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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.

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.

Suggested Citation

  • Kaplan, Steven E. & Mauldin, Elaine G., 2008. "Auditor rotation and the appearance of independence: Evidence from non-professional investors," Journal of Accounting and Public Policy, Elsevier, vol. 27(2), pages 177-192.
  • Handle: RePEc:eee:jappol:v:27:y:2008:i:2:p:177-192
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    Cited by:

    1. 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.
    2. Ioan-Bogdan ROBU & Maria GROSU & Costel ISTRATE, 2016. "The Effect of the Auditors’ Rotation on the Accounting Quality in the Case of Romanian Listed Companies under the Transition to IFRS," The Audit Financiar journal, Chamber of Financial Auditors of Romania, vol. 14(133), pages 1-65, January.
    3. 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.
    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 - Journal of REGIONAL RESEARCH, Asociación Española de Ciencia Regional, issue 22, pages 35-56.
    5. Richard Fontaine & Hanen Khemakhem & David N. Herda, 2016. "Audit committee perspectives on mandatory audit firm rotation: evidence from Canada," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 20(3), pages 485-502, September.
    6. Steven Kaplan & Janet Samuels & Jeffrey Cohen, 2015. "An Examination of the Effect of CEO Social Ties and CEO Reputation on Nonprofessional Investors’ Say-on-Pay Judgments," Journal of Business Ethics, Springer, vol. 126(1), pages 103-117, January.
    7. repec:eee:jeborg:v:137:y:2017:i:c:p:410-427 is not listed on IDEAS
    8. 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.
    9. repec:eee:advacc:v:38:y:2017:i:c:p:75-87 is not listed on IDEAS
    10. Boon Seng Tan & Yew Kee Ho, 2016. "Some Economics of Audit Market Reform," Australian Accounting Review, CPA Australia, vol. 26(3), pages 271-283, September.

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