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.

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 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.

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.

Mandatory Audit Firm Rotation and Audit Quality

2015 ◽  
Vol 31 (3) ◽  
pp. 1089 ◽  
Author(s):  
Hakwoon Kim ◽  
Hyoik Lee ◽  
Jong Eun Lee
Keyword(s):  
Audit Quality ◽  
Global Financial Crisis ◽  
Auditor Independence ◽  
Financial Statement ◽  
Policy Makers ◽  
Audit Firm ◽  
Going Concern ◽  
Financial Statement Audit ◽  
Mandatory Audit Firm Rotation ◽  
First Time

Recently, regulators and policy makers who witnessed the global financial crisis during 20072009 began considering a variety of ways to enhance auditor independence and financial reporting quality, ultimately aiming at investor protection. Since the enactment of the SarbanesOxley Act of 2002 (SOX), the Mandatory Audit Firm Rotation (MAFR) requirement has once again received significant attention from regulators and policy makers around the world, including the European Union (EU) and the U.S. Public Companies Accounting Oversight Board (PCAOB). In this paper, we investigate whether MAFR enhances audit quality in Korea. We find that under MAFR, newly rotated auditors are more likely to issue first-time going-concern audit opinions to financially distressed firms during their initial (first-year) financial statement audit compared with under the Voluntary Audit Firm Change (VAFC). Moreover, firms audited by mandatorily rotated new auditors have less discretionary accruals and higher accrual quality than those audited by voluntarily switched new auditors during the initial audit engagement. These results of earnings quality are more pronounced for firms that received a first-time going-concern audit opinion during the initial financial statement audit under MAFR. Taken together, the findings suggest that MAFR produces better audit quality than the VAFC. Further, our study provides implications for regulators and policy makers of countries considering the adoption of MAFR.

Threats to Auditor Independence: The Impact of Relationship and Economic Bonds

2011 ◽  
Vol 30 (1) ◽  
pp. 121-148 ◽  
Author(s):  
Ping Ye ◽  
Elizabeth Carson ◽  
Roger Simnett
Keyword(s):  
Audit Quality ◽  
Joint Effect ◽  
Auditor Independence ◽  
Audit Firm ◽  
Going Concern ◽  
Long Duration ◽  
Going Concern Opinion ◽  
Negative Effect ◽  
Nonaudit Services ◽  
The Impact

SUMMARY: This study examines the association of a comprehensive set of auditor-client relationship bonds (audit firm tenure, audit engagement partner tenure, long duration director-auditor relationships, and alumni affiliation) with the level of economic bonds provided to an audit client (nonaudit services [NAS]). We further examine the effect of these economic and relationship bonds on auditor independence in the context of nonaudit services fees and the propensity to issue going-concern opinions. It is these economic and relationship bonds that have attracted the interest of regulators in their consideration of audit quality. This study was undertaken in Australia in 2002, which provided a context in which all these relationships could be examined before new regulations were introduced. Results show that audit firm tenure and alumni affiliation are associated with clients purchasing auditor-provided NAS, with stronger associations for clients with low agency costs. We further find that long audit engagement partner tenure and a joint effect of auditor-provided NAS and alumni affiliation have a negative effect on the auditor’s propensity to issue a going-concern opinion.

scholarly journals Mandatory audit firm rotation: A student perspective An assessment of the perceived impact on auditor independence

2021 ◽  
Vol 25 (1) ◽  
pp. 1-11
Author(s):  
Msizi Gwala ◽  
Bomi Cyril Nomlala
Keyword(s):  
South African ◽  
The United States ◽  
Auditor Independence ◽  
Student Perspective ◽  
The European Union ◽  
Negative Consequences ◽  
Audit Firm ◽  
Perceived Impact ◽  
Mandatory Audit Firm Rotation ◽  
The Impact

Mandatory Audit Firm Rotation (MAFR), set to be implemented in South African from 1 April 2023, is poised by its propellers the world over as an essential reform in the efforts to improve auditor independence. Available literature suggests that there is no consensus regarding the impact of the implementation of MAFR. The divergent views on MAFR were demonstrated in recent time, with the European Union (EU) choosing to adopt it, while regulators in the United States decided to reject it. This paper examines the perspective of university auditing students on MAFR by examining the perceived impact it could have on auditor independence. The study finds that the majority (from 413 participants) of students surveyed are of the view that MAFR would yield positive outcomes on independence. The majority, however, agree on the MAFR Independence Benefit but warn about the possible negative consequences. MAFR will strengthen the independence of auditors.

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.

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 audit firm attributes on audit delay in the presence of financial reporting complexity

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Chu Chen ◽  
Hongmei Jia ◽  
Yang Xu ◽  
David Ziebart
Keyword(s):  
Financial Reporting ◽  
Content Type ◽  
Audit Firm ◽  
Public Firms ◽  
Business Reporting ◽  
Audit Firms ◽  
Mandatory Audit Firm Rotation ◽  
The Impact ◽  
Firm Attributes ◽  
Non Audit Services

Purpose This study aims to examine the effects of audit firm attributes on audit delay associated with financial reporting complexity (FRC). Design/methodology/approach The authors use regression models with a sample of public firms with distinct monetary eXtensible Business Reporting Language tags to test the research hypotheses. Findings The authors find that two audit firm attributes (audit firm tenure and non-audit services performance) moderate the effect of FRC on audit delay. Practical implications The study provides insights to regulators, practitioners and investors into how firms may reduce audit delay from FRC by keeping their long-tenured auditors and allowing their auditors to gain more knowledge about the firms by providing non-audit services. The results, therefore, have implications for mandatory audit firm rotation. Originality/value To the best of the knowledge, this study conducts the first comprehensive analysis of this topic, exploring the impact of three audit firm attributes on audit delay caused by FRC. It attempts to illustrate the impact of external audit firms on reducing the adverse consequences of FRC.

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