Phar-Mor Inc.

Phar-Mor, Inc.

Jesse M. Parks

Rasmussen College

Author’s Note

This research is being submitted on 08/08/2012 for Tiffany Krogman’s ACG3085 course at Rasmussen College by Jesse M. Parks.

Phar-Mor, Inc.

A company might want to hire a member of their external auditing team for a few different reasons. The chief reason probably being that they have experience with how the firm operates and completely understand the financial statements. In addition, the company will be able to decrease costs on training due to the individuals standing knowledge. Moreover, the individual will have already established relationships within the organization therefore increasing the company’s ability to trust the auditor’s ethical standards.

Hiring members of a former audit committee could possibly affect the independence of the existing external auditors which is crucial to the provision of an objective opinion on accuracy of the financial statements. It is possible for the existing external auditors to have the inability to maintain an unbiased attitude towards the financial statements due to their relationship with the newly hired internal auditor. Additionally, if the external auditors had ambitions to become part of the organization themselves due to the hiring of their former co-workers, this may affect their judgment regarding discrepancies (Arens, Elder, & Beasley, 2010).

The Sarbanes-Oxley Act of 2002, and related rulings, significantly affected a company’s ability to hire members of its external audit team. According to Section 203, lead audit partners are obligated to rotate after a five-year period. This provision was created to limit the relationship between the partner and the officers of a client, in order to decrease fraud. In addition, Section 208-2 states that a member of the audit engagement team must take a one year cooling off period between the end of the previous audit and beginning work at an audit client in a key position. This is to maintain the...