Since big scandals, such as Enron and WorldCom, in the beginning of this century, much attention had paid to auditing quality and auditors' independence. However, the efforts aiming to improve independence were strongly challenged again by the financial crisis in 2008, and confidence towards capital market largely shrinks. As more leaks and defects in auditing system were exposed and widely researches about the key issues in auditing regulation spring up. In this circumstance, on 30 November 2011 the European Commission (EC) stated several proposals to strengthen this situation. One of the proposals is mandatory rotation: audit firms must be rotated after maximum six years engagement, and a cooling off period of four years should existence before the same audit firm can be appointed again by the company. Rotation is not a new suggestion. In Europe, Italy has practiced it since 1974, meanwhile Spain and Greece once also enforce mandatory rotation for a period time. Australia has abandoned rotation before it comes into force. The Sarbanes-Oxley Act (2002) has required the U.S. Comptroller General to discuss the potential influence of mandatory rotation of audit firms. However, after the study took by the General Accounting Office (GAO), the response given seemed not be favorable "…mandatory audit firm rotation may not be the most efficient way to strengthen auditor independence" (GAO 2003, Highlights).
This essay, establishing on the empirical researches, studies the significance that mandatory rotation imposes to auditing independence and quality. Studies conducted by Davis et al. (2003) and Casterella et al. (2002) argue that "audit quality is lower given longer auditor tenure" [1] . Long-term relationship between audit firm and company may probably affect independence, as auditor has contributed many resources in early audit period and tended to some degree compromise for keeping the client. Financial reporting quality in Italy, which carried out mandatory rotation for about twenty years, has been enhanced for rotation (Cameran et al. 2009). In consideration of the less confidence in present capital market after financial crisis, the public require much intervention from the regulation to strict and guide company's activities. Gate et al. (2007) argue that rotation increase the confidence of investors in financial accounting quality based on their experience among US students. Nevertheless, short-term engagement will lead in evidence high cost which is related to unfamiliarity. A new audit partner may require company providing much time and human resources to deal with familiarity in accounting conditions. Such unfamiliar will in addition implicate poor quality in auditing report. The auditor cannot effectively distinguish high risk part which is most likely existing potential misrepresentation in specific financial statement. According to Johnson et al. (2002) who conducted a survey in 11,148 company from 1986-1995, "comparatively short assignments (two to three years) causing higher training costs combined with a lower quality of accounting" [2] . There is no consistent opinion on tenure, whether rotation in European auditing market will strengthen independence and produce high quality report is not assured.
II Risks in Rotation
Two main risks which related with mandatory rotation are cost and poor quality.
Cost
The cost may grow in several kinds for both of audit firms and its clients. To audit firms, a new client means more fees as well as more initial contribution. Without relative experience about the new client, much time and higher intensity of attention are required in examining the accounting structure. Findings in Timothy Bell et al. (2012) research argues that in the early period after change an auditor, rotation can impose large costs for auditors lacking adequate knowledge about a new client. Significant expenses are also faced by the audited entity. Similarly, lacking of accumulated knowledge of auditors costs the company in providing supporting documents as well as extra time consistenting some situations. High cost related with frequent changing tenure may also bring about large pressure on firms as transparent tender procedure imposed. One of key measures in EC proposals is mandatory tendering. Public-interest entities are required to disclose their selection procedure and the audit committee (of the audited entity) should be closely involved in. Hence short-term engagement unavoidably makes company bear unnecessary expense in open tendering process. Causholli (2012) suggested significant burden would place on audit firms and clients including transition costs, start-up as well as "steep learning curve for all parties involved" [3] . Current audit market is dominated by big 4 firms, and such highly-concentrated circumstance narrows public entities' choices to pick potential auditors. Mandatory rotation focus firms making change even other auditors cannot perform as effectively as the present one. The potential cost result from such low effectiveness is further shouldered in the firms.
Poor Quality
Timothy Bell et al. (2012) state that "accumulated knowledge about a client is very vital in assessing risks and interpreting audit evidence for an effective audit work. And they found that first year audits have lower audit quality but quality rises to an 'average level' in the second year and is sustained for even long tenure 6 engagements". Insufficient knowledge in the start period is the main factor leading to poor quality, but intentional manipulation in the audited firm cannot be free from it. Informed that new auditor may lack enough experience about the company, internal accountants have tendency to make up data in some degree to present favorable financial position. According to Carcello and Nagy (2004) who investigated 267 US corporations in 1990 to 2001, manipulations occurred heavily in the first three years of the assignment. Poor quality exits in the end period as well, which results from inevitable ending of partnership according to mandatory rotation. Emphasis will probably transfer to other clients when auditors deal with foreseeable engagement termination. Elizur and Falk (1996) showed the same concern about report quality in end period. They employed a model to illustrate that the quality of planning went down over time when auditors knew they only had a fixed engagement, and the quality reached lowest for the last period. This attitude among auditing firms will further switch auditors' focus to treat short-term auditing as a sale not a regulation, which leads auditors disinterest in service's long-term quality. As auditing service is merely a time-limited product, the continued profits generate from selling more such products not solid relationship with old clients.
III Benefits in Rotation
Close relationship may expect to be less independence. When fees from same auditing firm take a large proportion in the auditors' profit, a certain extent compromise in order to keep the stable income is a choice to auditor. Timothy Bell et al. (2012) regarded this concern as "economic bond forms". Firm depends auditor to give "favorable" and "clean" report, meanwhile auditor generates annually fees from firm and has tendency to shield some misrepresentation as a return. Hence this relationship tends to combine auditor and company together with their each economic interest. As a consequence, both parts in this bond obtain their own benefit and have motivation to maintain it in a long time.
Even auditor insists on independence and objective process, poor quality of report may still arise from reducing skepticism. The reason is that long engagement without finding many unfaithful representations in firms, auditors may let down guard in detection, which gives firms' chance to manipulation. In such context, mandatory rotation may be accepted an effective way to deal with poor quality problems. Casterella et al. (2002) shows evidence that when tenure is not such long, audit failures are also less likely to happen.
IV Conclusion
Independence is the essential variable in improving the quality of audit report as well as public confidence towards capital market. To enhance it European Commission has adopted a series measures: proclaiming 8th EC directive which requires internal rotation; publishing the Green Paper (2010) --Audit policy: lessons from the crisis; raising proposals for the reform of the audit market in 2011. One of the proposals discussed in this essay is mandatory rotation. As outlined above，an overview can be drew that mandatory rotation may not be an effective method to improve independence. It is not only cannot actually enhance auditing report quality by a wide margin but also engenders greater costs both in corporations and audit firms, especially to small and medium-size companies. Al-Thuneibat et al. (2011), who have invested 358 Jordan companies from 2002 to 2006, hold an unfavorable attitude towards the argument that external rotation can improve quality of accounting for finding "negative correlation between external rotation and the quality of accounting" [4] . In addition, the proposal of non-audit services, which states that audit firms are prohibited from providing non-audit services to their audit clients, will reduce mandatory rotation proposal's influence. Consider a situation: audit firm first provides audit service for 6 years, and then during cooling off period it provides non-audit service before being employed again. When audit firm is engaged again, auditors know what has been carefully revised by them during four year cooling off period, and tend to overlook the revised part because of much efforts being paid before. Instead of mandatory rotation, Cameran et al. (2009) suggest voluntary rotation. They find that lower audit quality is found in mandatory changes while voluntary changes tend to enhance audit quality. Market is effective in a large degree, and firm itself can know when is the proper time that to change their auditor for better report quality. Meanwhile enhancing statutory regulation is another way. Authority strengthen the review towards the company.
However, some weaknesses limit the value of the conclusion. As new situation occurs after 2008 financial crisis, the analysis and data which are mainly based on previous research may out of date. Meanwhile, the objects of these surveys mainly are companies in U.S. not Europe. Considering such shortcomings, more researches which focus on EU are required to determine whether the advantages of mandatory rotation outweigh its disadvantages before enforce the proposal.
