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BUSN 9123 : Principle Of Commercial Law

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BUSN 9123 : Principle Of Commercial Law

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BUSN 9123 : Principle Of Commercial Law

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Course Code: BUSN 9123
University: Flinders University

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Country: Australia

Question: 
1. Explain the test restricting former auditors and accountants who have played a significant role in a company’s audit from joining that company’s board? Comment on the debates surrounding the policy behind the exclusion and the merits of these rules. Refer to appropriate statutory provisions as required and empirical evidence available. 2. Discuss the present law of mandatory rotation of audit firms and comment with evidence as to whether it is working well or not. In your discussion include a brief reference to the present statutory requirements. Refer to any empirical data and appropriately reference it. 
 
3. “Australia is one of the few jurisdictions where auditing standards have the force of law (by way of an Act of Parliament, the Corporations Act 2001 (Cth)).” Discuss and explain with reference to at least 1 other jurisdiction (country) that has a different approach. 
Answer: 

Introduction:
Audit is one of the crucial parts of commerce and hence a lot of importance is given to the appointment of Auditor. In order to ensure the independence of auditors, mandatory rotation of audit firms is adopted in Australia. This model is being adopted in many different parts of the world. The research studies suggest that this mandatory rotation also has the ability to improve the quality of audits and because of this reason this approach is being adopted on such a wide scale globally. Though, additional costs are attached to this practice, however the advantages offered outweigh the drawbacks of the same.
The Law
This law was voluntary in Australia before 2003, but after the implementation of the “Professional Auditing Statement F1: Professional Independence” in the year May 2002 this rule came into existence. This act was a revolutionary reform in the field of auditing. The conduct of audit is mentioned in the Section 9 of the Corporations Act 2001 and according to that, audit firm includes the lead auditor, the review auditor and a registered company that is appointed as the auditor in an organization.On the basis of this law, the rotation of audit firms was made mandatory and also the period was set to resume these requirements. Lead partner is required to rotate in after time period of 7 years with a cooling period of two years. The second reform took place in the year 2006 and with this reform along with the lead partner the audit review partners were also subject to rotation. And this policy was tightened by fixing the rotation time period to five years.This rule is mentioned in the Section 324DA (1) and (2) of the Corporations Act. According to the APES 110 Code of ethics for professional accountants, an auditor is prohibited from engaging in any audit 2 years or more after the completion of his financial year that is five years of auditing.According to Section 323D (3) financial year can be extended for 18 months only.
The Impact
It has been found that the change of auditors is beneficial to the business. This is so because the change influences the positive peer review and offers a fresh perspective to the auditing work. Many researches have also been conducted that reveals that there is a relationship between the mandatory rotation and the audit quality. The occurrence of audit adjustments is practiced by the moving auditor as well as the new auditor in the beginning of his tenure.Monroe and Hossain (2013) undertook research in Australia in order to find out about the result of mandatory rotation of audit firms and whether it is successful or not. The authors found out that there was a positive association between the mandatory rotation and the quality of the audits in Australia. The author mentioned that when the tenure of audit client relationship is extended, the quality of audit is negatively impacted. The reason behind this is that over certain period, the auditor focus shifts towards making money from the client and as a result, economic dependency is generated.Another reason is that the auditor over certain period may develop learned confidence that he/she knows everything about client and may not test the financial reports with due care.Also, a long relationship between the two may turn into personal relations, which may hamper the independence of the auditors.
According to the research conducted by Ottaway (2011), it can be said that the law pertaining to mandatory rotation of audit firm’s is working well in Australia but, there are still scope for improvements that can be adopted by the Australian government and other law institutions. The author has said that this system of Australian Law has provided independence to the auditors of Australia and also the quality of  audit has been improved because of the features like fresh look and the watchdog offered by this system. But, the author has also mentioned the shortfalls in this law and how this law is not competent enough. It has been mentioned that the negative impact of this system can be directly seen on the market competition, as there scarcity of audit firms in the market. Specialization is ignored and also the effectiveness of the committees is negatively impacted. The author has also mentioned other models that can be adopted by the Australian Law like the Lottery Model, The Insurance Model or the Re-Tendering Regime adopted by UK. Though, many other authors do not support this statement and argue that a clear change or improvement can be seen in the quality of the audit in Australia after the implementation of this reform.
Conclusion:
It can be concluded that the main aim of the mandatory rotation of audit firm which is to provide independence to the auditors of Australia and also to improve the quality of audit has been successfully achieved. Many researchers have proved this statement as mentioned above that, the direct impact of this law was seen on the quality improvement of audits in the country. Apart from this, because of the continuous rotation the independency of the auditors has been maintained in the market. Though, this system was criticised by few authors by comparing this system with other common law in different countries. But, it can be said that this law is best suitable for the Australian market though there is always some scope left for further improvements. Apart from this, the fact cannot be denied that the mandatory rotation of audit firms has done wonders in the Australian market. A negative relationship is drawn between the quality of the audit when there is long tenure between the audit partner and the client. Hence, to avoid this, mandatory rotation is the best available option.
References:
Arel, B, Brody, RG & Pany, K 2005, ‘Audit firm rotation and audit quality’, The CPA Journal, vol 75, no. 1, pp. 36-39.
CPA Australia 2013, Auditor independence, viewed 04 September 2018, .
CPA Australia 2018, APES 110 Code of Ethics for Professional Accountants, viewed 04 September 2018, .
GAO 2003, Required Study on the Potential Effects of Mandatory Audit Firm Rotation, viewed 04 September 2018, .
Jackson, AB, Moldrich, M & Roebuck, P 2008, ‘Mandatory audit firm rotation and audit quality’, Managerial Auditing Journal, vol 23, no. 5, pp. 420-437.
Lennox, CS, Wu, X & Zhang, T 2014, ‘Does Mandatory Rotation of Audit Partners Improve Audit Quality?’, The accounting review, vol 89, no. 5, pp. 1775–1803.
Monroe, G & Hossain, S 2013, ‘Does audit quality improve after the implementation of mandatory audit partner rotation’, Accounting and Management Information Systems, vol 12, no. 2, pp. 263–279.
Ottaway, J 2011, Improving auditor independnece in Australia: Is ‘mandatory audit firm rotation’ the best option?, viewed September 2018, .
Ryken, K, Radich, R & Fargher, NL 2007, ‘Audit partner rotation: Evidence of changes in audit partner tenure as the result of mandatory regulation in Australia’, Current Issues in Auditing, vol 1, no. 1, pp. A28–A35.

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