The effect of mandatory audit firm rotation and the auditing and reporting standards on the auditor competition and audit fees relationship: Evidence from emerging markets

Abstract

This research investigates whether auditor competition is associated with low audit fees and whether a country's implementation of mandatory audit firm rotation requirements as well as strong auditing and reporting standards weaken the negative effect of auditor competition on audit fees. Using 41,811 firm‐year observations from 10 emerging markets—specifically China, India, Malaysia, Pakistan, the Philippines, Poland, Russia, South Africa, Thailand, and Turkey—we find that auditor competition has a decreasing effect on audit fees. We also find that firms from countries with mandatory audit firm rotation requirements and strong auditing and reporting standards have higher audit fees than firms from countries with weak auditing and reporting standards and no mandatory audit firm rotation requirements. In the former countries, the negative relationship between auditor competition and audit fees is weaker than that for firms in the latter countries. Our results are robust to various specification tests, such as those for endogeneity issues, and alternative measures of country‐level institutional features. This study presents significant implications for regulators by providing evidence that both mandatory audit firm rotation requirements and the strength of auditing and reporting standards play an essential role in enhancing audit quality by curbing the negative effect of audit competition.