Costs and benefits of mandatory audit firm rotation: initial engagement experience of audit committee chairs and engagement partners

Abstract

ABSTRACT Audit regulators remain divided on whether the costs of mandatory audit firm rotation (MAFR) will be outweighed by the benefits of the regulation. Existing research provides mixed results in support of the benefits of MAFR. This paper aims to complement these studies by examining what costs and benefits are experienced during the initial engagement after a MAFR. Interviews were conducted with dyads of South African audit committee chairs and audit partners involved in the same appointment process and initial audit engagement following a MAFR. While many audit committee chairs remained opposed to MAFR, most were impressed by the better-than-expected benefits of the fresh perspective and challenge offered by a newly appointed audit firm, and the less than expected costs of losing the incumbent auditor’s knowledge. By comparison, most audit partners expressed support for MAFR after their experience with the regulation and believed the policy would improve public perceptions of independence but raised concerns about the significant start-up costs their firms had been forced to absorb. As a result, while the findings suggest that the primary arguments against MAFR may be overstated, there is a risk that MAFR may compromise auditor independence by pressurising auditors to appease their new clients to retain the engagement and recover these initial costs. This paper provides insights for policymakers considering the costs and benefits of implementing MAFR, and for audit committees and auditors who seek to maximise the benefits while minimising the costs of their next MAFR event.