Should Companies Be Allowed to Hire Individuals Who Formerly Served as Their Independent Auditors? Discuss the Pros and Cons of Such a Policy.

We believe that companies should be able to hire former auditors as long as certain measures are taken to ensure that the quality of future audits will not be adversely influenced. The first measure that needs to be taken is a cooling-off period for the individuals being hired. The SEC requires cooling-off periods for auditors hired by public companies if two condition are met. First, the auditor is an individual who has provided more than ten hours of audit, review, or attest services to the hiring company. Second, the position that the individual is being hired for is one where the individual would have influence over the contents or reporting of financial statements. If these conditions exist, then the individual must wait to assume their position with the company until one year after the filing date of the annual reports of which the individual participated in the audit of. In addition to a mandatory cooling-off period, a company should not offer a position to an auditor until after an audit engagement is completed so that it does not affect the auditor's performance on the current audit. Hiring companies should also inform the partner in charge of the audit of their intention to eventually offer the individual a job so that the partner can plan next year's audit accordingly.

If all of these measures are taken, then we believe that the pros of hiring former auditors outweigh the cons. The first pro is that the auditor already has a good understanding of the company's accounting system and financial information from working on audits of the company. The second pro is that auditors' extensive knowledge of how their former firms perform audits might cause audits to go more efficiently because they know what to expect in certain situations. Auditors' knowledge of their former firms' practices can also be a con though if it is used improperly to circumvent audit testing. Audit firms must recognize that auditors who previously worked for them know how their audits...