Auditor Rotation - A Critical And Comparative Analysis

The present paper starts out from the challenge regarding auditor tenure launched in 2010 by the Green Paper of the European Commission "Audit Policy: Lessons from the Crisis". According to this document, the European Commission speaks both in favor of the mandatory rotation of the audit firm, and in favor of the mandatory rotation of audit partners. Rotation is considered a solution to mitigate threats to independence generated by familiarity, intimidation and self-interest in the context of a long-term audit-client relationship. At international level, there are several studies on auditor rotation, both empirical (e.g. Lu and Sivaramakrishnan, 2009, Li, 2010, Kaplan and Mauldin, 2008, Jackson et al., 2008) and normative in nature (e.g. Marten et al., 2007, Müller, 2006 and Gelter, 2004). The objective of the present paper is to perform a critical and comparative analysis of the regulations on internal and external rotation in force at international level, in the European Union and in the United States of America. Moreover, arguments both in favor and against mandatory rotation are brought into discussion. With regard to the research design, the paper has a normative approach. The main findings are first of all that by comparison, all regulatory authorities require internal rotation at least in the case of public interest entities, while the external rotation is not in the focus of the regulators. In general, the most strict and detailed requirements are those issued by the Securities and Exchange Commission from the United States of America. Second of all, in favor of mandatory rotation speaks the fact that the auditor becomes less resilient in case of divergence of opinions between him and company management, less stimulated to follow his own interest, and more scrupulous in conducting the audit. However, mandatory rotation may also have negative consequences, thus the debate on the opportunity of this regulatory measure remains open-ended.