The Effects of Audit Firms Rotation: An Event Study in Chile

39 Pages Posted: 12 Jan 2015 Last revised: 29 Jul 2016

See all articles by Antonio Aninat

Antonio Aninat

Pontifical Catholic University of Chile

Álvaro E. Bustos

Pontificia Universidad Catolica de Chile

Julio Riutort

Universidad Adolfo Ibáñez

Date Written: July 29, 2016

Abstract

In order to determine market reactions to an announcement of an audit firm change we carry out an event study between 2004 and 2013 of 65 publicly traded Chilean companies (they represent 95.8% of the non-financial component of the main Chilean Stock Index: IPSA). We find that the market reacted positively when a company announced that it will retain its audit firm for a given year. We rule out possible bias in the informational content of the event. Our result suggests that overall, the costs associated with a company’s audit firm change (start-up costs and know how losses) overshadow the benefits of this change (a reduction in the probability of a value destroying event such as fraud or error). We discuss the implications of this result for the potential implementation of a rule of mandatory audit firm rotation in an emerging country such as Chile. We also discuss the possibility of identifying the specific costs and benefits of the audit firm change.

Keywords: Audit, Auditing, Audit firm, mandatory rotation rule, event study

JEL Classification: M42, G34

Suggested Citation

Aninat, Antonio and Bustos, Álvaro E. and Riutort, Julio, The Effects of Audit Firms Rotation: An Event Study in Chile (July 29, 2016). Available at SSRN: https://ssrn.com/abstract=2548040 or http://dx.doi.org/10.2139/ssrn.2548040

Antonio Aninat (Contact Author)

Pontifical Catholic University of Chile ( email )

Av Libertador General Bernardo O'Higgins 340
Santiago, Región Metropolitana 8331150
Chile

Álvaro E. Bustos

Pontificia Universidad Catolica de Chile ( email )

Vicuna Mackena 4860. Macul
Santiago
Chile

HOME PAGE: http://https://sites.google.com/site/20bustos13/

Julio Riutort

Universidad Adolfo Ibáñez ( email )

Diagonal Las Torres 2640
Peñalolén
Santiago
Chile
56-2-2331-1077 (Phone)

HOME PAGE: http://https://sites.google.com/site/jriutort/

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