Abstract

http://ssrn.com/abstract=2046118
 


 



Mandatory Auditor Rotation, Audit Fees and Audit Quality


Silvano Corbella


University of Verona

Cristina Florio


University of Verona

Giorgio Gotti


University of Texas at El Paso - Department of Accounting

Stacy A. Mastrolia


Bucknell University - School of Management

April 25, 2012


Abstract:     
In this paper we examine some of the costs and benefits associated with mandatory audit firm rotation using data from Italy, where mandatory audit firm rotation has been in place since 1975. Previous studies on the subject did not find consistent evidence on the association between audit quality and mandatory audit firm rotation, and they fail to control for auditor fees. In this paper, we test whether there is a change in audit quality associated with mandatory audit firm rotation after controlling for audit fees. Further, we test whether there is a change in auditor fees associated with mandatory audit firm rotation. Our results indicate that audit quality, proxied by two different measures of earnings management, improves following mandatory audit firm rotation and this improvement is driven by higher negative (income decreasing) abnormal accruals. Our results also indicate that the total amount of fees paid to the auditor does not change following mandatory audit firm rotation, but the composition of total fees paid to the auditor (audit vs. non audit fees) does appear to change, with audit-related fees increasing as a percent of total fees. The results of this study might be of interest to U.S. and European legislators who are considering implementing mandatory auditor rotation in order to improve financial reporting quality.

Keywords: mandatory audit firm rotation, audit quality, audit partners

working papers series





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Date posted: April 28, 2012  

Suggested Citation

Corbella, Silvano and Florio, Cristina and Gotti, Giorgio and Mastrolia, Stacy A., Mandatory Auditor Rotation, Audit Fees and Audit Quality (April 25, 2012). Available at SSRN: http://ssrn.com/abstract=2046118

Contact Information

Silvano Corbella
University of Verona ( email )
Via dell'Artigliere, 8
Verona, 37129
Italy
Cristina Florio
University of Verona ( email )
Via dell'Artigliere, 8
Verona, 37129
Italy
Giorgio Gotti
University of Texas at El Paso - Department of Accounting ( email )
500 West University Avenue
El Paso, TX 79968-0542
United States
Stacy A. Mastrolia (Contact Author)
Bucknell University - School of Management ( email )
Lewisburg, PA 17837
United States
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