Recent collapses of gigantic companies like Enron, Worldcom, HIH, etc., have led to serious and meticulous studies of auditors' independence and objectivity of auditing their clients. The public, or more specifically the investors' confidence in auditors has impaired materially. The role of corporate watchdogs must be redefined since there is a serious sabotage towards their profession and credibility. In spite of comprehensive accounting and auditing practices and standards, more and more corporate collapses are incurring, highlighting the fact that these practices and standards have become more fragile and vulnerable to manipulations and misuse. At this point of time, audit partner rotation or audit firm rotation has been regarded as another way of assuring auditors' independence and objectivity. This paper focuses on the pros and cons of rotating audit firms or audit partners for an audit client after a specific period of time.
Audit partner rotation means retaining the audit firm for auditing the same client, but replacing normally a few senior audit staff with new senior audit staff for the next few audit engagements. As for audit firm rotation, the currently engaged audit firm is replaced (upon its termination of audit engagement) with a new audit firm for the next few audit engagements (years). However, there is no specific standard stipulated with regard to, when such rotation should take place. There are recommendations to have rotation every three, five or seven years.
The early 21st century saw a number of major corporate failures worldwide. With the collapses of Enron and World.Com in US and One.Tel, HIH and Harris Scarfe in Australia, quality of audited financial reports has been in question. In September 2002, the Australian government released the Corporate Law Economic Reform Program Proposals 9 (CLERP 9). It proposes, amongst other things, mandatory audit partner rotation in order to improve the quality of audited financial reports. This proposal was taken from Professor Ian Ramsay's report, "Independence of Australian Company Auditors: Review of Current Australian Requirements and Proposals for Reform", which was presented in October 2001. Professor Ramsay (2001), in his report, argued that such a move could enhance the auditor independence after considering Chapter 7 of the Audit Review Working Party's report, "Review of Requirements for the Registration and Regulation of Company Auditors", that was released in July 1997. Therefore, the arguments for the proposal to mandate audit partner rotation could be traced back to the Working Party's report. |
