Auditor Rotation and Independence

Just this week (July 9,2013) the House of Representatives passed a bill that would prohibit the independent audit oversight committee from making auditor rotation for public companies mandatory. The justification for this move is that audit costs would increase. The opposing argument in favor of audit rotation is that you do not want auditors to get too cozy with the management of firms they audit and enforced rotation might prohibit. Also a periodic “fresh pair of eyes” may be helpful in detecting irregularities or improper accounting treatments, I believe that any increase in audit costs is offset by the benefits of rotation.

In addition the public oversight committee should prohibit audit firms from performing any non audit tax or advisory services. Finally it may even be a good idea for an independent board to assign auditors to firms rather than the current practice of having the companies hire their auditors. In this way auditors would have no incentive to subjugate their judgment to company management. Such is the current political and economic power of the big audit firms that these common sense proposals have little chance of being implemented. Only a rash of audit failures on the scale of the Enron debacle is likely to end this state of affairs.

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Financial Accounting by Mike Elmaleh

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