Audit Partner Rotation Relating to Independence and Audit Quality

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Audit is defined as a systematic examination of the activities and status of an entity, based primarily on investigation and analysis of its systems, controls, and records'(BNET Business Dictionary). Audit partner on the other hand is explained as any partner whom is involved in the audit engagement team to perform an audit task. The person may have the responsibility in making a decision which relates to an area which he or she might have covered.

On the issue relating to auditor rotation, there are some countries such as Israel, Italy and Spain which has already adopted the rotation(Anthony H. CatanachJr., Paul L. Walker. 1999). However, there are much more countries in the world that are still debating on the issues of adopting this policy. The US has literally done some research and studies on the adoption of auditor rotation and from what they have discovered, they are still against the rotation.

Independence and audit quality

Robert K. Elliott and Peter D. Jacobson in 'Audit Independence Concept' assert that 'there has never been an official definition of the term independence and that there has never been a conceptual framework for audit independence'(Carmichael Douglas R.,1999). However, since the existence of Generally Accepted Auditing Standards (GAAS) in 1947, the word "independence" is defined as an auditor must have a good attitude and approach of being 'unbiased, fair and impartial' as well as have integrity.

Being competent is said to have the ability to perform the audit successfully with appropriate knowledge in detecting breach, fraud and error. For auditor to be independent is, whenever he found any of the misstatements, he has the ability to report it without any doubt. Furthermore, being less connected with the client is also said to be independent.

The quality of audit comprises of two elements which are independence and competence. As mentioned above, having a good auditor's characteristic will certainly influenced a good quality production of the audit report. Therefore, it will then influenced the external users in decision making process.

Auditor Rotation

Audit engagement partner rotation only applies to the lead partner and audit review partner or concurring reviewer. The rotation is required to be done every five consecutive fiscal years and it is supported by the Ethics Committee on the updated Section 8 in November 2001. In addition, Section 203 in Sarbanes-Oxley Act dated 28 January 2003 state that it is an obligatory requirement for a firm to apply a five-year 'timeout' period after each rotation. The new rules also required for other audit partner to be rotated after seven years performing audit to a particular client's company with a two-year 'timeout' period. According to Evan and Sutherland, this rotation policy effectively started on 2nd April 2004.

Survey conducted by ICAEW shows that 78.5% of respondent wanted a longer audit partner period before rotation. Just over half expressed interest in a seven-year rotation period, while 24% opted to retain the five-year period but be able to extend it to seven if required. 21.5% said they would maintain the five-year period (Accountancy Age, 2009).

Auditor rotation only applies to lead auditor. Therefore, it would not interfere the rest of the audit team. It will help the new lead partner in familiarizing himself to the client's business and thus, lead the audit team in searching or detecting any other new suspicious matter. This is due to the condition of the new partner in having 'fresh eyes' to the client's business.

Firm is likely to propose a change in audit partner to a client if it helps the firm to manage and develop key staf auditor. For instance, new auditor will be given a small task to deal with simple client. As their experience grew, they will be moved to a larger corporation to deal with more complex accounting issues. This will also help to familiarize the auditor on his responsibility in becoming independent. Therefore, it will increase the quality of audit work as well as increase his or her confidence in performing audit task.

Issues brought up

Although the opponents acknowledge the potential benefits from the adoption of the rotation, they argued on the cost that might be incur in the future due to the adoption, which might have a possibility to be more than the benefits earned. It is proven that there will be slight increase in cost which mainly focus on giving information to new partner. This is assigned as a start-up cost. The start-up cost is an initial cost which will be incurred while starting up an audit. This should be thoroughly discussed before any decision being made in rotating an auditor due to massive amount involved.

Despite the high cost, based on the collapsed of Enron and WorldCom, it has shown that "too close" relationship between the auditor and client will jeopardize the independence and the quality of work performed by the auditor (Sandra K. Gates et al., 2007). Auditor himself has the possibility to become bias when stating his opinion on the condition of the client. According to Herrick and Barrionuevo, 2002 (Arel et al., 2005), Andersen's auditors and consultants were given a space in Enron's office and have access to all the benefits obtained by Enron's employees. Due to this, other people thought they were Enron's employees.

Audit partner rotation is also argued that it will lead to firm rotation. Sarbanes-Oxley Act (SOX),2002 requires the lead audit partner to be rotated every five years on all public companies. However, this could only be achieved when the firm is large enough and comprises many auditors. For partner rotation which could lead to firm rotation, this is specifically for sole practitioners and small firms with limited number of audit partner. If they could not meet the rotation requirement (i.e.: no more partners to be rotated in the firm), they have to give up the audit to another firm.

Research done by the U.S General Accounting Office (GAO) reveals that setting a limit on the number of years to perform an audit of a particular company will not improve the efficiency and the quality of the audit work performed. This research is also supported by AICPA saying that in the first and second audit of a company, there were more likely audit failures occur when auditors performed their audit task (AICPA, 1992). This shows that the auditors have failed to detect and report material errors which has occurred in the financial statements of a client.

Audit partner rotation may also give impact to clients. They might face monetary issue due to increased in audit fees. Management will have 'money' difficulties in searching for auditors and will face time constraint in familiarizing the auditors with their operations, procedures, systems and industry (AICPA, 1992). With a quote 'Time is Precious', all these procedures is considered as a waste of time as they can use their time in making money. Furthermore, clients also may face difficulties in determining the audit quality differences between the audit firms that has perform audit in the organization.

In Taiwan, mandatory partner rotation can be said as being superficial. This is because the partner that rotates in that particular year will come back on the following year. Therefore, it will lead to no difference in terms of the quality of the audit work. (Chen, Lin, and Lin (2008)). The purpose of doing this is that they want to maintain the relationship with the client, and this may result into jeopardizing their audit work.


In conclusion, based on the above justifications, engagement partner rotation might improves independence in appearance which is the auditor's ability to be unbiased and objective on the audit work performed. In addition, it might also increase the overall audit quality due to the principle of auditor of having a good auditor characteristics.

However, despite of all the benefits may obtained, managing director must also consider the implication of adopting this policy. There are many countries which are still debating upon this adoption which indicates that there are still many issues undiscovered yet being unsolved.


It is best for the auditing board to gather and discuss this matter to evaluate the effectiveness of this adoption. There are certain criteria which must be take into thorough consideration such as the type of a company's involved, the quality of an audit which resulted from the adoption of rotation as well as to what extent the auditor him or herself might be independent in performing the audit work.

Besides, the cost involved for the audit partner rotation need to be disclosed and immediately resolve. Therefore, it will lessen the contribution towards the negative impact of this adoption.

Creativity and imagination is required in order to achieved a solid solution thus, enhance the productivity of audit work.