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Mandatory audit firm rotation and audit quality

Author

Listed:
  • Andrew B. Jackson
  • Michael Moldrich
  • Peter Roebuck

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.

Suggested Citation

  • Andrew B. Jackson & Michael Moldrich & Peter Roebuck, 2008. "Mandatory audit firm rotation and audit quality," Managerial Auditing Journal, Emerald Group Publishing, vol. 23(5), pages 420-437, May.
  • Handle: RePEc:eme:majpps:v:23:y:2008:i:5:p:420-437
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    References listed on IDEAS

    as
    1. Mark L. DeFond, 2002. "Do Non-Audit Service Fees Impair Auditor Independence? Evidence from Going Concern Audit Opinions," Journal of Accounting Research, Wiley Blackwell, vol. 40(4), pages 1247-1274, September.
    2. Zhan Shu, Susan, 2000. "Auditor resignations: clientele effects and legal liability," Journal of Accounting and Economics, Elsevier, vol. 29(2), pages 173-205, April.
    3. Craswell, Allen T. & Francis, Jere R. & Taylor, Stephen L., 1995. "Auditor brand name reputations and industry specializations," Journal of Accounting and Economics, Elsevier, vol. 20(3), pages 297-322, December.
    4. repec:bla:joares:v:29:y:1991:i:2:p:193-228 is not listed on IDEAS
    5. repec:bla:joares:v:22:y:1984:i::p:59-82 is not listed on IDEAS
    6. Kothari, S.P. & Leone, Andrew J. & Wasley, Charles E., 2005. "Performance matched discretionary accrual measures," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 163-197, February.
    7. Arrunada, Benito & Paz-Ares, Candido, 1997. "Mandatory rotation of company auditors: A critical examination," International Review of Law and Economics, Elsevier, vol. 17(1), pages 31-61, March.
    8. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
    9. Karla M. Johnstone & Jean C. Bedard, 2004. "Audit Firm Portfolio Management Decisions," Journal of Accounting Research, Wiley Blackwell, vol. 42(4), pages 659-690, September.
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    Citations

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    Cited by:

    1. Karen Benson & Peter M Clarkson & Tom Smith & Irene Tutticci, 2015. "A review of accounting research in the Asia Pacific region," Australian Journal of Management, Australian School of Business, vol. 40(1), pages 36-88, February.
    2. Gholamreza Rahimi & Samira Mohammad Amini, 2015. "The Survey of the Relationship between Auditing Quality and the Profitability in the Companies Accepted in Tehran’s Exchange Market," 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. 5(2), pages 100-115, April.
    3. Patrick Velte & Carl-Christian Freidank, 2015. "The link between in- and external rotation of the auditor and the quality of financial accounting and external audit," European Journal of Law and Economics, Springer, vol. 40(2), pages 225-246, October.
    4. repec:eco:journ1:2018-01-19 is not listed on IDEAS
    5. repec:rss:jnljbs:v1i1p4 is not listed on IDEAS
    6. repec:eee:spacre:v:18:y:2015:i:2:p:115-126 is not listed on IDEAS
    7. Anastasopoulos, Nikolaos P. & Anastasopoulos, Markos P., 2012. "The evolutionary dynamics of audit," European Journal of Operational Research, Elsevier, vol. 216(2), pages 469-476.
    8. Mark Wilson, 2011. "Earnings Management in Australian Corporations," Australian Accounting Review, CPA Australia, vol. 21(3), pages 205-221, September.
    9. Elizabeth Carson & Neil Fargher & Yuyu Zhang, 2016. "Trends in Auditor Reporting in Australia: A Synthesis and Opportunities for Research," Australian Accounting Review, CPA Australia, vol. 26(3), pages 226-242, September.
    10. 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.
    11. Michal Šindelář, 2016. "Rotation of auditors of companies listed on the stock market of the Prague Stock Exchange," Český finanční a účetní časopis, University of Economics, Prague, vol. 2016(3), pages 59-71.
    12. Angela Hecimovic & Nonna Martinov-Bennie, 2011. "The Differential Impact of the Force of Law Australian Auditing Standards," Australian Accounting Review, CPA Australia, vol. 21(2), pages 183-192, June.
    13. Patrick Velte, 2012. "External rotation of the auditor," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 23(1), pages 81-91, September.

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    Keywords

    Auditing; Auditors; Laws and legislation; Australia;

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