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Mandatory auditor firm rotation (mandatory rotation) has been a controversial issue in the United States for many decades. Mandatory rotation has been considered at various times as a means of improving auditor independence. For example, in the United States, the Public Company Accounting Oversight Board (PCAOB) has considered mandatory rotation as a solution to the independence problem (PCAOB, 2011) and the European Parliament approved legislation that will require mandatory rotation in the near future (Council of European Union, 2014). The concept of implementing a mandatory rotation policy has been encouraged by some constituents of audited financial statements and rejected by other constituents of audited financial statements. Although there are apparent pros and cons of such a policy, the developmental process of such a policy in this country has not necessarily been an open-democratic, objective process. Universal mandatory rotation may or may not be the ideal solution; however, an open-democratic, objective process is needed to facilitate the development of a solution that considers the needs of all major stakeholders of audited financial statements – not simply accounting firms and public companies, but also investors. The purpose of this paper is to critically examine key issues relating to mandatory rotation and to encourage and stimulate future research and ongoing dialogue regarding this issue, in spite of efforts by certain constituents to silence the issue. This paper provides an overview of the various reasons, including practical, theoretical, political, and self-motivated reasons, why a mandatory rotation policy has not been implemented in the United States in order to address the potential conflict of interest between the auditor and client. This paper will also discuss how some deliberations of mandatory rotation have been flawed. The paper concludes with a summary of key issues along with two approaches for regulators, policy makers, and academics to consider as ways to improve the process and address auditor independence. The authors are not advocating for any specific solution; however, we are advocating for a more objective, unified approach and for the dialogue regarding auditor rotation to continue.

The primary purpose of this study is to examine how and why contingent economic rents can lead to biased audit judgment via a cognitive processing phenomenon known as predecisional distortion of information. The secondary research objective is to develop a more refined measure of predecisional distortion, thereby yielding a more robust and predictive metric. A total of 73 audit partners representing four of the Big Five CPA firms participated in a two (low-balling: present or absent) by two (non-audit revenue: present or absent) between-subjects experiment. Research findings indicate that contingent economic rents can potentially impair audit independence, as such rents heighten an initial desire to maintain a long-term relationship with the client, trigger favorable predecisional distortion of client-related information, and bias audit judgment in favor of the client. Study results also reveal that the refined predecisional distortion metric is more predictive than past measurement techniques. Between-subject and within-subject debriefings suggest that predecisional distortion of information operates, at least partially, at the subconscious level.

Purpose – This study examines the relationship between Big Four audit firm country-level market shares and audit fees across a sample of nine emerging economies: Argentina, Brazil, Chile, Hong Kong, Israel, Korea, Mexico, South Africa, and Taiwan.

Design/methodology/approach – First, auditor market share is calculated as a percentage of client sales based on all publicly traded companies in each of the sample countries during the period 2002–2005. Next, Audit Analytics is used to obtain audit fee data for a set of foreign companies listed on a primary U.S. exchange. A final sample of 483 client-year observations is included in the audit fee regression analysis.

Findings – After controlling for other factors related to audit pricing, Big Four auditors with dominant country-level market shares earn a fee premium of approximately 27% over competitor firms.

Originality/value – These results suggest that individual Big Four firm reputations, as measured by fee premiums, are not homogeneous across countries. Rather, it appears the largest audit firms are associated with quality-differentiated services and thus earn higher fees. Although accounting research tends to classify large international accounting firms into a pool of the “Big Four,” these findings indicate that it is important to consider each firm's market share in specific geographic locations when examining questions related to auditor reputation and pricing.

We develop a theoretical model to compare forecast uncertainty estimated from time-series models to those available from survey density forecasts. The sum of the average variance of individual densities and the disagreement is shown to approximate the predictive uncertainty from well-specified time-series models when the variance of the aggregate shocks is relatively small compared to that of the idiosyncratic shocks. Due to grouping error problems and compositional heterogeneity in the panel, individual densities are used to estimate aggregate forecast uncertainty. During periods of regime change and structural break, ARCH estimates tend to diverge from survey measures.

Grounded theory (GT) is a very crucial qualitative tool in research inquiry. It embraces systematic, inductive, and comparative inquiry method to construct a theory. GT is mostly appropriate to investigate organizational phenomena, which involves a change process. In this chapter, the authors focus on the emergence of GT as a research inquiry tool with the focus how GT evolves from classis grounded theory to constructivist ground theory. In the detailed method of GT, a focus is given on coding method along with theoretical sampling and theoretical saturation points. Despite being a powerful technique, GT has drawn a number of criticisms. Majority GT researchers consider the technique as an inductive method with a few exceptions, where it has been deliberated as a deductive method. However, in the line of Corley (2015), it can be argued that GT should be considered as a methodological approach to study inductive phenomena having less understanding of theoretical perspective. Chapter concludes with identifying future scope of study in the field of GT.

At its best, participation observation (PO) includes the researcher living inside a formal or informal organization long enough to actually observe first-hand how the organization makes sense of its environment, frames problems and opportunities, plans and performs actions, evaluates outcomes, rewards and punishes its members, and celebrates and commiserates sacred, climatic, and/or exceptional events. The core feature of PO is being there — the researcher's presence in the same context as participants as events happen and not relying mostly on participants retrospections about what happened and the causes and consequences of what happened. In some studies PO data collection occurs unobtrusively — the researcher does not inform the organizations’ participants that she is conducting a study of their thinking and behavior — for example, in The Tearoom Trade (Humphreys, 1970) the researcher becomes a “watch queen” (lookout watching for police) in a men's room in park while others engage in homosexual acts; in The Informant (Eichenwald, 2000) an executive in an international manufacturing firm becomes an undercover researcher (with hidden cameras and listening devices) to collect data showing his colleagues planning and doing illegal price-fixing deals with executives in other firms. In most studies PO data collection is obtrusive with the organizations’ members knowing that a researcher is present for the purposes of observing, describing, and explaining what is occurring in the organization — for example, in Coming of Age in Samoa (Mead, 1943) the American researcher lived among the natives in the south Pacific island to describe rituals relating to the transformation of child to adult; in The Used Car Game (Browne, 1976) the researcher directly observed interactions of salesmen, customers, and sales managers for seven-to-ten hours a day for 15 months with all participants knowing that the researcher was “being there” to collect data to describe and understand their thinking and behavior. The intent for this chapter is not to present a full review of the PO literature; the focus here is to illustrate an obtrusive PO study in a formal organizational context in-depth. The main goals include (1) illustrating doing PO and (2) describing the value of PO research. This chapter serves to introduce the reader to relevant organizational PO literature and provides details of applying participant observation to the study of organizational behavior. The study applies an ethnographic approach to develop flow diagrams of the information processes and decision-making stages of corporate and plant executives in developing corporate purchasing agreements with suppliers. Participant observations of the processes to develop corporate purchasing agreements were conducted along with extensive personal interviews of plant buyers at seven plant locations of Epsilon Corporation — a multinational electronics firm with headquarter offices in New York City. The results indicate that valid and useful descriptions are possible of the information processes and decisions actually used to produce corporate purchasing agreements. Several diagnostic comments are provided to each of the four phases in the processes used to develop corporate purchasing agreements. A template for applying participant observation methods in case study research concludes the chapter.

This paper reviews key aspects of the regulatory response in the UK and the USA to the apparent crisis of confidence in auditing stimulated by Enron and other recent corporate scandals. Drawing on a consideration of the nature of the market for auditing services and the regulatory and corporate governance structures in which auditing is embedded, the paper argues that the bulk of recent regulatory attention appears to have been on matters of auditor independence rather than auditor competence. Such a focus is seen to have parallels with former ‘crisis’ eras in the auditing arena, while the analysis presented also raises questions about the status of the auditing function within accounting firms and the capacity of regulatory reform to deliver a fundamentally enhanced auditing function. The paper concludes by stressing the importance of making more transparent what is being done in the name of auditing and audit regulation.