Mandatory Audit Firm Rotation and Audit Quality
28 Pages Posted: 12 Jul 2007 Last revised: 4 Jan 2010
Date Written: July 12, 2007
This study investigates the effect a regime of mandatory audit firm rotation would have on audit quality in an Australian setting. Using two measures of audit quality, being the propensity to issue a going-concern report and the level of discretionary accruals, the study examines the switching patterns of clients in their current voluntary switching capacity, and the levels of audit quality. We find that audit quality increases with audit firm tenure, when proxied by the propensity to issue a going concern opinion, and is unaffected when proxied by the level of discretionary accruals. We conclude that given the additional costs associated with switching auditors there are minimal, if any, benefits of mandatory audit firm rotation. Other initiatives to address concerns about auditor independence and audit quality therefore need be considered before imposing mandatory audit firm rotation.
Keywords: Audit Quality, Audit Firm Rotation, Audit Opinion, Discretionary Accruals
JEL Classification: M49, M47
Suggested Citation: Suggested Citation