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Impact of renewable long-term audit mandates on audit quality

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  • Ann Vanstraelen

Abstract

Anglo-American countries like the US and the UK allow companies to switch auditors every year. In contrast, some continental European countries restrict auditor switching by allowing only renewable long-term audit mandates. This paper aims to analyse the impact of renewable long-term audit mandates on audit quality. Audit quality is considered from the viewpoint of the external users of the financial statements. It is questioned whether renewable long-term audit mandates have an impact on the auditor's reporting behaviour and on auditor independence. This research is motivated by the lack of consensus in the literature on the impact of the length of the auditor client relationship on audit quality. Moreover, few empirical studies use publicly available secondary data in order to determine whether perceived threats to auditor independence actually compromise auditor independence. Therefore, our research methodology consists in the development of a logistic regression model in which the explanatory variables are measured using publicly available data. The results of the study suggest that long-term auditor client relationships significantly increase the likelihood of an unqualified opinion or significantly reduce the auditor's willingness to qualify audit reports. A significant difference was also found between the auditor's reporting behaviour in the first two years versus the last year of the audit mandate. Auditors are more willing to issue an unqualified audit report in the first two years of their official mandate than in the last year of their mandate. This could be an indication that the decision to renew the auditor's mandate is already taken and known to the auditor before he has issued his last audit report within his current mandate. The policy implications of these findings could be in favour of mandatory auditor rotation to maintain the value of an audit for the external users. However, given recent theoretic evidence on the adverse effects of mandatory auditor rotation, there is a need to develop alternative measures to safeguard auditors' independence.

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  • Ann Vanstraelen, 2000. "Impact of renewable long-term audit mandates on audit quality," European Accounting Review, Taylor & Francis Journals, vol. 9(3), pages 419-442.
    • Handle: RePEc:taf:euract:v:9:y:2000:i:3:p:419-442
    DOI: 10.1080/09638180020017140
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    17. Chi Duong Thi, 2023. "Audit Quality, Institutional Environments, and Earnings Management: An Empirical Analysis of New Listings," SAGE Open, , vol. 13(2), pages 21582440231, June.
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    19. Mariana Cristina BULUCEA, 2020. "Audit Firm Rotation And Audit Quality: Case Of The Listed Romanian Firms," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(22), pages 158-168.
    20. García Blandón, Josep & Argilés Bosch, Josep Maria, 2013. "Audit firm tenure and qualified opinions: New evidence from Spain," Revista de Contabilidad - Spanish Accounting Review, Elsevier, vol. 16(2), pages 118-125.
    21. González-Díaz, Belén & García-Fernández, Roberto & López-Díaz, Antonio, 2015. "Auditor tenure and audit quality in Spanish state-owned foundations," Revista de Contabilidad - Spanish Accounting Review, Elsevier, vol. 18(2), pages 115-126.
    22. Otuya, Sunday, 2019. "Auditors' Independence And Quality Of Financial Reporting In Listed Nigerian Manufacturing Companies," International Journal of Contemporary Accounting Issues-IJCAI (formerly International Journal of Accounting & Finance IJAF), The Institute of Chartered Accountants of Nigeria (ICAN), vol. 8(1), pages 111-128, June.
    23. Amahalu Nestor Ndubuisi & Beatrice O. Ezechukwu, 2017. "Determinants of Audit Quality: Evidence from Deposit Money Banks Listed on Nigeria Stock Exchange," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 7(2), pages 117-130, April.
    24. Kym Butcher & Graeme Harrison & Jill McKinnon & Philip Ross, 2011. "Auditor appointment in compulsory audit tendering," Accounting Research Journal, Emerald Group Publishing Limited, vol. 24(2), pages 104-149, September.
    25. Seyed Mahmoud Hosseinniakani & Helena Inacio & Rui Mota, 2014. "A Review on Audit Quality Factors," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(2), pages 243-254, April.

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