Mandatory Audit Firm Rotation

Maintaining Auditor Independence and Audit Quality:

Should Audit Firms be subject to mandatory rotation?

The concept of mandatory audit firm rotation is that a company’s auditors should provide services for a defined period only, after which they should be replaced by a different firm of auditors (ICAEW, 2002). For decades it has been debated as to whether compulsory audit firm rotation should be enforced so as to improve the effectiveness of audits (Blough, 1951; Seidman, 1967; SDA Bocconni School of Management, 2005). The issue of mandatory audit firm rotation is quite controversial with strong opinions on both sides (Bocconni, 2005). After the financial collapses of recent years (Enron, Worldcom, AIG), this subject has been discussed at length in congressional hearings and professional circles, with the aim of enhancing auditor independence and audit quality and understanding the effects that such a rule may have. Presently, with the exceptions audit firms in Italy, Brazil, South Korea and Singapore there are currently no requirements for rotation of accounting firms on audit engagements (Bocconni, 2005). The audit function has been described as being as being ‘critical to the success of the economic system. Auditors provide credibility to information (Schwieger, 1997). As a result, there are those who share the views of Baker Tilly that mandatory audit firm rotation is the only way to restore confidence in financial markets after some of the accounting scandals of the last decade (Baker Tilly, 2009). Conversely, PWC, Deloitte and Ernst & Young are all firmly opposed to mandatory audit firm rotation citing research conducted that has found that firm rotation does not improve audit quality because audit quality depends on a good understanding of a business and its management (Bocconni, 2005; ICAEW, 2002).

The improvement of auditor independence has been argued to be a primary reason for the introduction of mandatory rotation (ICAEW, 2002). It is believed...