Mandatory rotation of audit firms may provide an effective safeguard against accounting scandals and corporate failures

During the past few years a number of accounting scandals have come to the lime light in the world. The Enron, WorldCom and Xerox are a few examples. The management of various corporate concerns has therefore felt the need to restructure the rules so that such scandals are avoided and a sustained growth of the organization is ensured.

Since the audit plays a very pivotal role in ensuring transparency and correctness of financial matters, a lager number of business organizations have revised their accounting and auditing rules make them more comprehensive. The aim was to prevent recurrence of financial scandals and corporate failures. Many countries have suggested a mandatory rotation of audit firms after a certain period of time to ensure accuracy in auditing.

The system of mandatory rotation of audit firms has come under criticism from various quarters as well. Those who are proponents of rotation hold the following views:

1) If certain auditors are kept engaged for a prolonged period of time a certain level of close association develops between the auditors and the business firm. This will prevent an impartial and critical audit that may lead to over looking serious loopholes and irregularities.

2) When a new audit firm is hired it will work with enhanced efficiency to prove that they are better than their outgoing sister audit firm. In that case a larger number of audit observations are likely to be highlighted.

3) If the rotation of audit firms is made mandatory it will help I breaking the monopoly of big audit firms and small and medium-sized firms will also get the chance to work and prove their skills.

Those who are against the rotation policy and want to maintain he status quo come up with following arguments:

1) Additional startup costs that effect both the audit firm and the client

2) The new audit firm may take time to get familiar with the client, hence may miss important observations during initial period.

3) If the audit firm comes to know that they are going to be changed, they may lose interest

In order to safeguard the corporate sector and the investors against such corporate failure, countries like Australia, India, Greece and Italy have switched over to the mandatory rotation of auditors. A large number of countries are still following the system of periodic rotation. Main reason for this is the lack of interest by the corporate firms and also a strong resistance offered by the auditor’s communities. The coming time will tell whether the corporate sector should go for the mandatory rotation system or continue with the present system.