Mandatory audit firm rotation and audit quality

Abstract

Purpose The purpose of this paper is to investigate the effect that a regime of mandatory audit firm rotation would have on audit quality. Design/methodology/approach Using two measures of audit quality, being the propensity to issue a going‐concern report and the level of discretionary accruals, the paper examines the switching patterns of clients in their current voluntary switching capacity, and the levels of audit quality. Findings The main finding is 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 expenses. Given the additional costs associated with switching auditors, it is concluded that there are minimal, if any, benefits of mandatory audit firm rotation. Research limitations/implications A limitation of this study is that only actual audit quality is examined. While the results suggest that actual audit quality is associated with the length of audit tenure, the perception of audit quality is not addressed, which may increase with audit firm rotation. Originality/value The results go against the move towards mandatory audit firm rotation, and suggest that other initiatives may need to be considered to address concerns about auditor independence and audit quality.

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