Mandatory Audit Firm Rotation Research Articles

Audit firm tenure and corporate tax avoidance: evidence spanning COVID-19 pandemic

Purpose This study aims to examine the effect of audit firm tenure (AFT) on corporate tax avoidance (CTA) and the moderating effect of the COVID-19 pandemic. Design/methodology/approach The sample comprises 41,074 firm-year observations from 32 countries from 2015 to 2020, for which data are collected from various sources: financial data from the Refinitiv database, country corporate tax rates from the Tax Foundation, and other country-level data from the World Bank database. The authors use the book tax difference to measure CTA and multiple proxies for AFT. Findings This study finds that a longer AFT is associated with higher CTA, confirming the notion that long AFT impairs auditor independence. The findings remain robust when considering various AFT proxies, incorporating Hofstede’s cultural factors, using weighted least-squares estimation and addressing endogeneity through propensity score matching. This study also finds a non-linear relationship between extended client and auditor relationships and CTA, supporting the mandatory audit firm rotation regulation and increasing investors’ caution regarding the consequences of extended client–auditor relationships on firm behaviour. Research limitations/implications This study offers new evidence on the effect of the COVID-19 pandemic on the link between AFT and CTA and documents a non-linear relationship between AFT, which has not been addressed in prior studies. Practical implications The findings of this study have several significant practical implications. First, governments and policymakers gain insights into the consequences of extended auditor–client relationships, hence calling for a review of auditing and taxation regulations. Second, the findings provide important insights into the issue of auditor independence, especially during long engagements and crises such as COVID-19. Finally, investors and tax authorities should be more cautious about the risks of aggressive tax avoidance during crisis periods. Originality/value To the best of the authors’ knowledge, this is the first study to use a global data set to investigate the effect of AFT on CTA during the COVID-19 pandemic.

Examining Mandatory Audit Firm Rotation and Audit Quality in South Africa: Practitioner and Academic Perspectives

Examining Mandatory Audit Firm Rotation and Audit Quality in South Africa: Practitioner and Academic Perspectives

Implementing mandatory audit firm rotation: Effects on audit and non-audit fees

The 2014 reform of the European Union (EU) regulation on auditing includes mandatory audit firm rotation and a significant limitation of the provision of non-audit services by the audit firm to their existing clients. This paper analyses the changes in audit fees, and non-audit fees, as well as in their proportion, when there is a switch of audit firms, before and after the new regulation. The analysis is carried out for the Spanish-listed companies from 2011 to 2018 using two types of analyses, descriptive/comparative and multivariate, panel data, and regressions. As expected, the new EU regulation has resulted in a significant increase in audit firm switches. The results show that, when there is a change of audit firm, the incoming firm offers a significant discount to the new client with the outgoing firm. This is the case before and after the reform, and for both voluntary and mandatory switches after the reform. In addition, the reform has led to a reduction of non-audit fees, which is especially evident after a voluntary audit firm switch. We conclude that audit firms seem to be willing to take on the additional cost of auditing a new company to gain clients. La reforma de la normativa de la Unión Europea sobre auditoria de 2014 incluye la rotación obligatoria de la firma de auditoría y una importante limitación de trabajos distintos de auditoria por parte del auditor. Este trabajo analiza los cambios en los honorarios de auditoría, honorarios por otros servicios, así como la proporción entre ambos, cuando se produce un cambio de firma de auditoría, antes y tras la nueva normativa europea. El análisis se realiza para las entidades cotizadas en España durante los años 2011 a 2018 mediante de dos tipos de análisis, descriptivo/estadísticos y de regresiones de datos panel. La nueva regulación ha supuesto un aumento en los cambios de firmas de auditoría. Los resultados muestran que, cuando hay un cambio de firma de auditoría, la firma entrante ofrece un descuento significativo al nuevo cliente en comparación con la firma saliente. Esto es así antes y después de la reforma y, en este último caso, tanto para cambios voluntarios como obligatorios tras la misma. La reforma ha supuesto una reducción de los honorarios por servicios distintos de auditoría, que se manifiesta especialmente después de un cambio voluntario de firma de auditoría tras la reforma. Las firmas de auditoría parecen dispuestas a asumir el coste adicional de auditar a una nueva empresa con el objetivo de ganar clientes.

Is earnings management impacted by audit fees and auditor tenure? An analysis of the Big Four audit firms in the US market

Research background: Audits are intended to ensure the reliability of financial statements, as this is fundamental for different stakeholders. However, both auditor tenure and audit fees could affect the earnings management of companies. In 2014, the European Union established a mandatory audit firm rotation policy. In the United States, although there is still no mandatory regulation in this regard, there has been a large public debate over the advisability of this policy. Another unresolved controversy is whether audit fees determine audit quality. Purpose of the article: The aim of this research is to study the effect of auditor tenure and audit fees on earnings management, i.e., to determine whether a longer-term relationship between the auditor and the audited company, as well as higher audit fees, reduce the audited company's earnings management, thereby making the financial statements more reliable for stakeholders and increasing the quality of the audit report. In addition, the Big Four auditing companies in the United States were analyzed in order to determine the influence of corporate culture. Methods: A sample of companies listed in the S&P 500 stock market index was employed for the analysis, covering the years 2012 to 2021, resulting in a dataset comprising 3,010 observations. To examine the research hypotheses while mitigating the potential bias from omitted variables, a linear regression analysis was conducted using panel data with fixed effects regression. To enhance the robustness of the results, winsorized variables were also employed. Findings & value added: Overall, the results confirm that the quality of financial statements improves as auditor tenure increases, and so implementing a mandatory auditor rotation may not be in a company’s best interests. The results also support the market segmentation theory, as higher audit fees are aligned with higher quality financial reporting. Furthermore, by analyzing the Big Four audit companies in the US, it is shown that the influence of audit fees and auditor tenure on earnings management also depends on the internal aspects of the particular audit firm, especially its ethical culture. In sum, US policymakers should neither set limits on audit fees nor enforce a mandatory audit firm rotation similar to that of the EU.

Auditor Tenure and Misreporting: Evidence from a Dynamic Oligopoly Game

We estimate an infinite-horizon dynamic oligopoly model of audit firm tenure and misstatements and evaluate a policy counterfactual involving mandatory audit firm rotation. Longer tenure lowers the cost of producing audits, increasing audit quality and reducing audit fees. Thus clients are less likely to misstate and more likely to keep the incumbent audit firm as tenure increases. By reducing the value of retaining audit firms, mandatory rotation leads to large increases in auditor switches, even before the term limit, implying increases in the switching costs borne by clients. Misstatement rates increase because audit firms endogenously lower audit quality and newly hired audit firms have lower quality. Overall, the model suggests caution when evaluating the costs and benefits of government oversight over the audit profession. This paper was accepted by Suraj Srinivasan, accounting. Funding: The authors thank the financial support from the Olin Busiiness School and the Wharton School of the University of Pennsylvania. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.4944 .

The Implementation of Mandatory Audit Firm Rotation as tool to enhance Audit Reform in South Africa: A Case of KwaZulu-Natal

Using a quantitative research method, this article examined the perceptions of audit experts concerning the influence of mandatory audit firm rotation on audit reform (AR) in the province of KwaZulu-Natal. Data was gathered from 102 audit experts knowledgeable in the field of accounting and auditing from Tier 2 audit firms and two public institutions and used for data analysis. The empirical results of this study were two-fold. Firstly, the descriptive statistics provided a general overview of the respondents’ opinions. The majority of respondents agreed that MAFR implementation would strengthen audit reform, thereby validating the initial position of the Independent Regulatory Board of Auditors. In addition, most participants agreed that the ramification of the imposition of additional costs could not be ignored. Moreover, the utilization of SPSS on ordinal logistic regression also found that the probability of a decrease in the progress of audit reforms is significantly higher when mandatory audit firm rotation is in place, and a non-significant positive predictor of mandatory audit firm rotation would increase audit independence. This article contributes to existing knowledge and the continuous discourse on mandatory audit firm rotation rule in South Africa. Conclusively, the study, therefore, recommends that since the research was limited to Kwazulu-Natal, future studies should broadly include registered auditors and academics from institutions and firms in different South African provinces to obtain diverse views about pre-and post-implementation of the rule in 2023 to compare the effects of the policy on audit independence.

MANDATORY AUDIT FIRM ROTATION: EVIDENCE FROM TURKISH AUDITORS’ PERCEPTIONS

The purpose of this paper is to investigate auditors' perceptions of mandatory audit firm rotation (MAFR) in Turkey. Using the survey method, the opinions of 45 audit partners, directors, and managers from the audit firms were determined. To the best of our knowledge, this is the first MAFR survey study conducted in Turkey. The findings show that auditors both support and oppose MAFR. Majority of the respondents believe that MAFR will increase independent and objective, higher quality audit, fresh look will be provided, and the risk of audit failure will be decreased as a result of familiarity with client management. Furthermore, respondents stated that the benefits of MAFR cannot exceed the benefits of mandatory audit partner rotation (MAPR). They also highlights that the benefits of MAFR outweigh the costs of enforcing such a requirement. The vast majority of respondents believe that the risk of audit failure (audit risk) is higher in the early years of an audit tenure period. This is, in fact, a result against the MAFR. From the standpoint of IFAC, it is necessary to examine the activities from numerous perspectives. Therefore, it is critical that a country develops a rule based on its own circumstances rather than copying and applying a rule from another country. Regarding audit quality, the MAFR regime in Turkey is not deemed necessary, but the MAPR regime will probably be sufficient.

The Anticipation of Mandatory Audit Firm Rotation and Audit Quality

ABSTRACTResearchers and regulators regularly debate whether mandatory audit firm rotation affects audit quality. Theoretically, rotation might improve auditor independence but impair competence. In 2014, the European Commission mandated audit firm rotation for public-interest entities, starting from 2020 for nonfinancial firms. However, any auditor change in the transition period could already be interpreted in light of the upcoming mandatory rotation regime, consistent with anecdotal evidence on such interpretations. These changes provide a unique setting because auditors have strong incentives to build a reputation for high-quality audits when choosing to participate in the market for rotations during the transition period. Using a balanced panel of 287 German firms and data from 2014 through 2019, we hypothesize and find lower discretionary accruals, abnormal working capital accruals, and total accruals in the first year after rotation. This effect is restricted to smaller public companies.Data Availability: The data are from public sources and are available from the third author upon written request.JEL Classifications: M42; M48.

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

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

Regulating the Market for Audit Services: A Game Theoretic Approach

We apply game theory to model how alternative mandatory audit firm rotation regimes can affect the strategic interaction between auditee and auditor firms, and analyze potential consequences on detection risk and impairment of auditor scepticism. The major results suggest that: (1) relative to an initial state with no rotation requirement but high probability for impaired auditor scepticism, imposing either short‐term or long‐term mandatory audit firm rotation will remove the threat to auditor scepticism and lead to higher audit fees and lower detection risk; (2) relative to long‐term mandatory audit firm rotation, imposing a short‐term rotation will lead to lower audit fees and higher detection risk, resulting from greater informational frictions. We further find that imposing supplementary regulatory instruments, such as increased regulatory scrutiny of the auditee and/or auditor, can be used to lower the detection risk and increase audit quality. We discuss implications of these findings for empirical research.

The investors' prospects on mandatory auditor rotation: evidence from Euronext Lisbon

<abstract> <p>The costs and benefits of mandatory auditor rotation (audit firm rotation and partner rotation) are far from being conclusive. This paper helps fill this gap in the literature by examining the relationship between mandatory auditor rotation and firms' stock market performance in the Portuguese context. Using a sample of listed companies in Portugal from 2009 to 2020, the main finding indicates that mandatory audit firm rotation is positively and significantly related to the firm's market performance. The evidence gathered suggests investors perceive mandatory audit firm rotation as a mechanism for improving audit quality. Controlling for the engagement partner rotation, we do not find that the rotation rule has a positive effect on firms' market performance. The net benefits of the mandatory audit rotation rule seem to be driven by the mandatory change of the audit firm, with improvements in market perceptions of earnings. Robustness tests suggest that the signal and significance of the association of firms' market performance and mandatory audit firm rotation holds in the presence of corporate governance mechanisms. Also, the audit experience of the departing and incoming partners does not interact with the relationship between mandatory partner rotation and firms' market performance.</p> </abstract>

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

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.

Does audit firm tenure enhance firm value? Closing the expectation gap through corporate social responsibility

PurposeThis study aims to examine the moderating effect of audit firm tenure on the association between corporate social responsibility (CSR) and firm value. Prior studies provide mixed results on this association, which may be due to differing theoretical expectations related to CSR and firm value. It is also possible that external stakeholders are unable to differentiate between positive and negative CSR investments, as CSR reports are generally not assured by independent third parties. Thus, the authors propose that audit firm tenure may be used by external stakeholders to evaluate CSR performance.Design/methodology/approachThe authors use an ordinary least squares regression to examine the moderating effect of audit firm tenure on the relation between CSR and firm value after controlling for other determinants of firm value and various internal and external governance mechanisms documented in the literature. The sample consists of 15,707 firm-year observations from US firms during the sample period of 2000 to 2012. The authors measure CSR quality using rating scores from MSCI ESG STATS (formerly the KLD database), audit firm tenure as the number of years the incumbent auditor has served the client and firm value using Tobin’s Q.FindingsThe results indicate that CSR is positively associated with firm value when audit firm tenure is long but not when tenure is short. The results are robust to alternative measures of firm value, CSR performance scores, and individual CSR dimensions. The evidence supports the argument against mandatory audit firm rotation in the USA.Research limitations/implicationsFuture studies could examine a similar issue in alternative settings and/or look at cross-sectional variations among firms on the association between CSR and firm value by other auditor traits such as auditor industry specialization and big-name reputation. Additionally, as auditor alone is unable to ensure the quality of management disclosures and their accountability, future studies could examine the moderating effect of internal and other external governance mechanisms on the association between CSR and firm value, exploring when the signaling effect of auditor tenure on CSR reporting quality and its effect on firm value is most salient.Practical implicationsThe findings are important to regulators and investors. The authors provide evidence that longer audit tenure serves as a signaling device for external investors with regard to the quality of a firm’s CSR performance. Hence, the study facilitates regulators’ cost-benefit analysis related to mandating audit firm rotation. The evidence suggests that mandating a term limit on auditor tenure may have the unintended consequence of eliminating a signaling effect of auditor tenure on the quality of CSR disclosures under information asymmetry. This supports the Public Company Oversight Board’s decision to forgo the requirement of mandatory audit firm rotation in the USA.Originality/valuePrior literature presents mixed findings on the association between CSR performance and firm value based on a variety of underlying theories (economic, stakeholder and contingency theory). Literature on mandatory auditor rotation has concentrated on the auditor tenure effect on perceived and actual audit quality as reflected in earnings quality. Relying on agency theory, this study posits that auditor tenure serves as a signal for the quality of CSR activities in the absence of CSR assurance reporting as CSR quality can be difficult to evaluate. The authors provide evidence that audit tenure moderates the association between CSR activities and firm value and longer audit tenure makes it more likely that the CSR activities are associated with increased firm value.

Audit fee premium for national and local level of industry expertise in Italy

PurposeThis study aims to examine whether national industry expertise in Italy is more dominant than local expertise. Prior studies from Australia, USA and UK show that audit fees for industry experts are priced at a higher premium at the local level than the national level. These countries have voluntary audit firm rotation, while Italy has mandatory audit firm rotation (MAFR). The authors predict that Italy has a stronger national than local level of industry expertise, to better retain and transfer industry expertise.Design/methodology/approachThe authors compare audit fee premiums of national industry experts to local levels, using quantitative (multivariate tests) and qualitative (interviews) methodology.FindingsUsing hand-collected audit fees, the authors find that the audit fee premium for industry expertise is greater at the national level than the local level. The authors find corroborating results with audit hours. To provide further support, the authors conduct analysis for a neighboring country that does not have audit firm rotation. Using hand-collected data from Germany, the authors find that audit fee premiums from national industry expertise are no different from local industry expertise.Originality/valueThe present study study has theoretical and practical implications, for European Union countries, which recently adopted MAFR and for countries considering adoption in the future.

The Effect of Mandatory Audit Firm Rotation on Earnings Management and Audit Fees: Evidence from Iran

The present study aims to investigate the effects of mandatory requirements of audit firm rotation on earnings management among companies listed on the Tehran Stock Exchange (TSE). The study population consists of 1030 observations and 103 companies listed on the TSE during the years 2003–2012; moreover, the statistical technique used to test the hypotheses is panel data and pooled data. The results showed that the rule of mandatory audit firm rotation increased accruals-based earnings management (AEM) significantly. In addition, outcomes demonstrated that mandatory requirements of audit firm rotation did not have a significant influence on real earnings management (REM) and audit fees. Overall, our findings proved that the mandatory requirements of audit firm rotation in Iran have not been able to prevent the opportunistic actions of management at a time when they were faced with severe financial problems because of economic sanctions and auditors taking standardized systems-based auditing approaches. This research will make investors and others aware of the fact that mandatory audit firm rotation might be not effective in stopping managers wishing to manipulate the accounting figures. This paper actually suggests that when firms have financial distress, regulatory mechanisms such as audit firm rotation may not have a deterrent role. Our findings give lawgivers a stark warning that the length of an audit firm’s tenure should be based on the features of the audit market structure of each country.

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

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.

Audit Quality and Rotation: Perception in Turkey

Independent auditors, who form an opinion on financial statements, increase the reliability of financial statements by minimizing the information risk. Investors, credit institutions and other users of financial statements are expected to increase the accuracy of their economic decisions by making use of these tables that are believed to be reliable. In order to achieve this aim, auditing activities must be carried out in a manner of high quality. One of the most important indicators of quality in auditing is the independence of the auditor. It is claimed that mandatory audit firm rotation is one of the indicators of independence in auditing. Past studies have reached varying conclusions regarding the impact of rotation on audit quality. In this study, it is aimed to measure the perception of the users of financial statements in Turkey about audit rotation on audit quality

Zimbabwean Stakeholder Perceptive of How Mandatory Audit Firm Rotation Contribute to Audit Quality

There is a consistent debate in the literature on how mandatory rotation of audit firms (MAFR) contributes to audit quality (AQ). For a reason, some have adopted MAFR while others did not. This study examined MAFR to AQ based on stakeholder perceptions. Theoretical insights were established to explore on existing evidence. A descriptive survey design was carried out with a triangulation approach. Interviews were conducted while at the same time questionnaires were administered to accountants, auditors, investors, and management. A population of 71 listed and audit firms were chosen, of which 29 firms were selected using simple random, systematic and purposive sampling. Correlation and regression analysis were used to examine and interpret the quantitative data. The study's findings indicated that MAFR has a positive relationship with AQ from the linear logistic regression computed; therefore, the null hypothesis is rejected. Meanwhile, having firm audit rotation is compulsory for all listed firms, which increases competition and improves independence and new idea development which ultimately results in improved audit quality. The study, therefore, concludes that MAFR is essential. The study recommends that a further study must be done to address other factors that can enhance AQ constituting 67% shown by the ANOVA test results.

Aspects Regarding the Structure of the Financial Audit Market in the European Union from Fees Perspective

The audit market, developed out of the need to strengthen the credibility and the quality of financial reporting, has led since the 1980s to a concentration around large audit firms, the dominance effect being marked on the one hand by the auditor’s increasing reputation and notoriety, and on the other hand by the client’s association with a reputed auditor, which contributes to improving the company’s image on the market. In this context, a major issue is represented by the level of the fees charged, as they represent key elements that may affect the auditor’s independence. Moreover, a sensitive aspect is the relationship between the fee charged for financial audit services and the one for non-audit services and the compensation practices between them. The European Commission wants to facilitate competition in an overly concentrated market and also provide the opportunity for small and medium-sized audit firms to become active players in the large corporate audit market through joint audit, in which at least one of the audit firms is not part of the Big4 group. The mandatory audit firm rotation and the limitation on the non-audit services provided are the main aspects of the recent audit reform that directly influences the fee level. The main purpose of this study is to analyse whether there is a pattern of audit costs at the community level. In this context, this paper aims to assess the uniformity of audit costs, namely to determine the structure of the audit market in the European Union. The research involves data set comparison methods, by analysing a sample of 2,896 firms listed on the stock exchange in 35 different states over the period 2013-2021.

Will mandatory audit firm rotation reduce audit market concentration in South Africa?

Purpose: Deconcentrating the audit market was one of the stated objectives of the proposed mandatory audit firm rotation (MAFR) ruling in South Africa. With MAFR being a contentious topic, this study aimed to explore the possible effect of MAFR on audit market concentration in South Africa in anticipation of the implementation thereof in 2023.Design/methodology/approach: A sample of 415 South African listed companies was studied for the period 2010–2018. Data were mainly captured from annual reports. Descriptive statistics and significance testing were performed on calculated concentration ratios and identified audit firm rotations.Findings/results: South African audit market concentration mirrored empirical evidence from most developed countries – with Big 4 audit firms dominating the audit market, whilst a monopoly within the Big 4 audit firm grouping was also evident. Based on observed audit firm concentration and audit firm rotation behaviour, it was anticipated that MAFR might further increase audit market concentration. A concerning result was the sheer scale of audit firm rotations to be carried out in anticipation of MAFR in 2023.Practical implications: This study identified the impairment of audit quality and increased costs as possible unintended consequences of MAFR in South Africa.Originality/value: This study contributed to the limited body of knowledge on the possible effect of MAFR in South Africa. This study proposed alternatives to MAFR and recommended areas for future research to support evidence-based decisions on remedies to address audit quality and audit market concentration in South Africa.