Background and Research Problem
Discuss about the Auditor and Audit Committee Report Changes.
The introduction of this new concept is focused on the fact that the auditor’s rotation conducted by PCAOB is focused on the fact that it can facilitate in improving the audit quality. This will result in better structure along with maintaining high level of auditor independence. Previous researches indicated the process of rotation that results to improvement of quality (Kachelmeier and Van Landuyt 2017). These reasechers has a viewpoint regarding the fact that compulsory auditor rotation can result in disturbance within audit along with enhancing the cost while certain other research signifies that the concept is direct associated with the advantage of the audit. The variations within the policy along with the auditor rotation introduction is directly linked with the auditor advantage as it facilitates an increased auditor independence level. Auditors independence is vital because of the reason that it is directly linked with the success of the organization. It is vital for the auditor to offer a true and fair view and this can only take place at the time auditor is based in such consideration (Lapsley 2012). Certain variations are made so that the auditor is not aware of the accounts set or else the overall concept of true and fair view will go in vain. It is also vital to consider that such familiarity can result in misstatement and this also impact the authentic focus of the financial statements.
In this research, the organizations are listed within the Australian Stock Exchange are focused on in this study. The top 50 public listed organizations are listed within the country’s stock exchange is chosen where the concept related to rotation of auditors can be observed (Lewis 2015). These organizations are deemed to be regulated through Securities and Exchange Commission along with the Australian financial accounting board. There are several changes that took place and considering the same, the major objective of this research is to make sure that the auditor independence concept is considered seriously (Livne 2015). The auditors’ rotation is deemed to be vital for the reason that is an innovative idea that cab facilitate in promoting an independent view. For this reason, the company is not being not that particular and a huge number of organizations are chosen so that the research is complete and a better observation can be ensured.
The research problem that is identified in evaluating the auditors’ rotation along with its effect on their performance is reading proper identification of the current scenario of the auditors within Australia (Lobo et al. 2017). Moreover, another research problem is relegating the concept of introduced auditor’s interdependence along with advantages which might be obtained by means of auditor’s independence Moreover, it has also been observed that the Australian organizations are deemed to face certain shortfalls that is evidenced within the absence of auditor’s independence. Increased concern is also present regarding the ways in which the companies can make sure of compulsory auditor’s rotation along with recognising the role of audit committee in consideration to auditor rotation (Luippold, Kida, Piercey and Smith, 2015). Considering such identified research problem, the current research will analyse whether the audit function will require an overhaul and necessary recommendations will be provided on enhancing auditor’s performance through auditor’s rotation.
Research Objectives
The first section of the report will introduce the topic through explaining the background, will introduce the organization, research problem and the structure of the report. The second section of the paper will elaborate the research problem and objectives. The third section of the research will explain the associated literature and previous reasechers on auditor’s rotation along with its impact on auditors’ performance. The fourth section of this research proposal will explain the related methodology that will be employed in this study in order to attain constructive findings. This section will also explain justification of research type, research approach, data type employed, data collection, sampling and sample size, data analysis along with the related ethical consideration.
The research problem that is identified in evaluating the auditors’ rotation along with its effect on their performance is reading proper identification of the current scenario of the auditors within Australia (Luippold, Kida, Piercey and Smith, 2015). Moreover, another research problem is relegating the concept of introduced auditor’s interdependence along with advantages which might be obtained by means of auditor’s independence Moreover, it has also been observed that the Australian organizations are deemed to face certain shortfalls that is evidenced within the absence of auditor’s independence. Increased concern is also present regarding the ways in which the companies can make sure of compulsory auditors’ rotation along with recognising the role of audit committee in consideration to auditor rotation (Luippold, Kida, Piercey and Smith, 2015). Considering such identified research problem, the current research will analyse whether the audit function will require an overhaul and necessary recommendations will be provided on enhancing auditors’ performance through auditors’ rotation. The research objectives those are set in this research are explained under:
To analyse the ways in which the auditors’ performance and stress on the on the concept of auditors’ rotation. This is for the reason that it is directly related with independence of auditor. Extended tenure along with repeated work results in maintaining a link with the consumers that impacts the independent view. For this reason, auditors’ rotation services as the requirement of the hour which will enable better decision making that will develop an effective aspect.
To analyse the ways in which auditors’ independence is advantageous for the company that will further make sure that whether the rotation processes is of great advantage for the auditors working.
According to Abbott, Brown and Higgs (2015) in case the selected auditor organization has some auditor staff that do not have enough experience along with basic audit knowledge along with calculations then it turns out to be difficult for the business of the public organizations. It has also been observed that the company’s auditor working for the organization over past few years develops a type of bonding that turns out to be complex within the auditing process in its specific way. Agrawal and Cooper (2017) gathered that it is obvious that because of the likely auditors’ rotation, the client auditor gets interrupted and the organization deals with the same. After removal of the previous auditing company a new auditing organization comes int existence and the developing of the interaction between these companies is deemed to take a lot of time. Bae, Choi, Dhaliwal and Lamoreaux (2016) stated that this serves as the cause for which the management of the organization can get impacted and miscommunication might arise that can hamper the major functions of these two bodies that can further impact the auditor’s performance through auditors’ rotation.
Related Literature
In contrast, Bauer (2014) indicated that GOA has set a time for over two years for which an auditing organization can audit a particular organization in order to develop effective financial statements. It is also gathered that necessary audit rotation was developed with an objective that can increase the audit quality along with auditors’ independence. The concept of auditors’ rotation can be examined from the perception of the superior quality governance as in case the auditor is not that familiar with the consumers then it might result in the better prospect. Billig and Waterman (2014) stated that the decisions taken by the management will be independent in nature along with helping the companies as a whole. It is deemed to be important to evaluate the relationship between the auditor independence and audit quality at the time of analysing the reasechers theory regarding the impacts of the necessary audit rotation. According to Bowlin, Hobson and Piercey (2015) the quality that is provided by the provided audit services relied on the below mentioned two probabilities:
- The auditor is deemed to report such loopholes
- The working auditor is observed to smart enough in order to recognise the limitations within the accounting systems of the Australian organization
Boyle, DeZoort and Hermanson (2015) evidenced that the need for simply rotating personnel has been questioned several reasechers as it is enough for safeguarding the familiarity threat that is dealt by the auditors. Because of several unexpected business failure within the Australian accounting industry, audit rotation is suggested by the companies for decreasing the threat level on auditor’s face with necessary introduction of the audit company rotation. Cassell, Myers, Myers and Seidel (2016) added that introduction of necessary audit rotation serves as a technique of improving independence that decreases chances of audit failure along with enhancing the audit quality. These reasechers also stated that the regulators need auditors’ rotation due to increased concern that long-time duration might decrease auditor’s independence and impact the capability to prepare creative as well as innovative audit programmes because of over familiarity. Choy (2014) indicated that because of long term relationship an auditor can have with the consumer, it might have impact on decreasing the innovative point of view that is necessary for an auditor in the fist few years of his involvement. The need of the audit rotation is can also result in increased market competition relied on service quality that can result in enhanced auditor performance in several competent organizations.
There are certain negative implications of audit rotation, which are enumerated briefly as follows:
- In the words of Reid et al. (2016), if the auditor is observed to work for a longer timeframe, it could be considered as independent; however, the auditor is argued to have a visionary and clear thought in order to conduct the accounting statements. Both the situations are possible at the time the auditor works independently and there is presence of biased view. In order to ensure this effort, the auditor needs to have a timeframe at the office and the rotation concept could be applied for this situation. As a result, adequate reliance needs to be provided on the situation. As soon as the rotational concept comes into play, suitable decisions could be undertaken.
- The fresh look benefit signifies the situation at the time the new audit firm signs the organisation in replacement. According to Smith (2015), it is quite obvious when an audit firm is working with the business organisation for a longer timeframe, various figures and related facts might be ignored, which were not the case initially. Moreover, they might not cross-check the financial results provided by overlooking or omitting those areas of accounting having the potential of creating material misstatements and loopholes, which could be lethal. On the other hand, the appointment of a new audit firm would scrutinise all the calculations and hence, any significant threats identified could be minimised or eradicated. As soon as the loopholes are identified, better service and problem elimination could be ensured at the earliest. Hence, more research needs to be conducted on this aspect in future.
- As commented by Su et al. (2016), if an audit firm is engaged with a particular organisation for greater time span, it is obvious that the financials on the organisation would depend on the auditor. This could not be considered as a feasible move and hence, adopting the audit rotation scheme would help in eliminating this issue. It has been observed that the auditors could make quasi-rents from their client firms as a result of the relationship developed between them. For earning the quasi-rents, the auditor does not take the business policies seriously so that it could conduct the future audit work of the organisation as well. This is a significant defect depicted in the article. The intention is to ensure the survival of the audit firm in the market while maintaining competitive edge. Therefore, when an audit firm leaves the organisation due to appointment of a new auditor, the former audit firm before leaving would like to ensure that the financial statements of the client firm are reported lightly coupled with greater quality. The quality aspect is significant, as it is related to the goodwill of the auditing firm as well. This step clearly highlights on reputation; however, this is a suitable move from the business perspective in relation to the regulatory viewpoint.
- It is observed that the market has minimised competition due to the fact that most of the organisations need to have their financial statements audited by the big four audit firms (Svanberg and Öhman 2015). As a result, the market becomes saturated for the other audit firms and hence, there is absence of competition in the market. The nig four audit firms are primarily the ones called for conducting the audit work by neglecting the other medium-sized and small-sized audit firms (Taylor, Bogdan and DeVault 2015). Hence, choosing the new auditors timely other than the big four would help in increasing the overall market competition with respect to the developed rules. Thus, all the business organisations are needed to rotate their audit partners in order to accomplish effective outcomes with pliability and ease.
The initial case where the auditor would be able to identify the deficiencies rests on the skill sets. These skill sets include application of suitable plans, technical knowhow and other skills needed in the audit. The emphasis could be made strongly at the time of auditor rotation, since it would lay additional stress on providing quality services (Uday and Geerts 2017). In addition, in the absence of familiarity, better service range could be provided. In case of evaluation of the second point, it could be observed that the reporting of deficiency relies on the association between the client and the audit firm. This would enable in viewing the degree of independence of the auditor offered from the organisation. Based on the above-depicted explanations, it is inherent that the independence of the auditor and the quality of audit has strong relationship with each other (Vaioleti 2016). For ensuring the effectiveness of the rotation concept, it is necessary to take into consideration auditor independence as well as audit quality. This would result in the development of seamless services and positive brand image in the market.
Methodology
Audit rotation is immensely valuable for ensuring the audit quality. There are certain advantages that could be derived through mandatory audit rotation. When the audit firms are changed on timely manner, it is obvious that the audit quality would be improved and thus, auditor independence and audit quality rely on two factors. These factors are independence in fact and independence in appearance.
According to Geoffrey, Joleen Kelli and David (2016) in order to improve the audit quality and for making sure of auditor’s objectivity and interdependence, there are increased number of regulators such as the FRC tat gave emergence to APB within an attempt to deal; with the likely threats dealt by the auditors in Australian organizations. Constant updating of the Australian ethical standards regarding auditing has been ensured as they were first introduced as the auditors’ guidelines in the year 2004. Griffith, Hammersley, Kadous and Young (2015) stated that in an attempt to deal with the auditor’s independence concerns all over the world constant updating of the auditing ethical standards functions are carried out. These reasechers also stated that auditor’s rotation is conducted in order to decrease the likelihood that the auditors will decrease the independence pressure along with maintaining better auditing standard. Humphries (2017) indicated that within the current standards, the accounting organizations auditing publicly listed organizations require peer reviews on their work. Regular audit arrangements facilitate auditors to focus on judgements related with the previous auditors in making sure whether a necessary management anticipation is in compliance with GAAP. Necessary audit company rotation regularly forces the auditors to monitor the monuments representation to remain complied with GAAP and might persuade the management to implement highly conservative accounting practices. Johed and Catasús (2018) revealed that mandatory audit rotation can enhance auditor’s public perception on their independence as it offers a distancing among the audit company and the audit client employees.
Descriptive type of research will be used in this study as it can support in analysing the impact of auditor’s rotation process on their performance. This research type will elucidate that through ensuring auditors rotation can have an influence on their performance within the organization (Mackey and Gass 2015). This research type is deemed to have increased transparency in ensuring superior performance of auditors in the Australian public listed organizations. This method is employed within this research for the cause that it can support in explaining aspects associate with the process or population chosen for research. Descriptive type of study is selected considering that it can explain situation in the organizations after carrying out auditors’ rotation process (Matthew 2015). Considering this scenario, survey method will be chosen for this is one type of descriptive research type. This acts as a scientific technique which includes observing as well as elaborating the accountants and the auditor’s behaviours in carrying out auditor’s rotation within the company without affecting the research relevancy in any manner.
Advantages and Disadvantages of Auditor Rotation
Mixed approach for research has been chosen in evaluating the impact of auditor’s rotation process in improving performance of Australian organizations auditors. Research approach including both qualitative and quantitative are employed within the research. Qualitative approach of research will be used as it can support in employing semi-structured as well as unstructured processes (Panneerselvam 2014). This approach can also be helpful in revealing trends within viewpoints and opinions on providing detailed view in the identified research problem. Approach of quantitative research employed will indicate that analysis of formation will be conducted through use of gathered data in account for research findings. This can also provide implications in process vital information on subject of human inclination for which it needs larger sample size for data analysis. In account for the same, employees working within Australian companies are chosen for evaluating the efficiency of auditor’s rotation along with ensuring impact on auditor’s performance.
Primary along with secondary data will be gathered in order to evaluate the impact of auditor’s rotation on their performance within Australian organizations. In this study primary data will be collected by means of questionnaire method of survey (Kachelmeier and Van Landuyt 2017). Instrument of questionnaire research is employed in order to collect relevant data considering the reason that it is cost effective and also supports in obtaining speedy responses for the reason that this is segmented to all the respondents at a particular time. Moreover, the secondary data will also be collected by means of employing previous research papers, articles, journals, books s well as authentic websites that will contain important information regarding use of auditor’s rotation in enhancing auditor’s performance within the company (Kachelmeier and Van Landuyt 2017). In addition, within this current study, data concerned with several practices of auditor’s rotation and its impact on performance measures of employees will be extracted from the literature review. Moreover, the collected secondary data is likely to be associated with the research results and objects set for the study.
Interview method is selected in this study in the process of quantitative data collection taking place in the research. The interview will be conducted within the managers of the 50 public listed companies in Australia (Lobo et al. 2017). Within the process of interview important questions concerning the auditor’s rotation and its impact on the performance of the auditors will be asked. Additionally, they will also be asked important questions concerning the impact of auditor’s rotation use on their performance.
Quantitative data collection process will be conducted through the process of survey within which questionnaires will be distributed to all the 50 Australian public listed organizations. This questionnaire is deemed to contain both the close as well as open ended questionnaire which will include questions focused on the research aspects relied on implementation of auditor’s rotation process within Australia organizations (Lobo et al. 2017). Email medium will be employed by the researcher in order to distribute the questionnaires to the selected organizations and moreover they will also be offered a specific time of seven days for reverting on the questions asked to them through such survey.
Sampling turns out to be an effective method of selected some target respondents for reassert from a large population of the participants within the survey. The technique of sampling used within the research can support the reasechers to most suitable primary source of data in order to collect important data that is linked with the defined objectives and aim of the study (Luippold, Kida, Piercey and Smith, 2015). Simple random sampling technique will be used in the study of auditor’s rotation and its impact on their performance improvement based in which survey will be carried out. This sampling technique is employed within the study because there is equal opportunity for every survey participants from a given population to take part within the investigation. This is one of the causes for which gathering of quantitative data from large sample population can take place through simple random sampling. It is deemed that analysis of quantitative data requires bigger sample size in obtaining and analysing responses collected from respondents taking part in the survey (Luippold, Kida, Piercey and Smith, 2015). Sample size of 50 public listed Australian companies will be selected focused on which implementing of auditors’ rotation within these companies will be analysed along with reviewing their advantages and disadvantages on auditors’ performance.
The qualitative data will be collected in the current study and this will be analysed by means of employing thematic analysis. It can support in evaluating certain found out themes or patterns that can facilitate in analysing data gathered from it. Effective analysis of qualitative information can be ensured for systematic gathering of knowledge based on an organization, individual, situation or organizational culture viewpoint (Mackey and Gass 2015).
Collecting quantitative data will take place by means of questionnaire survey and this will be analysed by means of using certain reliable statistical tools. Considering this, it is made sure that the researcher chooses its statistical data analysis tool which can support in obtaining reliable and useful research results. Additionally, it can also help the reasechers in sustaining transparency through suitable interpretation of gathered data. Analysis of the quantitative data will be carried out through presenting the research results in the form of charts, graphs and tables. This can make representation of data simpler along with ensuring better data analysis (Mackey and Gass 2015). Application of MS excel will be employed for conducting regression as well as correlation analysis which can support in transforming viewpoint presented by the respondents to a percentage that can estimate insight trends on the research subject.
For accomplishing study on auditor’s rotation practice and its impact on their performance necessary ethical code of conduct has been followed by the researcher. The researcher will uncertain that ethical consideration is maintained in analysing auditor’s rotation impact in public listed Australian organizations (Lapsley 2012). All the important process followed within this study as well as data collection process has been carried out in compliance with ethical research standards. It was also made sure by the researcher that gathering of secondary data took place from reliable websites containing currently updated information that will also uncertain reassert reliability. In abiding by the ethical norms, the researcher did not conduct questionnaire survey that contains delicate questions and in addition mutual permission has been based from the survey participants in order to take their consent to take part within the survey (Lapsley 2012). Additionally, respondents’ personal information collected in the survey has been kept confidential de to security matters. In this no use of research statements have been encouraged from the reasechers part within the current study.
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