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The link between in- and external rotation of the auditor and the quality of financial accounting and external audit

Listed author(s):
  • Patrick Velte

    ()

  • Carl-Christian Freidank

The European Commission (EC) regulation draft of 2011 contains the external mandatory auditor rotation (audit firm rotation) as a reform measure to increase auditor independence. The external auditor firm rotation could supplement the internal mandatory rotation (auditor rotation) by the 8th EC directive. This article presents an agency theoretical foundation of rotation. In this context, the main influences on low balling and on the expectation gap will be presented. The total effect of the rotation on financial accounting and audit quality is theoretically uncertain, because the rotation can also lead to a decreased independence in a low balling situation and is connected with interrupted or lost learning and knowledge effects by the auditor or the audit firm. Then, a state of the art analysis of empirical research results with regard to auditor and audit firm rotation is focused. In contrast to the assumption of the EC, the majority of the empirical results don’t lead to an increased financial accounting and audit quality by audit firm rotations. Furthermore, the positive effects of the internal rotation period of 7 years and the cooling off period of 2 years by the 8th EC directive are not empirically proved yet. Copyright Springer Science+Business Media New York 2015

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File URL: http://hdl.handle.net/10.1007/s10657-012-9361-0
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Article provided by Springer in its journal European Journal of Law and Economics.

Volume (Year): 40 (2015)
Issue (Month): 2 (October)
Pages: 225-246

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Handle: RePEc:kap:ejlwec:v:40:y:2015:i:2:p:225-246
DOI: 10.1007/s10657-012-9361-0
Contact details of provider: Web page: http://www.springer.com

Order Information: Web: http://www.springer.com/journal/10657

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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. Ali Abedalqader Al-Thuneibat, 2011. "Do audit tenure and firm size contribute to audit quality?: Empirical evidence from Jordan," Managerial Auditing Journal, Emerald Group Publishing, vol. 26(4), pages 317-334, April.
  3. Sattar A. Mansi & William F. Maxwell & Darius P. Miller, 2004. "Does Auditor Quality and Tenure Matter to Investors? Evidence from the Bond Market," Journal of Accounting Research, Wiley Blackwell, vol. 42(4), pages 755-793, 09.
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  7. Neil Fargher, 2008. "The effect of audit partner tenure on client managers' accounting discretion," Managerial Auditing Journal, Emerald Group Publishing, vol. 23(2), pages 161-186, January.
  8. Patrick Velte, 2012. "External rotation of the auditor," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 23(1), pages 81-91, September.
  9. Andrew B. Jackson, 2008. "Mandatory audit firm rotation and audit quality," Managerial Auditing Journal, Emerald Group Publishing, vol. 23(5), pages 420-437, May.
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  13. DeAngelo, Linda Elizabeth, 1981. "Auditor independence, `low balling', and disclosure regulation," Journal of Accounting and Economics, Elsevier, vol. 3(2), pages 113-127, August.
  14. Quick, Reiner, 2012. "EC Green Paper Proposals and Audit Quality," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 60560, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
  15. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, Oxford University Press, vol. 87(3), pages 355-374.
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