The Impact of the Auditor Rotation on the Audit Quality: A Field Study from Egypt
The German University in Cairo
August 7, 2010
The audit quality is a very debatable topic in the area of auditing. Actually it is a very subjective notion, which can neither be quantified nor accurately measured but only proxies are used to help in the assessment of the existence of such a notion. The absence of the audit quality means an audit failure as it reflects that the auditor either failed to detect and report the material misstatements or failed to comply with the Generally Accepted Auditing Standards (GAAS). Audit failures result mainly from the lack of independence problem which is a main thought to be a consequence of the extended auditor client relationship. To overcome such unfavorable consequences of the extended auditor client relationship, the mandatory auditor rotation is recommended to the Egyptian auditing and legal frame work as a solution for the lack of the independence problem.
The results of the field study carried out in the framework of this research, figures out that the auditors in Egypt truly understand the meaning of the audit quality and agree that the long auditor client relationship promotes the audit quality through increasing the auditor's experience with the client's business and financial reporting systems. However they agreed that there is a lack of independence problem in Egypt and that the main reason behind such lack of independence is that most of the companies are closely held where some of the owners represent the management of the company, such an absence of a third party, would indirectly force the auditor to become an advocate for the client, thus lose the objectivity and un-biasness in his/her judgment. Another important reason was the non-existence of a code of ethics in Egypt that would help the auditors in identifying the causes and the conditions that would impair their independence and put regulations on how to avoid it. Also the results indicate that the mostly accepted solution by the auditors to overcome the lack of independence problem is the mandatory auditor rotation.
The research suggests that suitable form of mandatory rotation that should be applied in Egypt is the mandatory firm rotation instead of the mandatory partner rotation. The reason is that it was found that many reputable and qualified audit firms other than the BIG FOUR exist in Egypt and that the audit firms in Egypt assign auditors to client companies based on their degree of specialization in the client's business industry an issue that would sustain the independence and promote the audit quality at the same time.
Number of Pages in PDF File: 27
Keywords: Auditor Rotion, Audit Quality, Audit Report, Audit Report Lag, Auditor Reputation, Auditor Experience, Earnings Managment, Audit feesworking papers series
Date posted: September 14, 2010 ; Last revised: September 22, 2010
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