Audit Rotation And Earnings Quality: An Analysis Using Discretionary Accruals

Adalene Silvestre,Clóvis Kronbauer,Cristiano Costa

doi:10.15728/bbr.2018.15.5.1

Adalene Silvestre, Clóvis Kronbauer + Show 1 more

Open Access

https://doi.org/10.15728/bbr.2018.15.5.1

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Abstract

This article aims to measure the effect of the audit firm rotation on the earnings quality of Brazilian public companies listed on BM&FBOVESPA in the period from 2008 to 2015. We use discretionary accruals as a measure of earnings quality, using two approaches: earnings management and the estimation errors. Results show that audit firm rotation reduced the volume of discretionary accruals and, thus, increases the earnings quality, when these are measured from the perspective of earnings management. However, we do not observe the effect of audit firm rotation on earnings quality when the discretionary accruals are measured from the perspective of accounting estimation errors. The results also show that companies that rotate audit firms voluntarily have greater discretionary accruals and, consequently, lower earnings quality.

Highlights

The results disclosed by companies depend as much on their resource management performance, as on the way the accounting system measures this performance. (DECHOW; GE; SCHRAND, 2010)
In order to analyze the effect of mandatory audit firm rotation and voluntary audit firm rotation on earnings quality, we developed the following hypotheses: H1: The earnings quality reported by companies, increases with the mandatory audit firm rotation
Audit variables evidence that on average 21.72% of observations in the period refer to exercises in which audit rotation occurred - on average, 13.30% of all observations refer to voluntary exchange

Summary

Introduction

The results disclosed by companies depend as much on their resource management performance, as on the way the accounting system measures this performance. (DECHOW; GE; SCHRAND, 2010). The formation of the results according to the accounting standards contains provisions so that the results demonstrate the company’s real performance, allowing the competence of the facts to be respected regardless of the effective movement of cash flows (JOHNSON; KHURANA; REYNOLD, 2002). On the one hand, the provisions allow the company to report its real performance, on the other, the provisions increase the possibility of occurrence of estimation errors, whether intentional or not (KRISHNAN, 2003). In this context, the independent auditor emerges to reduce the asymmetry of information between the company and those that are external to it.

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