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Mandatory audit firm rotation and audit quality

  • Andrew B. Jackson
  • Michael Moldrich
  • Peter Roebuck
Registered author(s):

    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.

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    File URL: http://www.emeraldinsight.com/journals.htm?issn=0268-6902&volume=23&issue=5&articleid=1724514&show=abstract
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    Article provided by Emerald Group Publishing in its journal Managerial Auditing Journal.

    Volume (Year): 23 (2008)
    Issue (Month): 5 (May)
    Pages: 420-437

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    Handle: RePEc:eme:majpps:v:23:y:2008:i:5:p:420-437
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    1. 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.
    2. 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.
    3. 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, 09.
    4. Karla M. Johnstone & Jean C. Bedard, 2004. "Audit Firm Portfolio Management Decisions," Journal of Accounting Research, Wiley Blackwell, vol. 42(4), pages 659-690, 09.
    5. Zhan Shu, Susan, 2000. "Auditor resignations: clientele effects and legal liability," Journal of Accounting and Economics, Elsevier, vol. 29(2), pages 173-205, April.
    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. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
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