Mandatory audit firm rotation and audit quality

Mandatory audit firm rotation and audit quality Purpose – The purpose of this paper is to investigate the effect that a regime of mandatory audit firm rotation would have on audit quality. Design/methodology/approach – Using two measures of audit quality, being the propensity to issue a going‐concern report and the level of discretionary accruals, the paper examines the switching patterns of clients in their current voluntary switching capacity, and the levels of audit quality. Findings – The main finding is that audit quality increases with audit firm tenure, when proxied by the propensity to issue a going‐concern opinion, and is unaffected when proxied by the level of discretionary expenses. Given the additional costs associated with switching auditors, it is concluded that there are minimal, if any, benefits of mandatory audit firm rotation. Research limitations/implications – A limitation of this study is that only actual audit quality is examined. While the results suggest that actual audit quality is associated with the length of audit tenure, the perception of audit quality is not addressed, which may increase with audit firm rotation. Originality/value – The results go against the move towards mandatory audit firm rotation, and suggest that other initiatives may need to be considered to address concerns about auditor independence and audit quality. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Auditing Journal Emerald Publishing

Mandatory audit firm rotation and audit quality

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Publisher
Emerald Publishing
Copyright
Copyright © 2008 Emerald Group Publishing Limited. All rights reserved.
ISSN
0268-6902
DOI
10.1108/02686900810875271
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to investigate the effect that a regime of mandatory audit firm rotation would have on audit quality. Design/methodology/approach – Using two measures of audit quality, being the propensity to issue a going‐concern report and the level of discretionary accruals, the paper examines the switching patterns of clients in their current voluntary switching capacity, and the levels of audit quality. Findings – The main finding is that audit quality increases with audit firm tenure, when proxied by the propensity to issue a going‐concern opinion, and is unaffected when proxied by the level of discretionary expenses. Given the additional costs associated with switching auditors, it is concluded that there are minimal, if any, benefits of mandatory audit firm rotation. Research limitations/implications – A limitation of this study is that only actual audit quality is examined. While the results suggest that actual audit quality is associated with the length of audit tenure, the perception of audit quality is not addressed, which may increase with audit firm rotation. Originality/value – The results go against the move towards mandatory audit firm rotation, and suggest that other initiatives may need to be considered to address concerns about auditor independence and audit quality.

Journal

Managerial Auditing JournalEmerald Publishing

Published: May 23, 2008

Keywords: Auditing; Auditors; Laws and legislation; Australia

References

  • Auditor brand name reputations and industry specializations
    Craswell, A.; Francis, J.; Taylor, S.
  • Detecting earnings management
    Dechow, P.; Sloan, R.; Sweeney, A.
  • Do non‐audit service fees impair auditor independence? Evidence from going concern audit opinions
    DeFond, M.; Raghunandan, K.; Subramanyam, K.
  • Audit‐firm tenure and the quality of financial reports
    Johnson, V.; Khurana, I.; Reynolds, J.
  • Audit firm portfolio management decisions
    Johnstone, K.; Bedard, J.
  • Performance matched discretionary accruals measures
    Kothari, S.; Leone, A.; Wasley, C.
  • The valuation of initial public offerings
    Krinsky, I.; Rotenberg, W.
  • Auditor resignations: clientele effects and legal liability
    Shu, S.
  • The potential determinants of auditor change
    Williams, D.

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