Developments in France regarding the mandatory rotation of auditors: Do they enhance auditors’ independence?

2016 ◽  
Vol 22 (1) ◽  
pp. 44-66 ◽  
Author(s):  
Christine Fournès Dattin
Keyword(s):  
Research Evidence ◽  
Audit Quality ◽  
A Priori ◽  
Auditor Independence ◽  
Audit Firms ◽  
French Case ◽  
The Subject ◽  
Mandatory Rotation ◽  
Mandatory Audit Firm Rotation ◽  
The Impact

Mandatory rotation of auditors or of audit firms has been the subject of extensive debate among academics, professionals, and regulators, especially since the financial crisis of the 2000s. Does rotation enhance auditors’ independence and audit quality? The research evidence on the impact of mandatory audit firm rotation on audit quality and auditor independence is inconclusive. This article offers a historical approach to understanding the implementation of mandatory rotation, based on the French case. The auditing profession in France is strongly regulated, with four main provisions designed to reinforce auditors’ independence: prohibitions on a priori and a posteriori incompatibilities, a 6-year audit tenure, a ban on non-audit services, and the use of joint audit. The rotation of auditors was merely an additional and non-compulsory tool. However, in 2014, the European Commission decided to implement the mandatory rotation of audit firms despite the opposition of the French accounting profession and regulators. Does this suggest that the French model was ineffective? It probably does not. In this specific context of France, a mandatory rotation of audit firms would seem unlikely to enhance audit quality.

scholarly journals A theoretical approach to auditor independence and audit quality

2020 ◽  
Vol 17 (2) ◽  
pp. 124-141
Author(s):  
Rahman Yakubu ◽  
Tracey Williams
Keyword(s):  
Audit Committee ◽  
Audit Quality ◽  
Audit Fees ◽  
Auditor Independence ◽  
Accounting Scandals ◽  
Audit Firms ◽  
Mandatory Audit Firm Rotation ◽  
The Impact ◽  
Insight Into

Auditor independence and the quality of audit report is of growing concern to regulators, institutional investors and stakeholders as a series of accounting scandals have undermined the professionalism of auditors. The findings from this study produced an insight of how auditor’s independence improve audit quality and that abnormal audit fees is as a result of additional effort for auditor to carry out rigorous audit engagement as a result of wider audit scope; that mandatory audit firm rotation will enhance auditor independence, and that audit committee with nonexecutive independence will promote audit quality. The study also finds that in terms of auditor size, smaller audit firms that belong to professional bodies will provide higher audit quality. The main conclusion of this research is that where an auditor is fully independent in carrying out audit engagement with strong resistance to fees pressure will enhance audit quality. This research provides insight into the impact of IFRS adoption on audit fees.

Does Mandatory Audit Firm Rotation Enhance Auditor Independence? Evidence from Spain

2009 ◽  
Vol 28 (1) ◽  
pp. 113-135 ◽  
Author(s):  
Emiliano Ruiz-Barbadillo ◽  
Nieves Go´mez-Aguilar ◽  
Nieves Carrera
Keyword(s):  
Positive Impact ◽  
Rotation Period ◽  
Empirical Support ◽  
Auditor Independence ◽  
Audit Firm ◽  
Going Concern ◽  
Audit Firms ◽  
Mandatory Rotation ◽  
Mandatory Audit Firm Rotation ◽  
The Impact

SUMMARY: In this study, we document evidence on the impact of mandatory rotation of audit firms on auditor independence using Spanish archival data. Rotation of audit firms every nine years was mandatory in Spain from 1988–1995. Although the rule was never enforced, the Spanish context provides a unique setting to examine the effects that mandatory audit firm rotation has on auditor behavior. We examine audit reports for a sample of financially stressed companies from 1991–2000 to compare audit reporting behavior in a regime with rotation (mandatory rotation period: 1991–1994) and one without rotation (post-mandatory rotation period: 1995–2000). We test two competing hypotheses concerning the impact of mandatory rotation on the likelihood of auditors' issuing going-concern modified audit opinions. We find no evidence to suggest that a mandatory rotation requirement is associated with a higher likelihood of issuing going-concern opinions. Our results suggest that auditors' incentives to protect their reputation have a positive impact on the likelihood of issuing going-concern opinions, while auditors' incentives to retain existing clients did not impact on their decisions in both the mandatory rotation and post-mandatory rotation periods. Overall, our results provide empirical support for the arguments put forward by opponents of mandatory rotation.

scholarly journals The Impact of the Auditor Selection Process and Audit Committee Appointment Power on Investment Recommendations

2017 ◽  
Vol 37 (1) ◽  
pp. 69-87 ◽  
Author(s):  
Anna Gold ◽  
Patrick Klynsmit ◽  
Philip Wallage ◽  
Arnold M. Wright
Keyword(s):  
Audit Committee ◽  
Selection Process ◽  
Auditor Independence ◽  
Selection Processes ◽  
Corporate Governance Mechanisms ◽  
Committee Appointment ◽  
Auditor Selection ◽  
Mandatory Rotation ◽  
Mandatory Audit Firm Rotation ◽  
The Impact

SUMMARY After the global 2007–2008 financial crisis, regulatory bodies proposed alternative auditor selection processes to enhance auditor independence such as mandatory audit firm rotation or mandatory tendering (i.e., rotation that allows for the current auditor to be reappointed). However, these alternative selection processes may not be effective if management has substantial influence over auditor appointment decisions. We posit that disclosures of high appointment power of the audit committee will enhance the perceived effectiveness of rotation and tendering, and thus increase investment recommendations. In an experimental study involving 118 experienced investment professionals, we examine the impact of the auditor selection process (mandatory rotation, mandatory tendering, and voluntary selection) and the appointment power of the audit committee (high, low) on investment recommendations. We find that audit committee appointment power affects investment recommendations only when a possible auditor change is anticipated (i.e., in the case of rotation and tendering), but not when the auditor selection is voluntary. Further, rotation and tendering lead to a higher recommended investment likelihood than voluntary selection, but only when an audit committee has high appointment power. In all, the findings underscore that investors do not view auditor selection processes in isolation of a company's internal corporate governance mechanisms. JEL Classifications: M42; M48; G11.

scholarly journals How Investors Perceive Mandatory Audit Firm Rotation in Korea

2019 ◽  
Vol 11 (4) ◽  
pp. 1089 ◽  
Author(s):  
Sook Kim ◽  
Seon Kim ◽  
Dong Lee ◽  
Seung Yoo
Keyword(s):  
Audit Quality ◽  
Indirect Evidence ◽  
Auditor Independence ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Audit Firm ◽  
The Cost ◽  
Mandatory Audit Firm Rotation ◽  
The Impact

Credible audit quality is a precondition for a firm’s sustainability. External auditors offer assurance with regard to the uncertain factors that can jeopardize a firm’s sustainability and provide audit opinions that help investors assess risk. After the global crisis and accounting scandals, mandatory audit firm rotation has been implemented globally. However, few studies have investigated either the cost or the benefit of mandatory audit firm rotation. Prior studies provide only indirect evidence on the effects of audit firm tenure on audit quality/perceived audit quality. By discussing prior arguments, we examine how investors perceive the implementation of mandatory audit firm rotation in Korea. Using a unique and direct setting to examine our research question, we analyze the relationship between firms with mandatorily switched audit firms and the cost of equity capital from 2006 to 2008. We find that the mandatory change in the auditors has a negative association with the cost of equity capital. The results are robust to using the arithmetic mean of the cost of equity capital, lagged control variables, and the manufacturing industry effect. The results indicate that investors perceive that mandatory audit firm rotation provides an environment for qualified audits by enhancing auditor independence and skepticism, and thus decreases the cost of equity capital. This study helps to improve our understanding of the impact of mandatory audit firm rotation the information risk evaluations and provides political implications for policy makers by showing the benefit of mandatory audit firm rotation.

scholarly journals Effects Of Rotation On Auditor Independence And Quality Of Audit Service In Malaysian Banking Industry

2012 ◽  
Vol 6 (2) ◽  
pp. 249 ◽  
Author(s):  
Kabiru Isa Dandago ◽  
Nur Diyana Binti Zamro
Keyword(s):  
Audit Quality ◽  
Banking Industry ◽  
Auditor Independence ◽  
Primary Data ◽  
Auditor Rotation ◽  
Mandatory Requirement ◽  
Banking Institutions ◽  
Mandatory Rotation ◽  
The Impact

This study highlights the nature of auditor rotation in the Malaysian banking industry and its effects on auditor independence and quality of audit service in the industry. To generate primary data for analysis, interviews were conducted on officials of two banking institutions and one accounting/audit firm. The study finds that there have not been significant changes in the annual appointment of auditors in the Malaysian banking institutions over the last ten years, suggesting that there is a good working relationship between the auditors (especially the Big4) and the banks. This allows room for continuous debate on the need for mandatory rotation as a<br />means for ensuring auditor independence and high audit quality in the Malaysian banking industry. In the absence of statutory/mandatory requirement for auditor rotation, it is recommended that the Malaysian banking institutions should be carefully evaluating the impact auditor rotation would have on the quality of audit work on their current and future financial statements, as they decide whether to rotate their auditors or not.

scholarly journals Impact of auditor and audit firm rotation on accounting and audit quality: A critical analysis of the EC regulation draft

2012 ◽  
Vol 1 (3) ◽  
pp. 7-13 ◽  
Author(s):  
Patrick Velte ◽  
Markus Stiglbauer
Keyword(s):  
Audit Quality ◽  
Rotation Period ◽  
Auditor Independence ◽  
Financial Accounting ◽  
Audit Firm ◽  
Positive Effects ◽  
Auditor Rotation ◽  
Mandatory Rotation ◽  
Mandatory Audit Firm Rotation ◽  
A Current

In a current regulation draft of 2011, the European Commission (EC) plans the mandatory audit firm rotation principally after six years and with regard to a cooling off period of four years to increase auditor independence. This could complement the internal mandatory rotation (auditor rotation) by the 8th EC directive. The present paper gives a state of the art analysis of the empirical research results with regard to auditor and audit firm rotation. In contrast to the perception of the EC, the majority of the empirical results doesn’t find evidence for increased financial accounting and audit quality by audit firm rotation. Furthermore, the positive effects of the internal rotation period of seven years and the cooling off period of two years by the 8th EC directive are not empirically proved yet.

The Effect of Mandatory Audit Firm Rotation on Audit Quality and Audit Fees: Empirical Evidence from the Korean Audit Market

2014 ◽  
Vol 33 (4) ◽  
pp. 167-196 ◽  
Author(s):  
Soo Young Kwon ◽  
Youngdeok Lim ◽  
Roger Simnett
Keyword(s):  
Empirical Evidence ◽  
Audit Quality ◽  
Audit Fees ◽  
Discretionary Accruals ◽  
Data Availability ◽  
Audit Firm ◽  
Audit Market ◽  
Audit Firms ◽  
Mandatory Rotation ◽  
Mandatory Audit Firm Rotation

SUMMARY: Using a unique setting in which mandatory audit firm rotation was required from 2006–2010, and in which both audit fees and audit hours were disclosed (South Korea), this study provides empirical evidence of the economic impact of this policy initiative on audit quality, and the associated implications for audit fees. This study compares both pre- and post-policy implementation and, after the implementation of the policy, mandatory long-tenure versus voluntary short-tenure rotation situations. Where audit firms were mandatorily rotated post-policy, we observe that audit quality (measured as abnormal discretionary accruals) did not significantly change compared with pre-2006 long-tenure audit situations and voluntary post-rotation situations. Audit fees in the post-regulation period for mandatorily rotated engagements are significantly larger than in the pre-regulation period, but are discounted compared to audit fees for post-regulation continuing engagements. We also find that the observed increase in audit fees and audit hours in the post-regulation period extends beyond situations where the audit firm was mandatorily rotated, suggesting that the introduction of mandatory audit firm rotation had a much broader impact than the specific instances of mandatory rotation. Data Availability: Most of the financial data used in the present study are available from the KIS Value Database. The data for audit hours and fees were drawn from statements of operating results filed with the Financial Supervisory Services (FSS) in Korea.

The Effect of Office Changes within Audit Firms on Clients' Audit Quality and Audit Fees

2020 ◽  
Vol 39 (1) ◽  
pp. 71-99
Author(s):  
Carl W. Hollingsworth ◽  
Terry L. Neal ◽  
Colin D. Reid
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Additional Analysis ◽  
Audit Firm ◽  
Audit Firms ◽  
Audit Fee ◽  
The Impact ◽  
Audit Partner Rotation

SUMMARY While prior research has examined audit firm and audit partner rotation, we have little evidence on the impact of within-firm engagement team disruptions on the audit. To examine these disruptions, we identify a unique sample of companies where the audit firm issuing office changed but the audit firm did not change and investigate the effect of these changes on the audit. Our results indicate that companies that have a change in their audit firm's issuing office exhibit a decrease in audit quality and an increase in audit fees. In additional analysis, we partition office changes into two groups—client driven changes and audit firm driven changes. This analysis reveals that client driven changes are more likely to result in a higher audit fee while audit quality is unchanged. Conversely, audit firm driven changes do not result in a higher audit fee but do experience a decrease in audit quality.

scholarly journals The Effect of Independence and Integrity on Audit Quality: Is There A Moderating Role for E-Audit?

2021 ◽  
Vol 23 (3) ◽  
Author(s):  
Diza Dianeke Budi Prabowo ◽  
Dwi Suhartini
Keyword(s):  
Industrial Revolution ◽  
Audit Quality ◽  
Practical Implication ◽  
Financial Statements ◽  
Auditor Independence ◽  
Audit Process ◽  
Accounting Firms ◽  
Audit Reports ◽  
The Impact

The financial statements must be reliable and become a benchmark in considering an audit decision on the financial statements. In order for this to be achieved, independence and integrity is required in carrying out the audit process. E-Audit helps overcome challenges in the industrial revolution 4.0 and prevent fraud. This research aims of testing and analyzing the role of e-audit in moderating the impact of auditor independence and integrity on audit quality. The data was collected through a questionnaire distributed to auditors at Public Accounting Firms in Surabaya. There are 36 respondents involved. The data were analyzed using SmartPLS. The results showed that auditor independence positively effect audit quality, auditor integrity positively effect audit quality; e-audit does non moderate the effect of auditor independence on audit quality; ande-Audit negatively moderates the effect of auditor integrity on audit quality. The practical implication of this research is that when determining high audit quality, independent auditors should at least increase their independence and integrity so that the resulting audit reports are of high quality and can be a reference for decision makers.

Did the PCAOB's Restrictions on Auditors' Tax Services Improve Audit Quality?

2015 ◽  
Vol 91 (5) ◽  
pp. 1493-1512 ◽  
Author(s):  
Clive S. Lennox
Keyword(s):  
Treatment Group ◽  
Audit Quality ◽  
Auditor Independence ◽  
Control Group ◽  
Difference In Differences ◽  
Significant Drop ◽  
Going Concern ◽  
The Impact

ABSTRACT In 2005–2006, the PCAOB imposed restrictions on auditors' tax services in order to strengthen auditor independence and improve audit quality. The restrictions resulted in a significant drop in auditor-provided tax services (APTS). To test the impact on audit quality, I partition the sample into a treatment group (companies whose APTS purchases dropped significantly when the restrictions were introduced) and a control group (companies whose APTS purchases were relatively unaffected) and I measure audit quality using the incidence of accounting misstatements, tax-related misstatements, and auditors' going-concern opinions. Using a difference-in-differences design, I find no change in audit quality for the treatment group relative to the control group after the restrictions are imposed.

Sign in / Sign up

Export Citation Format

Share Document