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The effects of audit firm rotation on perceived auditor independence and audit quality

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  • Daniels, Bobbie W.
  • Booker, Quinton

Abstract

Our study explores loan officers’ perceptions of auditors’ independence and audit quality under three experimental audit firm rotation scenarios. We use a case experiment with a between-subjects design to determine whether rotation of the audit firm impacts financial statement users’ perceptions of auditor’s independence and quality. Findings based on 212 useable responses indicate that loan officers do perceive an increase in independence when the company follows an audit firm rotation policy. However, the length of auditor tenure within rotation fails to significantly change loan officers’ perceptions of independence. Findings also indicate that neither the presence of a rotation policy nor the length of the auditor tenure within rotation significantly influences the loan officers’ perceptions of audit quality.

Suggested Citation

  • Daniels, Bobbie W. & Booker, Quinton, 2011. "The effects of audit firm rotation on perceived auditor independence and audit quality," Research in Accounting Regulation, Elsevier, vol. 23(1), pages 78-82.
    • Handle: RePEc:eee:reacre:v:23:y:2011:i:1:p:78-82
    DOI: 10.1016/j.racreg.2011.03.008
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    References listed on IDEAS

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    1. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
    2. DeAngelo, Linda Elizabeth, 1981. "Auditor independence, `low balling', and disclosure regulation," Journal of Accounting and Economics, Elsevier, vol. 3(2), pages 113-127, August.
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    Cited by:

    1. Khansa Shahibah & Bambang Hariadi & Zaki Baridwan, 2020. "The effect of quality control system on audit quality: Professional skepticism as the moderator variable," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 9(4), pages 419-425, July.
    2. Desai, Sreedhari D. & Kouchaki, Maryam, 2015. "Work-report formats and overbilling: How unit-reporting vs. cost-reporting increases accountability and decreases overbilling," Organizational Behavior and Human Decision Processes, Elsevier, vol. 130(C), pages 79-88.
    3. repec:mth:ijafr8:v:9:y:2019:i:1:p:51-73 is not listed on IDEAS
    4. Markus Widmann & Florian Follert & Matthias Wolz, 2021. "On the Political Decision of Audit Market Regulation: Empirical Evidence of Audit Firm Tenure and Maximum Durations within the European Union," Economies, MDPI, vol. 9(2), pages 1-24, May.
    5. Achraf Haddad, 2023. "Impact of financial development initiatives on the banks’ financial performance: comparative study in the stakeholders’ theory framework," SN Business & Economics, Springer, vol. 3(1), pages 1-27, January.
    6. Booker, K., 2018. "Can clients of economically dependent auditors benefit from voluntary audit firm rotation? An experiment with lenders," Research in Accounting Regulation, Elsevier, vol. 30(1), pages 63-67.
    7. Dilek Kaçmaz & Ahmet Türel, 2021. "Audit Quality and Rotation: Perception in Turkey," Istanbul Management Journal, Istanbul University Business School, vol. 0(91), pages 109-122, December.
    8. Quick, Reiner & Schmidt, Florian, 2018. "Do audit firm rotation, auditor retention, and joint audits matter? – An experimental investigation of bank directors' and institutional investors' perceptions," Journal of Accounting Literature, Elsevier, vol. 41(C), pages 1-21.
    9. Katrin Hummel & Christian Schlick & Matthias Fifka, 2019. "The Role of Sustainability Performance and Accounting Assurors in Sustainability Assurance Engagements," Journal of Business Ethics, Springer, vol. 154(3), pages 733-757, February.
    10. Melinda Timea FULOP & Nicolae MAGDAS & George Silviu CORDOS, 2019. "Theoretical Background Of Internal And External Environment Of Negotiation," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(21), pages 1-3.
    11. Houqe, Muhammad Nurul & van Zijl, Tony & Dunstan, Keitha & Karim, A.K.M. Waresul, 2015. "Corporate ethics and auditor choice – international evidence," Research in Accounting Regulation, Elsevier, vol. 27(1), pages 57-65.
    12. Casterella, Jeffrey R. & Johnston, Derek, 2013. "Can the academic literature contribute to the debate over mandatory audit firm rotation?," Research in Accounting Regulation, Elsevier, vol. 25(1), pages 108-116.
    13. Justin Logie & Warren Maroun, 2021. "Evaluating Audit Quality Using the Results of Inspection Processes Performed by an Independent Regulator," Australian Accounting Review, CPA Australia, vol. 31(2), pages 128-149, June.
    14. Schneider, Arnold, 2018. "Studies on the impact of accounting information and assurance on commercial lending judgments," Journal of Accounting Literature, Elsevier, vol. 41(C), pages 63-74.
    15. 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.
    16. Athavale, Manoj & Guo, Zhaorui & Meng, Yun & Zhang, Tianshu, 2022. "Diversity of signing auditors and audit quality: Evidence from capital market in China," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 554-571.
    17. Mahdi Salehi & Grzegorz Zimon & Hossein Tarighi & Javad Gholamzadeh, 2022. "The Effect of Mandatory Audit Firm Rotation on Earnings Management and Audit Fees: Evidence from Iran," JRFM, MDPI, vol. 15(3), pages 1-20, February.
    18. Florio, Cristina, 2024. "A structured literature review of empirical research on mandatory auditor rotation," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 55(C).
    19. George Silviu CORDOŞ & Melinda Timea FÜLÖP, 2020. "Debates In The Literature Regarding Audit Reporting," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(22), pages 1-4.

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