In light of a number of high-profile corporate failures during the first half of 2001, a number of studies have been performed to address the impact of mandatory rotation of audit firms to ensure the appropriate level of ‘independence’ of auditors. Majority of studies conclude that the detrimental effects of firm rotation on the quality of the audit work by far outweigh its positive effects as a safeguard against various independence and quality threats.
Frequent changes of audit firms, whether resulting from mandatory rotation or otherwise, introduce threats to independence and operational difficulties that make audit failure more likely. Many studies have involved practitioners’ opinions on this issue, which have been based on their experiences and is therefore necessarily more subjective than from impartial, third party studies. There are differing opinions, as some audit firms wish to preserve the client bases, while others welcome more market volatility. Mandatory firm rotation has been concluded as an unnecessary step at present, whose main impact will be the auditing profession and its ability to attract talent for the future. At a time when the restoration of public trust in financial reporting is a key priority, such changes should be avoided.
Following the failure of HIH Insurance and other listed Australian companies during the first half of 2001, concerns were raised about the adequacy of Australian rules governing audit independence. Auditor independence is fundamental to the credibility and reliability of auditors’ reports. Independence is defined to require “… a freedom from bias, personal interest, prior commitment to an interest, or susceptibility to undue influence of pressure, any of which could lead to a belief that the audit opinion was determined other than by reference to the facts of the audit alone.”
With the increasing globalistion of capital markets and the fact that that section 324 of the Corporations Act in relation to the independence of auditors had not changed in any substantiative form for at least 40 years, it was recognised that this area required attention and revision. The existing regulation prior 2004 of the auditing profession was predominantly the responsibility of the professional accounting bodies. Whereby the legislative requirements were “minimal” and “piecemeal.”
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...port on the relationship between companies, financial markets and the safeguard of savings’, Assirevi, February 2004
Johnstone, E., ‘CLERP 9’, Law Institute Journal, December 2003
Joint Committee of Public Accounts and Audit, ‘Review of Independent auditing by registered company auditors’, Canberra, 2002.
‘Mandatory Rotation of Company Auditors: A Critical Examination’, Benito Arrunada, Universitat Pompeu Fabra, Barcelona, Spain, 1997
‘Mandatory Rotation of Audit firms – Review of current requirements, research and publications, the Institute of Chartered Accountants in England and Wales’, ICAEW, July 2002.
Professor Ian Ramsay, ‘Independence of Australian Company Auditors, Review of the Current Australian Requirements and Proposals for Reform – Report to the Minister for Financial Services and Regulation’, Canberra, October 2001.
‘Public accounting firms – required study on the potential effects of mandatory audit firm rotation; report to the Senate Committee Banking, Housing and Urban Affairs and the House Committee on Financial Services’, US General Accounting Office, Washington, 2003.
‘The Failure of HIH Insurance’, The HIH Royal Commission, Vol 1, Canberra, April 2003
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