Restoring public confidence in capital markets through auditor rotation

Abstract

Purpose

To determine the effect of audit firm rotation and/or audit partner rotation on individuals' confidence in the quality of audited financial statements.

Design/methodology/approach

Two separate behavioral studies were conducted with participants from the business and legal community (MBA and law students). In each study, one‐way analysis of variance was conducted using a between‐subjects approach. The independent measure was auditor rotation; the dependent measure was participants' responses to questions regarding company earnings. Because an experimental approach was utilized, the stimulus materials excluded potentially relevant information for this task. In addition, the participants were not held accountable for their decisions, nor was there any explicit motivation provided. Future research could explore other richer more complex case scenarios that provides some explicit motivation for participants.

Findings

Results revealed that even in an environment of strong controls for corporate governance, audit firm rotation incrementally influenced individuals' confidence in financial statements. However, audit partner rotation did not have a similar effect.

Originality/value

Little if any research examines both audit firm rotation and audit partner rotation. This research fills this void by addressing both concepts. The results suggest that rotating the audit firm will, contrary to GAO assumptions, better advance the goal to enhance auditor independence and audit quality and to restore investor confidence in the capital markets.

Citation

Gates, S.K., Jordan Lowe, D. and Reckers, P.M.J. (2007), "Restoring public confidence in capital markets through auditor rotation", Managerial Auditing Journal, Vol. 22 No. 1, pp. 5-17. https://doi.org/10.1108/02686900710715611