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Article
Publication date: 18 September 2007

Nieves Carrera, Nieves Gómez‐Aguilar, Christopher Humphrey and Emiliano Ruiz‐Barbadillo

In recent international debates on auditing regulation, Spain has assumed a real prominence as a claimed practical example of where a policy of mandatory audit firm rotation did…

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Abstract

Purpose

In recent international debates on auditing regulation, Spain has assumed a real prominence as a claimed practical example of where a policy of mandatory audit firm rotation did not work and was duly abolished. This study aims to provide an analysis of the implementation and subsequent removal of mandatory audit firm rotation in Spain in the 1990s.

Design/methodology/approach

This takes the form of historical analysis; the evidence in the paper derives from congressional hearings, financial newspapers and documents produced by the professional associations of auditors in Spain.

Findings

This paper demonstrates that at no stage was mandatory rotation of audit firms ever enforced on Spanish auditors. Further, the revision and subsequent removal of the Spanish law on mandatory audit firm rotation emerge as a rather politicized process, with no evident reference being made in the process of legislative reform to Spanish auditing experiences. The analysis also reveals that at the very time that Spain was being cited internationally for rejecting mandatory audit firm rotation, Spanish political parties and regulators were debating whether to “re‐introduce” such a regulation.

Originality/value

The clear implication of the paper is that considerable caution needs to be taken in today's international‐auditing arena, when analyzing the standpoints and claims made by professional associations and the evidence they provide to support their arguments for and against regulatory reform.

Details

Accounting, Auditing & Accountability Journal, vol. 20 no. 5
Type: Research Article
ISSN: 0951-3574

Keywords

Article
Publication date: 25 February 2018

Reiner Quick and Florian Schmidt

As a consequence of the global financial and economic crisis, the European Commission recently reformed the audit market. One objective was to restore public trust in the auditing…

Abstract

As a consequence of the global financial and economic crisis, the European Commission recently reformed the audit market. One objective was to restore public trust in the auditing profession and thus to enhance the audit function. This study investigates whether perceptions of auditor independence and audit quality are influenced by audit firm rotation, auditor retention and joint audits, because regulators argue that these instruments can improve auditor independence and audit quality. Therefore, we conduct an experiment with bank directors and institutional investors in Germany. The results indicate a negative main effect for joint audits on perceived auditor independence, and that a rotation cycle of 24 years marginally significantly impairs participant perceptions of audit quality, compared to a rotation cycle of only ten years. Besides the main effects, planned contrast tests suggest a negative interaction between rotation and joint audit on participant perceptions of auditor independence. Moreover, a negative interaction effect is revealed between rotation after 24 years and retention on perceptions of audit quality. It is particularly noteworthy that we failed to identify a positive impact of the regulatory measures taken or supported by the European Commission on perceptions of auditor independence and audit quality.

Details

Journal of Accounting Literature, vol. 41 no. 1
Type: Research Article
ISSN: 0737-4607

Keywords

Article
Publication date: 15 July 2013

Diana Mostafa Mohamed and Magda Hussien Habib

The purpose of this paper is to introduce the problem of the lack of auditor independence in the Egyptian context, how it might affect the audit quality, through assessing reasons…

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Abstract

Purpose

The purpose of this paper is to introduce the problem of the lack of auditor independence in the Egyptian context, how it might affect the audit quality, through assessing reasons behind the voluntary switching of auditors, whether this switch is in the side of improving audit quality or not and the suggestion of the mandatory auditor rotation as a solution to such a problem.

Design/methodology/approach

The paper's findings are based on a survey analysis. The survey is done through a questionnaire created by the researcher (author) from the literature and distributed among audit practitioners from the Big Four audit firms operating in Egypt.

Findings

The problem of lack of auditor independence exists in Egypt due to many reasons. The main reason is the poor structure of corporations of being closely held. It was also found that the voluntary switching of auditors are for purposes improving the quality; from these reasons is the search of more reputable auditors and timelier audit opinions. Finally auditor rotation was suggested by the practitioners in order to overcome the problems of lack of independence and that the mandatory firm rotation is suggested instead of the mandatory partner rotation.

Practical implications

The mandatory audit firm rotation in different countries had some positive effect on audit quality. The application of mandatory rotation in the Egyptian context where there the problem of the lack of auditor independence is really clear is suggested so as to overcome the consequences of the independence problem and improve the audit quality.

Originality/value

This research work tries to dig more into the Egyptian context as a developing country regarding the threats to the auditing professionals in terms of the causes that might be impairing their independence as well as assessing the applicability of the mandatory rotation practice in Egypt.

Details

Education, Business and Society: Contemporary Middle Eastern Issues, vol. 6 no. 2
Type: Research Article
ISSN: 1753-7983

Keywords

Article
Publication date: 12 July 2013

David S. Jenkins and Thomas E. Vermeer

The purpose of this paper is to provide a succinct overview of academic research that has examined audit firm rotation both in the USA and in other countries.

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Abstract

Purpose

The purpose of this paper is to provide a succinct overview of academic research that has examined audit firm rotation both in the USA and in other countries.

Design/methodology/approach

The authors outline the unresolved nature of academic research on audit firm rotation, review recent literature, discuss why academics have been unable to resolve this issue and offer suggestions for improving subsequent research in the area.

Findings

Overall, the collective evidence is inconclusive at best; with earlier studies generally finding mixed results and more recent studies indicating that audit quality generally goes through two distinct phases during the auditor‐client relationship, the “auditor learning” and “auditor closeness” phases.

Originality/value

Given the importance of the issue, this article provides an overview of academic research that has examined audit firm rotation, discusses why academics have been unable to resolve this issue, and provides suggestions on how academics and practitioners can work together to enhance the quality of future research.

Details

Accounting Research Journal, vol. 26 no. 1
Type: Research Article
ISSN: 1030-9616

Keywords

Article
Publication date: 6 June 2016

Laura K. Rickett, Anastasia Maggina and Pervaiz Alam

This study aims to examine the relationship between auditor tenure and conservatism for firms in Greece. Greece not only has a high incidence of earnings management but is also…

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Abstract

Purpose

This study aims to examine the relationship between auditor tenure and conservatism for firms in Greece. Greece not only has a high incidence of earnings management but is also required under the new European Commission (EC) regulation to comply with mandatory auditor rotation. Therefore, Greece is an ideal setting in which to study the association between auditor tenure and accounting conservatism.

Design/methodology/approach

Similar to Jenkins and Velury (2008), this paper uses Basu’s (1997) asymmetrical timeliness of earnings as a measure of conservatism. Following Li (2010), the regression is re-estimated for subsamples based on client importance as measured by the ranking of client sales among all clients audited by the firm.

Findings

In contrast to Li (2010), the results of this study, which used a sample of firms in Greece, indicate that conservatism decreases as the auditor–client relationship lengthens. Client importance does not appear to affect the relationship between auditor tenure and conservatism, as measured by asymmetric timeliness of earnings. However, when using the accrual–cash flow measure of conservatism (Ball and Shivakumar, 2005), it is found that auditor tenure is positively (negatively) associated with conservatism for less (more) important clients. The results suggest that longer auditor tenure may have a negative impact on audit quality in certain countries where accounting quality has been found to be poor. Therefore, the new EC regulation requiring mandatory auditor rotation may in fact improve audit quality for firms in Greece.

Research limitations/implications

This study’s sample consists of firms on the Athens Stock Exchange for the period of 1998-2011. This sample was purposely selected because of the unique conditions of rampant earnings management and low incentive in Greece for the auditors to exert effort to detect such practices. Moreover, Greece is subject to the new EC regulations requiring mandatory auditor rotation beginning in 2014. Future studies could examine this issue in alternate settings and over different time periods. Also, other cross-sectional variations among firms which affect the association between auditor–client tenure and audit quality may exist.

Practical implications

The findings are important to regulators such as the EC and indicate that Greece may be an appropriate setting in which to require mandatory auditor rotation. These results are also useful to auditors who wish to improve the audit quality and the public’s perception of their work.

Originality/value

Auditor tenure has been the subject of considerable debate, and regulators contend that long auditor tenure reduces audit quality. There may be a valid argument in favor of mandatory auditor rotation in countries particularly susceptible to low accounting quality due to issues such as rampant earnings management. Greece appears to be one such example, and this study provides support in favor of that argument by demonstrating that longer auditor tenure may lead to lower accounting quality in terms of conservatism. Therefore, the recent EC regulation may result in improved audit quality for firms in Greece.

Details

Managerial Auditing Journal, vol. 31 no. 6/7
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 23 May 2008

Andrew B. Jackson, Michael Moldrich and Peter Roebuck

The purpose of this paper is to investigate the effect that a regime of mandatory audit firm rotation would have on audit quality.

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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.

Details

Managerial Auditing Journal, vol. 23 no. 5
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 1 August 2022

Abiot Tessema and Heba Abou-El-Sood

Audit rotation (AR) is a key policy initiative implemented in global jurisdictions to deal with concerns about audit quality. Auditing financial reports involves communicating…

Abstract

Purpose

Audit rotation (AR) is a key policy initiative implemented in global jurisdictions to deal with concerns about audit quality. Auditing financial reports involves communicating attested value-relevant company information to investors, and hence audit quality plays a role in the quality of financial reporting information. This paper aims to investigate whether AR affects the degree of information asymmetry (IS) between investors. It further aims to examine whether voluntary AR results in less asymmetric information compared to mandatory AR. Additionally, it examines whether political connections moderate the association between AR and IS.

Design/methodology/approach

The authors use data from publicly traded banks across the Gulf Cooperation Council (GCC) for the period 2010–2018. The authors include several variables to control for corporate governance and other firm-specific characteristics by using country-year fixed-effects regression model.

Findings

The authors find higher IS for banks that periodically rotate auditor, while banks voluntarily choose to rotate auditors obtain high-quality audits, which results in higher trading volume and lower stock return volatility, hence lower IS. The results suggest that when banks voluntarily choose to rotate auditors, investors perceive these banks as more committed to obtaining high-quality audits relative to mandatory AR. Providing higher quality audits enhances the credibility of reported information and thus reduce the level of IS. Moreover, IS following AR is higher for politically connected banks than for similar but politically unconnected banks. Finally, investors perceive voluntary AR as a disciplining tool, which mitigates IS. This mitigating role is not affected by bank political connectedness.

Research limitations/implications

This study has limitations as the definition of AR could be interpreted as binary or too narrow, and hence it may not be appropriate to generalize findings to different contexts. Nonetheless, this study casts light on a new perspective to reconcile the existing mixed evidence on the influence of AR on IS and the moderating role of political connections. A further limitation is that because of data unavailability, the authors were unable to use other proxies (e.g. bid-ask spreads and analyst forecast dispersion) of IS.

Practical implications

The present findings provide insight to regulators, policymakers and standard setters on the potential adverse effect of political connections on the role of AR in mitigating IS. The results underscore the importance of voluntary AR, and suggest that regulators, policymakers and standard setters encourage firms to rotate their auditors periodically.

Originality/value

This study provides evidence in a setting that is unique at the economic, social and regulatory levels. Prior literature is lacking and has been centered on developed countries or focusing on single-country specifications. The data set of this study is unique and allows us to examine the interplay between political influence that arises through ownership and management roles of influential members of state.

Details

Meditari Accountancy Research, vol. 31 no. 5
Type: Research Article
ISSN: 2049-372X

Keywords

Article
Publication date: 8 July 2020

Michael Harber and Warren Maroun

This study aims to address an acknowledged gap in the literature for the analysis of experienced practitioner views on the effects and implications of mandatory audit firm…

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Abstract

Purpose

This study aims to address an acknowledged gap in the literature for the analysis of experienced practitioner views on the effects and implications of mandatory audit firm rotation (MAFR).

Design/methodology/approach

Using an exploratory and sequential design, data was collected from South African regulatory policy documents, organisational comment letters and semi-structured interviews of practitioners. These findings informed a field survey, administered to auditors, investors, chief financial officers (CFOs) and audit committee members of Johannesburg Stock Exchange (JSE) listed companies.

Findings

Practitioners expressed considerable pushback against the potential efficacy of MAFR to improve audit quality due to various “switching costs”, notably the loss of client-specific knowledge and expertise upon rotation. In addition, the cost and disruption to both the client and audit firm are considered significant and unnecessary, compared to audit partner rotation. The audit industry may suffer reduced profitability and increased strain on partners, leading to a decline in the appeal of the profession as a career of choice. This is likely to have negative implications for audit industry diversity objectives. Furthermore, the industry may become more supplier-concentrated amongst the Big 4 firms.

Practical implications

The findings have policy implications for regulators deciding whether to adopt the regulation, as well as guiding the design of policies and procedures to mitigate the negative effects of adoption.

Originality/value

The participants are experienced with diverse roles concerning the use, preparation and audit of financial statements of large exchange-listed multinational companies, as well as engagement in the auditor appointment process. The extant literature presents mixed results on the link between MAFR and audit quality, with most studies relying on archival and experimental designs. These have a limited ability to identify and critique the potential’s witching costs and unintended consequences of the regulation. Experienced participants responsible for decision-making within the audit, audit oversight and auditor appointment process, are best suited to provide perspective on these effects, contrasted against the audit regulator’s position.

Details

Managerial Auditing Journal, vol. 35 no. 7
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 3 August 2021

Nemiraja Jadiyappa, L. Emily Hickman, Ram Kumar Kakani and Qambar Abidi

The Indian Companies Act 2013 mandated auditor rotations in the financial year 2018–2019. Similar regulations are being considered in many countries, based on the assumption that…

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Abstract

Purpose

The Indian Companies Act 2013 mandated auditor rotations in the financial year 2018–2019. Similar regulations are being considered in many countries, based on the assumption that longer tenure is detrimental to audit quality; yet, the evidence from investigations of this assumption is inconclusive. This paper aims to examine the effect of moderating factors on the relation between audit quality and audit tenure, given the regulatory trend and the lack of consensus in extant literature.

Design/methodology/approach

This paper examines the relationship between audit quality and audit tenure among Indian firms from 2001 to 2015 and tests for moderating factors including auditor compensation, business group affiliation and chief executive officer (CEO) duality.

Findings

Contrary to the objective of mandatory rotations, this study finds that longer auditor tenure generally enhanced audit quality among Indian firms prior to mandatory rotations. However, for companies paying abnormally high compensation to auditors, this paper finds that longer tenure decreases audit quality, particularly if the firm is affiliated with a business group or firms where the CEO also serves as the board chair. Thus, the potential benefits of mandated shorter tenure appear to be confined to high-fee paying companies with a business group affiliation and/or a dual-role CEO.

Originality/value

This study is one of the first to examine conditioning factors that affect the relationship between audit quality and auditor tenure. Results suggest that regulations limiting auditor tenure would be beneficial only to the shareholders of a narrow group of firms; while for the majority of firms, limiting auditor tenure may actually be counter-productive.

Details

Managerial Auditing Journal, vol. 36 no. 5
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 4 January 2008

Neil Fargher, Ho‐Young Lee and Vivek Mande

This paper aims to examine the effect of audit partner tenure (PARTEN) on client managers' accounting discretion.

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Abstract

Purpose

This paper aims to examine the effect of audit partner tenure (PARTEN) on client managers' accounting discretion.

Design/methodology/approach

The authors contend that, when a new audit partner is from the same audit firm as the outgoing audit partner (audit partner rotation), audit quality increases because the new audit partner brings “fresh eyes” to the engagement.

Findings

The results confirm this conjecture. The authors find that, in the initial years of tenure of a new audit partner, client managers' accounting discretion decreases when the new partner is from the same audit firm as the outgoing partner. However, when the new audit partner is from a different audit firm as the outgoing partner (audit firm rotation), it is found that client managers' accounting discretion increases in those initial years.

Originality/value

The results provide support for recent legislation in the US restricting audit PARTEN and should be of interest to other regulatory bodies contemplating mandatory audit partner rotation.

Details

Managerial Auditing Journal, vol. 23 no. 2
Type: Research Article
ISSN: 0268-6902

Keywords

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