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The Effect of Auditor Rotation on the Relationship between Financial Manipulation and Auditor’s Opinion

The Effect of Auditor Rotation on the Relationship between Financial Manipulation and Auditor’s... AbstractBackground: Since external auditors possess the expertise necessary for detecting manipulations in financial statements, they should also take into account earnings management that could lead to it. In that context, auditor’s independence, which can be affected by auditor’s rotation, is of utmost importance.Objectives: This paper aims to examine the moderating effect of auditor rotation on the relationship between the extent of financial manipulation and the type of auditor’s opinion for companies listed on the Zagreb Stock Exchange in the Republic of Croatia.Methods/Approach: A panel analysis with logistic regression is conducted to test the research hypothesis. The sample consists of 210 observations during the three years from 2015 to 2017.Results: Results show a significant positive relationship between auditor rotation in a current financial year and auditor’s opinion. Furthermore, there is a negative, but the statistically insignificant moderating effect of auditor rotation in a current financial year on the relationship between financial manipulation and auditor’s opinion, as well as the statistically insignificant moderating effect of auditor rotation frequency over five years on the relationship between financial manipulation and auditor’s opinion.Conclusions: It is not likely that auditors take earnings management into account when generating their opinion on financial statements, and auditor rotation is not proven to be an adequate stimulus in that context. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Business Systems Research Journal de Gruyter

The Effect of Auditor Rotation on the Relationship between Financial Manipulation and Auditor’s Opinion

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Publisher
de Gruyter
Copyright
© 2021 Ivica Filipović et al., published by Sciendo
ISSN
1847-9375
eISSN
1847-9375
DOI
10.2478/bsrj-2021-0007
Publisher site
See Article on Publisher Site

Abstract

AbstractBackground: Since external auditors possess the expertise necessary for detecting manipulations in financial statements, they should also take into account earnings management that could lead to it. In that context, auditor’s independence, which can be affected by auditor’s rotation, is of utmost importance.Objectives: This paper aims to examine the moderating effect of auditor rotation on the relationship between the extent of financial manipulation and the type of auditor’s opinion for companies listed on the Zagreb Stock Exchange in the Republic of Croatia.Methods/Approach: A panel analysis with logistic regression is conducted to test the research hypothesis. The sample consists of 210 observations during the three years from 2015 to 2017.Results: Results show a significant positive relationship between auditor rotation in a current financial year and auditor’s opinion. Furthermore, there is a negative, but the statistically insignificant moderating effect of auditor rotation in a current financial year on the relationship between financial manipulation and auditor’s opinion, as well as the statistically insignificant moderating effect of auditor rotation frequency over five years on the relationship between financial manipulation and auditor’s opinion.Conclusions: It is not likely that auditors take earnings management into account when generating their opinion on financial statements, and auditor rotation is not proven to be an adequate stimulus in that context.

Journal

Business Systems Research Journalde Gruyter

Published: May 1, 2021

Keywords: auditor’s opinion; auditor rotation; earnings management; financial manipulation; M41; M42

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