Explain the test restricting former auditors and accountants who have played a s

Question

Explain the test restricting former auditors and accountants who have played a significant role in a company's audit from joining that company's board? Comment on the debates surrounding the policy behind the exclusion and the merits of these rules. Refer to appropriate statutory provisions as required and empirical evidence available. OR 2. Discuss the present law of mandatory rotation of audit firms and comment with evidence as to whether it is working well or not. In your discussion include a brief reference to the present statutory requirements. Refer to any empirical data and appropriately reference it. OR 3. "Australia is one of the few jurisdictions where auditing standards have the force of law (by way of an Act of Parliament, the Corporations Act 2001 (Cth))." Discuss and explain with reference to at least 1 other jurisdiction (country) that has a different approach.

Explanation / Answer

2. The present law pertaining to the mandatory rotation of audit firms was passed with an intention to improve the audit quality and the standard of corporate auditing.

The law is not working well as the costs associated with the mandatory rotation of audit firms far outweigh the benefits that accrue due to this provision. First of all this provision leads to increase in audit cost and price through the destruction of specific assets and through the distortion of competition. First of all the mandatory rotation of audit firms leads to a significant increase in the total cost of auditing. Audit firms end up incurring higher costs and this increases the prices of their services. This, in turn, increases the costs being incurred by companies that are being audited.

Rotation of audit leads to a direct increase in costs. This is because rotation causes an increase in both explicit as well as implicit costs which are incurred more frequently and at an earlier point of time. Examples of explicit costs are principal start up costs that has to be borne by the auditor while familiarizing itself with the client’s accounting procedure. Clients also end up incurring explicit costs. In terms of implicit costs there can be costs due to suboptimal contracting and having fewer possibilities for contractual safeguards.

Secondly the law makes the market less competitive in the long run. The audit firms have less incentive to compete in the market. Switching costs are also involved and all these factors dilute the impact and the desirable outcome of the law.

Reference: Irvine, J. (July 2013). US blocks mandatory auditor rotation. Retrieved from https://economia.icaew.com/news/july2013/us-blocks-mandatory-auditor-rotation

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