From the American Institute of CPAs (AICPA)
2. Increased start-up costs. Changing auditors results in more frequent start-up costs, both for the auditor and the organization.
3. Increased difficulties in timely reporting. Timely reporting becomes more difficult because audit firms need to meet a very short “learning curve” to perform a rigorous audit.
4. Loss of “institutional knowledge.” Over successive audits, firms increase institutional knowledge, including, for example, their knowledge of the client’s accounting and internal control systems. This benefit would be greatly diminished by mandatory rotation.
5. Reduced incentives to improve efficiency and audit quality. Mandatory rotations fail to fully reward firms that achieve greater efficiency and audit quality because rotation reduces potential demand. Auditors providing less efficient and quality services are likely to survive because there will constantly be organizations looking for new auditors. Conversely, quality firms no longer have the incentive to increase market share and profits since they lose clients after the maximum allowed duration.
The importance of audits of state and local government entities and nonprofit organizations is important to the success of our communities. It is always in our best interest to review new initiatives to increase effectiveness and quality of audits for these organizations, but mandatory firm rotation may lead to unintended and undesirable consequences.
1. Increase in audit failures. Studies found that audit failures are three times more likely in the first two years of an audit (Public Oversight Board, Commission on Auditor’s Responsibilities, and the National Commission on Fraudulent Financial Reporting). In addition, the Committee of Sponsoring Organizations of the Treadway Commission found that 26% of the organizations that released fraudulent financial statements changed auditors between the last clean financial statements and the last fraudulent financial statements, whereas only 12% of no-fraud organizations switched auditors during that time.2. Increased start-up costs. Changing auditors results in more frequent start-up costs, both for the auditor and the organization.
3. Increased difficulties in timely reporting. Timely reporting becomes more difficult because audit firms need to meet a very short “learning curve” to perform a rigorous audit.
4. Loss of “institutional knowledge.” Over successive audits, firms increase institutional knowledge, including, for example, their knowledge of the client’s accounting and internal control systems. This benefit would be greatly diminished by mandatory rotation.
5. Reduced incentives to improve efficiency and audit quality. Mandatory rotations fail to fully reward firms that achieve greater efficiency and audit quality because rotation reduces potential demand. Auditors providing less efficient and quality services are likely to survive because there will constantly be organizations looking for new auditors. Conversely, quality firms no longer have the incentive to increase market share and profits since they lose clients after the maximum allowed duration.
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