Audit Firm Rotation and Earnings Management in Brazil

Abstract:     
The main reason for requiring rotation of independent auditors is to preserve independence and ethics in the relationship between the audited company and its external auditing firm and consequently to reduce accounting fraud and errors. To investigate whether this procedure was effective in the Brazilian capital market, we analyzed data on Brazilian public companies between 1997 and 2007. We applied the abnormal working capital accruals (AWCA) method to analyze the effects on earnings management of changing the auditor, focusing on the reason for the change (obligatory or spontaneous), classification of the auditing firm among the Big Four (PwC, DTT, E&Y and KPMG) and length of the relationship with the audited company. The findings indicate there is no significant effect on earnings management of changing the auditing firm. A factor in this respect may be that all of the Big Four have internal policies to rotate the staff assigned to specific audited companies.

Number of Pages in PDF File: 19

Keywords: Audit firm rotation, independent auditing, earnings management

JEL Classification: M41, M42

working papers series