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Auditor rotation and the appearance of independence: Evidence from non-professional investors

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  • Kaplan, Steven E.
  • Mauldin, Elaine G.
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    Abstract

    We examine the impact of audit firm versus partner rotation on non-professional investors' independence-related perceptions, extending prior research on auditor rotation and independence in fact. Arguments for mandatory audit firm rotation continue to be made by regulators and investor groups based, in part, on the idea that firm rotation will incrementally strengthen independence in appearance relative to audit partner rotation. We report the results of two experiments. The first examines 5-year audit firm versus partner rotation under relatively weak or strong audit committees. We find no statistically significant difference in beliefs about how much of an income reducing audit difference management will record, or in beliefs about auditor independence, between the two auditor rotation conditions. On the other hand, we find that non-professional investors do believe more of the audit difference will be recorded, and the auditors will be more independent, under a strong audit committee than a relatively weak audit committee. The second experiment provides further evidence on audit firm versus partner rotation by examining a setting involving a 26-year audit firm-client relationship. Again, no statistically significant differences between the two auditor rotation conditions were found. These findings suggest that compared to audit partner rotation, audit firm rotation does not strengthen independence in appearance among non-professional investors and that non-professional investors recognize the value of strong audit committees.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Accounting and Public Policy.

    Volume (Year): 27 (2008)
    Issue (Month): 2 ()
    Pages: 177-192

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    Handle: RePEc:eee:jappol:v:27:y:2008:i:2:p:177-192

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    Web page: http://www.elsevier.com/locate/jaccpubpol

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    Cited by:
    1. Jasim Al-Ajmi & Shahrokh Saudagaran, 2011. "Perceptions of auditors and financial-statement users regarding auditor independence in Bahrain," Managerial Auditing Journal, Emerald Group Publishing, vol. 26(2), pages 130-160, January.
    2. Firth, Michael & Rui, Oliver M. & Wu, Xi, 2012. "How Do Various Forms of Auditor Rotation Affect Audit Quality? Evidence from China," The International Journal of Accounting, Elsevier, vol. 47(1), pages 109-138.
    3. Wang, Karl J. & Tuttle, Brad M., 2009. "The impact of auditor rotation on auditor-client negotiation," Accounting, Organizations and Society, Elsevier, vol. 34(2), pages 222-243, February.
    4. Moreno Enguix , María del Rocío & Antón Renart , Marcos & Vidal Hernández-Mora, José Antonio, 2012. "European regional policy: Analysis of the management reports of structural funds 2000-2006," Investigaciones Regionales, Asociación Española de Ciencia Regional, issue 22, pages 35-56.

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