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Current Control

From the start, there is already an inherent risk on auditors independence due to the fact
that the audit clients pay the audit fees.1 Aside from providing for qualifications and
requirements for external auditors to ensure independence, SOX also set up various control
mechanisms to guarantee perpetual independence of the external auditor during the course of the
audit engagement.2 These controls are also adopted here in the Philippines by the Securities and
Exchange Commission (SEC).
SOX established the Public Company Accounting Oversight Board (PCAOB) with the following
mandate:
to oversee the audit of public companies that are subject to the securities laws,
and related matters, in order to protect the interests of investors and further the
public interest in the preparation of informative, accurate, and independent audit
reports for companies the securities of which are sold to, and held by and for,
public investors.3
PCAOB has the duties to register auditing firms, establish and adopt auditing standards to ensure
independence, conduct inspection to ensure compliance with standards, and conduct

1CharlesBowsher,AuditIndependenceandAuditFirmRotation,availableat
http://pcaobus.org/Rules/Rulemaking/Docket037/ps_Bowsher.pdf(lastaccessedJuly8,2015)

2SOX,TitleIIAuditorsIndependence
3SOX,TitleIPublicCompanyAccountingOversightBoard,101,a
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investigation and impose sanctions in case of violation of rules on audit independence. 4 In the
Philippine setting, external auditors are accredited by SEC.5
SOX also provided for a list of services that external auditors cannot perform for an audit client.
These are collectively called non-audit services such as bookkeeping, financial information
system design and implementation, actuarial services, management functions, and the like. 6
However, non-audit work such as tax services may be undertaken by the external auditor
provided it is with prior approval of the audit committee. 7 External auditors in the Philippines
have similar restrictions.8
In addition, SOX implemented the cooling off period of one year before a previous auditor
occupies an executive or board seat of the audit client.9
More importantly, SOX provides for mandatory audit partner rotation as follows:
Audit Partner Rotation.--It shall be unlawful for a registered public accounting
firm to provide audit services to an issuer if the lead (or coordinating) audit
partner (having primary responsibility for the audit), or the audit partner
4PCAOBAdvisoryGroup,TheSarbanesOxleyActTenYearsLater,availableat
http://pcaobus.org/News/Events/Documents/03282012_IAGMeeting/Independence_Objectivity_Working
_Group_Report.pdf(lastaccessedJuly6,2015).
5SecuritiesandExchangeCommission,AccreditedExternalAuditorsAndAuditingFirms,availableat
http://www.sec.gov.ph/accountantsinfo/auditingfirm.html(lastaccessedJuly10,2015)
6SOX,ArticleIIAuditorsIndependence,201,g.

7SOX,ArticleIIAuditorsIndependence,201,h.
8StrengtheningtheCommission'sRequirementsRegardingAuditorIndependence
9Supra29.
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responsible for reviewing the audit, has performed audit services for that issuer in
each of the five previous fiscal years of that issuer.10
SEC also applied audit partner rotation every five years for Philippine companies.11
The last control is one of the most controversial provisions of SOX. Some stakeholders suggests
that in order to truly ensure audit independence, SOX should have mandated audit firm rotation
instead of merely engagement audit partner rotation.12 The authors of SOX obviously favored
audit partner rotation; however, they did not close their doors to possible transition to audit firm
rotation. Hence, as provided in SOX, the Comptroller General of United States was mandated to
conduct a survey and report on the possible effects of audit firm rotation after the enactment of
SOX.13

Deficiency in Audit Partner Rotation

Audit partner rotation was placed as control in order to address threats to independence
especially self-review, intimidation, and familiarity or social bonding threat. 14 However, there
10SOX,ArticleIIAuditorsIndependence,203,j.
11Supra33.
12Supra29.
13SOX,ArticleIIAuditorsIndependence,207,a.

14TheReportoftheReviewGrouponAuditing,Chapter12,page187,availableat
http://www.djei.ie/publications/commerce/2004/auditing/chapter12.pdf(lastaccessedJuly8,2015).
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proves to be a deficiency in audit partner rotation in achieving SOXs goal of ensuring auditors
independence.
The 2008 global financial crisis, which is believed to be the worst since Great
Depression,15 proved that despite SOX in place to mitigate threats to auditors independence, the
controls are still inadequate to ensure the credibility and fairness of corporations financial
information.16 Based on a sampling done by PCAOB Advisory Group, big firms such as Lehman
Brothers, Wash Mutual, and New Century, all receiving an unqualified audit opinion from Ernst
and Young (E&Y), Deloitte, and KPMG, respectively, have gone bankrupt. AIG and Citigroup,
also with unqualified audit opinion from PwC and KPMG, were placed under Troubled Assets
Relief Program (TARP). Fannie Mae, Freddie Mac, Bear Sterns and Countrywide were either
taken over by the government or purchased despite the unqualified audit opinion rendered by the
big four auditing firms in US.17 From these companies alone, investor lost almost $600 billion
based on decline in market capitalization.18

15YiciShi,TheRoleofAuditorsinCurrentFinancialCrisis,page1,availableat
https://www.google.com.ph/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0CCcQFjAB&url=http%3A%2F
%2Fwww.honors.ufl.edu%2Fapps%2FThesis.aspx%2FDownload
%2F980&ei=iQydVbvnLcLioASg85WYBg&usg=AFQjCNEZeBE7IXDBZ5HjwDcsT
5AcL8hw&sig2=0ASC34TVxP_aTctHHnmI8A&bvm=bv.96952980,d.aWw(lastaccessedJuly8,2015)
16PCAOBAdvisoryGroup,TheWatchdogthatDidntBackAgain,availableat
http://pcaobus.org/News/Events/Documents/03162011_IAGMeeting/The_Watchdog_That_Didnt_Bark.p
df(lastaccessedJuly8,2015).
17Id.
18Id.

This event proves that auditors, based on other external factors, have decided to give an
unqualified audit opinion to these corporations despite them operating on the edge of their
financial positions or worse, months after the reports, declared bankruptcy or was taken over.19 It
seemed like principles laid down by SOX were mere mockery. As one columnist, Jonathan Weil,
said it, and I quote:
Here we had the greatest banking industry meltdown since the Great Depression.
Hundreds of lenders failed. And yet the number of banks correcting accounting
errors declined while the collapse was unfolding. There were no restatements by
the likes of IndyMac, Washington Mutual or Lehman Brothers, for example. The
obvious conclusion is the government has been giving lots of banks a free pass, as
have their auditors.20
Based on the Financial Crisis Inquiry Commission report, there has been lack of
disclosures in the financial statements of corporations especially when it comes to the companys
capacity to take in more liabilities or leverage. 21 Also, it was discovered that by removing the
effects of window dressing done by companys accountants in collusion with their auditors and
taking into consideration the impact of hidden off-balance sheet liabilities or exposures of the
firm, the corporations should have reported higher leverage.22
19Id.
20JonathanWeil,TheMysteryofVanishingAccountingScandals,availableat
http://www.bloomberg.com/news/articles/20110303/honestyforbanksisstillsuchalonelywordcommentary
byjonathanweil(lastaccessedJuly8,2015).

21Supra41.
22Id.

It can be noted from the studies of the cases of Enron in 2001 and the global financial
crisis in 2008 that despite the measures implemented by SOX in 2002 to ensure audit
independence such as the mandatory rotation of external audit partner every five years, the evils
sought to be prevented by the said law were not ended.
The Philippine setting was not exempted from said failures in the control mechanism of
audit rotation to ensure auditors independence. The recent case involving the alleged billions of
Pag-Ibig funds extended as loan to home owners of Globe Asiatique is a case which could have
been prevented if proper accounting controls were implemented to expose the anomalies.23
The problem with mandatory audit partner rotation is that, since essentially the partners
serve one master, overall, the audit partners still represent and pursue one interest. Hence, some,
if not all, threats accumulated by the past engagement team would necessarily be just passed on
to the next team. Hence, the principle behind, The friends of my friends are my friends, and the
enemies of my friends are also my enemies, is prevalent in the case of mandatory audit partner
rotation.
These circumstances only proves that during these times when businesses are still profitoriented and inclined towards shareholders theory, a more stringent rule must be implemented to
ensure that the publics watchdog over corporations, especially those vested with public interest,
will bark whenever red flags of fraud and scam surface. External auditors must be strictly
regulated to avoid collusion and management or board capture over them.

23GlobeAsiatiqueCaseisAboutQuestforJustice,notPoliticalPersecutionHDMF,availableat
http://www.pagibigfund.gov.ph/newsevents/pdf/2014/Globe%20Asiatique%20Case%20is%20About
%20Quest%20for%20Justice.pdf(lastaccessedJuly10,2015).
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