon their independence because they do not need to bear on about the loss of quasi rents for they will not be re-elected. These can lead to the decrease of the last periods auditing quality. Bigus and Zimmermann (2007) said that because of the rotation, the quasi rent had been decreased, which implies the rotation may not increase the independence of audit firm. Consequently, the mandatory rotation cannot increase the quality and independence of audit firm as expect.ConclusionWhen come up the new proposals, there will have different voice because of the different role they play. As for the rule of the mandatory rotation of audit firm, according to the European Commission, the Big Four hold the opposed attitude, they avow there is studies that have certify the mandatory rotation affect the quality of audit firm the mid(prenominal) Tier Firms and small and medium-size entities also do not stand by the rule, they consider the increase cost and harm to the quality of audit firm the investors had divergent opinion some of public authorities did not favor of the mandatory rotation, while others think the rule will be beneficial, one of the idea regards to the issue they came up it to allow the committee to decide whether the rotation of a firm should be needed.To sum up, the new rule of the mandatory rotation of audit firm may be beneficial, but only under certain situation. For example, the cost of fees and man-hours can be low to change audit firm the negative impact of last period of audit before rotation can be avoid. So that, the proposal can be beneficial if more detail and rules can be add in to make the mandatory rotation more perfection.