The evaluation of mandatory audit firm and auditor rotation: literature review

Abstract

Purpose- The purpose of this study it to evaluate the impacts of mandatory audit firm and auditor rotation on audit quality and auditor independence by literature review. Methodology- This study empoys a literature review on the auditor rotations in the auditing firms. Findings- In the first stage of literature review, it is determined that there are positive sides of mandatory audit firm and auditor rotation reflected on audit quality and auditor independence. Among them such facts are observed; a client’s be audited by the same audit firm and auditor for a long time can increase intimacy and therefore, professional skepticism can be declined. Furthermore, mandatory rotation can prevent poor audit procedures. Besides, it is also emphasized that financial information users’ perception regarding auditors’ independence is positively effected and with a new point of view, rotation decreases the risk of misevaluation caused by repetitional tasks and risk of making mistakes. It is also observed that a positive competition in the audit sector would be created and therefore, there would be an era for the firms other that the big four. On the other hand, negative sides of rotation draw the attention in the literature review, as well. It is underlined that it could take long time period to determine the firm’s organization structure, its operations, exposed risks, due to new auditor’s inexperience and this could lead to cost increases. Furthermore, following the rotation, long-term-based audit information could disappear and efficiency and productivity of audit process could decline. Besides these, by the approach of the planned rotation date, it is observed that especially in the last year careless behaviours could be seen and therefore, mandatory audit quality could be affected negatively. Limited number of nonaudit firms on behalf of clients, new auditors high confidence in existing audit reports and therefore, their incapability of making tiny distinctions, are the other findings of the study. Conclusion- Literature review indicates that there are mixed findings regarding mandatory rotations’ impacts on independence and quality other than positive and negative results. Hence, it is seen that there is no consensus on mandatory rotation in terms of rotation period and its impact on independence and quality. Field researches especially by considering qualitative methods are important to explain the results obtained by quantitative researches. In-depth interviews with experienced international audit sector representatives are important to explain the rotation impact levels of international audit network (Big Four and other international firms) and national audit firms and their comparisons, ex-audit firm turning back ratios and its reasons. In this way, it could be supportive to decide whether existing legislation is capable of creating independence and quality in audit and by new amendments it could be possible to develop confidence in audit firms, audited clients and capital markets. Keywords: Mandatory auditor rotation, mandatory audit firm rotation, quality in independent audit, auditor independence JEL Codes: M42, M48