English

Martinez Antonio Lopo,Bassetti Aldecir

doi:10.5897/jat2013.0128

Abstract

The aim of mandatory rotation of audit firms by public companies is to preserve the independence of the external auditor and reduce errors and fraud associated with the auditing of financial statements. Nevertheless requiring this rotation periodically is a controversial subject, since it involves the commercial and professional relationship of auditors with their clients and the market for auditing. This study focuses on the effect of rotation on the reports issued by audit firms, comparing them before and after the mandatory rotation established by the Brazilian Securities Commission (CVM), effective as of 2004. For this purpose, the auditor´s report was analyzed on the financial statements of 151 listed companies for the period of 2003 to 2006 that changed audit firms as required by the CVM’s rules. According to the results, the rotation of independent auditors did not assure the preservation of independence, nor is there any evidence of an increase in the quality of auditing. However, it was noted that the requirement for periodic rotation led to reduced concentration in the auditing market, with increased participation of small audit firms.   Keywords: Auditing; auditor rotation; audit opinion; mandatory rotation. &nbsp

Highlights

There is a growing demand for transparency and trustworthiness from companies, regardless of the size or sector
Lopo and Aldecir audit firm decreases the likelihood of earnings management, they found no significant differences in this respect between when this change was voluntary and mandatory, rejecting the hypothesis that compulsory rotation decreases the level of earnings management
Opponents have a number of considerations about the mandatory rotation of audit firms, including that it would be detrimental to audit quality, weaken the role of the board of directors and audit committees, would increase the total costs for preparers of financial statements and would be very difficult to implement in a complex global environment

Summary

Introduction

There is a growing demand for transparency and trustworthiness from companies, regardless of the size or sector. Publicly traded corporations in Brazil, the subject of this study, are required to submit their financial statements to the Brazilian Securities Commission. The many accounting and financial scandals and failures that have occurred in the past two decades (Enron/Arthur Andersen, World Com., Parmalat, among others) have prompted growing questions in the capital market about the independence, ethics and quality of auditing services (Reis, 2009). In response to this rising concern the Brazilian Central According to Boynton, Johnson and Keel (2002), the audited company is the audit firm’s client, the “responsibility of the auditors to the users of their opinion is significant.” The many accounting and financial scandals and failures that have occurred in the past two decades (Enron/Arthur Andersen, World Com., Parmalat, among others) have prompted growing questions in the capital market about the independence, ethics and quality of auditing services (Reis, 2009).

Objectives

Methods

Findings

Conclusion