Study Says Auditor Rotation Inhibits Skepticism

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Terry Sheridan
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A new study is adding fuel to the auditor rotation debate, stating that rotation actually inhibits skepticism rather than encourages it as current policies maintain.

The study entitled “The Effects of Auditor Rotation, Professional Skepticism, and Interactions with Managers on Audit Quality,” appeared in the in the July/August issue of the American Accounting Association's Accounting Review.

“Rotating auditors, aware that they will not be in a long-term relationship, will...likely perceive themselves to be less competent in evaluating the honesty or dishonesty of the [corporate] manager” compared to auditors who don't rotate, according to the study. Because of that, “rotating auditors would find it difficult to garner psychological support for the probability of manager dishonesty, leading them to be less likely to choose high levels of audit effort than non-rotating auditors,” the study contends.

This “diminution in accounting vigilance” isn't intentional. Instead, it's a subtle psychological effect. But it's something that everyone involved – from policymakers to professors -- should consider when evaluating the effectiveness of rotations, the study states.

Beginning in June 2016, companies in the European Union will have to rotate accounting firms – or put their audits up for bids – every 10 years.

The U.S. doesn't currently require rotation but does require that the engagement partner responsible for a client's audits rotate after five years.

The authors concede that their research is limited, and tested only some aspects of real audit settings. Mandatory rotation costs and benefits could be affected by audit firm switching costs, auditor expertise, and client complexity. Those aspects could be the subject of further study, they said.

“Given the significant costs associated with mandatory rotation, focusing auditors on a skeptical assessment frame without requiring mandatory rotation may be a less costly way for standard-setters to improve audit quality,” according to the study.

Authors of the research included assistant professor Kendall O. Bowlin at the University of Mississippi, assistant professor Jessen L. Hobson at the University of Illinois at Urbana-Champaign, and associate professor M. David Piercey at the University of Massachusetts in Amherst.

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