scholarly journals Will mandatory audit firm rotation reduce audit market concentration in South Africa?

2021 ◽  
Vol 52 (1) ◽  
Author(s):  
Nicolene Wesson
Keyword(s):  
South Africa ◽  
South African ◽  
Audit Quality ◽  
Market Concentration ◽  
Unintended Consequences ◽  
Calculated Concentration ◽  
Audit Firm ◽  
Audit Market ◽  
Big 4 ◽  
Mandatory Audit Firm Rotation

Purpose: Deconcentrating the audit market was one of the stated objectives of the proposed mandatory audit firm rotation (MAFR) ruling in South Africa. With MAFR being a contentious topic, this study aimed to explore the possible effect of MAFR on audit market concentration in South Africa in anticipation of the implementation thereof in 2023.Design/methodology/approach: A sample of 415 South African listed companies was studied for the period 2010–2018. Data were mainly captured from annual reports. Descriptive statistics and significance testing were performed on calculated concentration ratios and identified audit firm rotations.Findings/results: South African audit market concentration mirrored empirical evidence from most developed countries – with Big 4 audit firms dominating the audit market, whilst a monopoly within the Big 4 audit firm grouping was also evident. Based on observed audit firm concentration and audit firm rotation behaviour, it was anticipated that MAFR might further increase audit market concentration. A concerning result was the sheer scale of audit firm rotations to be carried out in anticipation of MAFR in 2023.Practical implications: This study identified the impairment of audit quality and increased costs as possible unintended consequences of MAFR in South Africa.Originality/value: This study contributed to the limited body of knowledge on the possible effect of MAFR in South Africa. This study proposed alternatives to MAFR and recommended areas for future research to support evidence-based decisions on remedies to address audit quality and audit market concentration in South Africa.

The Effects of Mandatory Audit Firm Rotation on Client Importance and Audit Industry Concentration

2017 ◽  
Vol 93 (1) ◽  
pp. 1-27 ◽  
Author(s):  
Christopher Bleibtreu ◽  
Ulrike Stefani
Keyword(s):  
Market Concentration ◽  
Unintended Consequences ◽  
The European Union ◽  
Audit Firm ◽  
Bidding Strategies ◽  
Audit Market ◽  
Rotation System ◽  
Economic Forces ◽  
Mandatory Audit Firm Rotation ◽  
Equilibrium Number

ABSTRACT Recently, a system of audit firm rotation has been implemented for the audits of listed companies conducted in the European Union (EU). In the U.S., in contrast, the regulator decided against such rotation. Whereas proponents argue that rotation would strengthen independence and decrease audit market concentration, opponents stress the importance of auditors' learning effects, which would be eliminated by a change in auditors. In extending the market matching model of Salop (1979), we provide an analysis that integrates these contradictory views. We assume that both auditors' industry expertise and their experience in auditing a client decrease audit costs. We investigate the bidding strategies applied to re-acquire clients that were lost due to rotation, auditors' profit contributions, the equilibrium number of auditors (i.e., audit market concentration), and the economic importance of specific clients. Our findings indicate that the regulators' goals of simultaneously decreasing client importance and audit market concentration are in direct conflict and, therefore, the rotation system might have unintended consequences. Our model, thus, suggests how different institutional parameters give rise to economic forces that can support diverging decisions regarding the implementation of MAR.

Mandatory audit firm rotation: a critical composition of practitioner views from an emerging economy

2020 ◽  
Vol 35 (7) ◽  
pp. 861-896
Author(s):  
Michael Harber ◽  
Warren Maroun
Keyword(s):  
Audit Committee ◽  
Audit Quality ◽  
Unintended Consequences ◽  
Policy Implications ◽  
Chief Financial Officers ◽  
Structured Interviews ◽  
Design Data ◽  
Content Type ◽  
Audit Firm ◽  
Mandatory Audit Firm Rotation

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.

scholarly journals The relation of auditor tenure to audit quality: Empirical evidence from the German audit market

2013 ◽  
Vol 2 (1) ◽  
pp. 27-43 ◽  
Author(s):  
Patrick Krauß ◽  
Henning Zülch
Keyword(s):  
Audit Quality ◽  
The European Union ◽  
Short Term ◽  
Audit Firm ◽  
Audit Market ◽  
Auditor Tenure ◽  
Client Relationship ◽  
Mandatory Audit Firm Rotation

This study investigates whether and how the length of an auditor-client relationship affects audit quality. Using a sample of 1,071 firm observations of large listed companies for the sample period of 2005 to 2011, the study is one of the first to empirically analyze this auditing issue for the German audit market. The empirical results demonstrate that neither short term nor long term audit firm tenure seems to be a significant factor with regard to audit quality in Germany. In the wake of the ongoing discussion in the European Union regarding the optimal audit tenure length for the quality of the conducted statutory audits, our findings do not support the idea of a mandatory audit firm rotation rule.

scholarly journals Joint audit, audit market concentration, and audit quality: Perceptions of stakeholders in the UAE

2020 ◽  
Vol 17 (2) ◽  
pp. 32-45
Author(s):  
Yasser Barghathi ◽  
Esinath Ndiweni ◽  
Alhashmi Aboubaker Lasyoud
Keyword(s):  
Emerging Economies ◽  
Audit Quality ◽  
Practical Implication ◽  
Market Concentration ◽  
Structured Interviews ◽  
Face To Face ◽  
Audit Market ◽  
Quality Perceptions ◽  
Big 4 ◽  
The Cost

The present study is intended to scholarly explore auditors’ perceptions regarding joint audits; whether it can improve audit quality. To reach this goal, participants were enrolled from Big 4, non-Big 4, and other stockholders. In addition, the present study examines the perception of the same stakeholders in terms of how audit concentration affects the audit market in the UAE. Being a qualitative study, 12 semi-structured interviews were conducted to collect required data; 4 face to face and 8 through using Google forms. The finding of the study revealed mixed perception regarding joint audits; it may improve audit quality at the cost of high fees and free-rider problems. Findings of the study has practical implication for policymakers of emerging economies around the globe, such as policymakers who can make joint audits as compulsory. Another significance of the present work is that it has allowed for the perception of stakeholders, who are at the center of the controversial subject of joint audits and audit market concentration. The study suggests that there is a need for removing language barriers; it will benefit some firms in the form of directly communicating with auditors either in English or in Urdu.

Investor Reaction to the Prospect of Mandatory Audit Firm Rotation

2016 ◽  
Vol 92 (1) ◽  
pp. 183-211 ◽  
Author(s):  
Lauren C. Reid ◽  
Joseph V. Carcello
Keyword(s):  
Audit Quality ◽  
Market Reaction ◽  
Abnormal Returns ◽  
Data Availability ◽  
Control Group ◽  
Cross Sectional ◽  
Audit Firm ◽  
Auditor Tenure ◽  
Big 4 ◽  
Mandatory Audit Firm Rotation

ABSTRACT The PCAOB recently considered implementing mandatory audit firm rotation in hopes of better aligning auditors' interests with investors' interests, suggesting that the PCAOB views long auditor tenure as problematic. However, the accounting profession argues that long tenure actually improves audit quality. This study provides insight into investors' views by evaluating the market's reaction to events related to the potential adoption of rotation that occurred between 2011 and 2013. The results provide some evidence that the market reacts negatively (positively) to events that increased (decreased) the likelihood of rotation, although these results are sensitive to the market index used to calculate abnormal returns. More importantly, particularly given the lack of a U.S.-specific control group, cross-sectional tests provide strong evidence that the market reaction is more negative (positive) on dates that increased (decreased) the likelihood of rotation given longer auditor tenure. Moreover, we also find that the market reaction is more negative (positive) on dates that increased (decreased) the likelihood of rotation given a Big 4 auditor. Data Availability: Data are available from public sources identified in the text.

Audit Market Structure and Audit Pricing

2016 ◽  
Vol 31 (1) ◽  
pp. 57-81 ◽  
Author(s):  
John Daniel Eshleman ◽  
Bradley P. Lawson
Keyword(s):  
Fixed Effects ◽  
Audit Quality ◽  
Audit Fees ◽  
Market Concentration ◽  
First Year ◽  
Audit Pricing ◽  
Ongoing Debate ◽  
Audit Market ◽  
Big 4 ◽  
The U.S

SYNOPSIS Extant literature finds mixed evidence on the association between audit market concentration and audit fees. We re-examine this issue using a large sample of U.S. audit clients covering 90 metropolitan statistical areas (MSAs) spanning 2000–2013. We find that audit market concentration is associated with significantly higher audit fees, consistent with the concerns of regulators and managers. We also find that increases in audit market concentration are associated with fewer initial engagement fee discounts (i.e., reduced lowballing), particularly for non-Big 4 clients. We reconcile our findings with those of prior research and find that our divergent findings are attributable to controls for MSA fixed effects. In supplemental analyses, we find that audit market concentration is associated with higher audit quality. We also find that concentration is associated with higher audit quality for first-year engagements, but only if the auditor does not lowball on the engagement. Our results are relevant to the ongoing debate regarding the consequences of increased concentration within the U.S. audit market (GAO 2003, 2008). JEL Classifications: M41; M42; L13.

The Market Premium for Audit Partners with Big 4 Experience

2020 ◽  
Author(s):  
Aleksandra B. Zimmerman ◽  
Kenneth L. Bills ◽  
Monika Causholli
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Audit Firm ◽  
Audit Market ◽  
Big 4 ◽  
Audit Firms ◽  
Second Tier ◽  
Market Premium

This study investigates how non-Big 4 firm audit partners’ Big 4 experience is valued by the audit market. The Big 4 audit firms have differentiated themselves as nationally recognized firms for whose services companies are willing to pay a premium. It is unclear, however, whether this reputation follows individual auditors when they move to a non-Big 4 audit firm. We find that audit fees are higher for non-Big 4 audit partners with Big 4 experience with the fee premium ranging from 17 to 26 percent depending on the extent of experience when they are employed by small audit firms but find no evidence of a fee premium for Big 4 experience at the second-tier audit firms. Furthermore, in additional analyses, we do not find strong, consistent evidence that audit quality is higher for clients of non-Big 4 audit partners with Big 4 experience than their counterparts without Big 4 experience.

The Impact of the Big 4 Consolidation on Audit Market Share Equality

2011 ◽  
Vol 30 (1) ◽  
pp. 49-73 ◽  
Author(s):  
Kimberly Dunn ◽  
Mark Kohlbeck ◽  
Brian W. Mayhew
Keyword(s):  
Market Share ◽  
Market Concentration ◽  
Levels Of Analysis ◽  
Big 5 ◽  
Audit Firm ◽  
Audit Market ◽  
Big 4 ◽  
Market Shares ◽  
The Impact ◽  
The City

SUMMARY: We investigate the Big 5 to Big 4 consolidation and its impact on audit market share equality. We extend the GAO’s (2008) study on audit firm industry market concentration to examine whether the remaining Big N firms’ market shares are more equal after the Big 4 consolidation. We also extend the GAO study to examine audit market shares at the city and city-industry levels. We find that while overall market concentration increases, the Big 4 have more equal market shares than the Big 5 had prior to the consolidation at all levels of analysis. The increase in market share equality may explain why there has been inconsistent evidence of an association between market concentration and competition after the consolidation (Feldman 2006; GAO 2008). However, we find that the largest four clients in each market we examine are more likely to share the same auditor after consolidation, which suggests the largest clients face constrained choices.

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