Mandatory Audit Firm Rotation and Audit Quality

28 Pages Posted: 12 Jul 2007 Last revised: 4 Jan 2010

See all articles by Andrew B. Jackson

Andrew B. Jackson

UNSW Australia Business School, School of Accounting

Michael Moldrich

Independent

Peter Roebuck

UNSW Australia Business School, School of Accounting

Date Written: July 12, 2007

Abstract

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

Jackson, Andrew B. and Moldrich, Michael and Roebuck, Peter, Mandatory Audit Firm Rotation and Audit Quality (July 12, 2007). Managerial Auditing Journal, Vol. 23, No. 5, 2008. Available at SSRN: https://ssrn.com/abstract=1000076 or http://dx.doi.org/10.2139/ssrn.1000076

Andrew B. Jackson (Contact Author)

UNSW Australia Business School, School of Accounting ( email )

Sydney, NSW 2052
Australia

Michael Moldrich

Independent ( email )

No Address Available

Peter Roebuck

UNSW Australia Business School, School of Accounting ( email )

Sydney, NSW 2052
Australia

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