Mandatory Auditor Rotation is Dead

Almost two years ago, I wrote about a PCAOB proposal that would require companies to rotate auditors every 5 to 10 years.  The theory was that forcing companies to change auditors regularly would make audits better, because fresh eyes on the books every few years would mean a more skeptical audit.

My position was that it doesn’t matter how long an auditor worked on the same engagement. Instead, the problem is audits themselves. Audits have never been designed to detect fraud. Thus, audits rarely find fraud. I wrote previously:

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Fooling the Auditors in Seven Easy Steps

mncpa-footnoteMinnesota Society of CPAs Footnote Magazine
February/March 2014

Even with all of the publicity surrounding the issue of financial fraud in the last decade, most auditors, investors and other professionals still do not “get it” when it comes to detecting fraud. Traditional financial statement audits were never designed to detect fraud. The audit is simply a process by which auditors check the company’s math and application of accounting rules.

Fraud is rarely detected by financial statement audits because they are not designed to do so. Occasionally, fraud is detected by auditors, but they could increase their chances of finding fraud if they changed their audit procedures.

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