Auditor Rotation Research Articles

Auditor Tenure, Information Asymmetry and Earnings Quality

We confirm the results of prior studies that auditor tenure improves earnings quality on average. We extend their findings to show that the improvement in earnings quality resulting from longer auditor tenure is greater for firms with higher information asymmetry, after controlling for auditor’s industry specialization. We argue that audits of client firms with higher information asymmetry demand more client specific knowledge that cannot be gleaned from industry or general experience. Longer tenure helps auditors acquire such knowledge and therefore, the benefit of longer audit tenure is greater in firms with greater information asymmetry. We use bid-ask spread, return volatility, intensity of R&D expenditure and a composite distance measure to measure information asymmetry. Our results imply that frequent auditor changes are costlier for firms with higher information asymmetry. At the policy level, our results imply that mandatory auditor rotation is more (less) costly for firms with high (low) information asymmetry.

The interaction effects of firm and partner tenure on audit quality

This paper investigates the impact of firm and partner tenure on audit quality, where audit quality is proxied by discretionary accruals. We study a sample of Spanish listed companies between 2005 and 2011 and address both the individual and the interaction effects of firm and partner tenure. Our study is motivated by the current debate, particularly intense at the EU level, on the impact of the auditor rotation regime on the quality of auditing. We find that, without considering the interaction effects, firm and partner tenure do not seem to play a relevant role as determinants of audit quality. Importantly, the interaction of firm and partner tenure shows stronger effects on audit quality than both forms of tenure separately considered. Finally, our analysis suggests that audit quality is maximized when medium firm and partner tenures interact. However, results for the interaction variables are sensitive to the accruals estimation method.

Impact of Partner Change on Audit Quality: An Analysis of Partner and Firm Specialisation Effects

AbstractThis study investigates the impact of audit partner rotation on audit quality and whether industry specialisation moderates such a relationship. The results of this study show that audit partner rotation can enhance audit quality but only when both the incoming audit partner and the audit firm are industry specialists. The results of the study provide valuable insights into the effectiveness of audit partner rotation and auditor industry specialisation practices, and their impact on audit quality. The results have implications for the profession as well as regulators regarding audit partner and audit firm industry specialisation. This is the first study to examine the moderating effect of industry specialisation on the auditor rotation–audit quality relationship at the partner level. The introduction of industry specialisation as a moderating factor provides additional insights into the auditor rotation–audit quality relationship at the partner level.

An empirical evidence on audit selection and audit rotation: the case of Qatari listed companies

The primary objective of this research is to examine the current state of audit selection and rotation practised by Qatari listed firms. A questionnaire survey has been used. A number of findings have emerged from the current investigation. First, the results indicate that a number of criteria appear to be used by listed companies in Qatar for such decisions: namely, accuracy, completeness, appropriateness, adequacy and multi-function ability. Indeed, the findings reveal that audit firm expertise, reputation and service quality are the most important factors employed by Qatari listed firms when choosing/changing an audit firm. Second, the study finds that audit rotation can enhance both audit quality and investors' confidence in the published financial statements. Finally, an industrial analysis of audit selection and rotation criteria shows that both audit firm expertise and service quality are statistically different among sectors examined. The findings of this research provide a great deal of insight for policy-makers, academicians and professionals about audit rotation in Qatar.

An empirical evidence on audit selection and audit rotation: the case of Qatari listed companies

An empirical evidence on audit selection and audit rotation: the case of Qatari listed companies

Audit firm, retain or rotation? (client and audit firm perspectives)

AbstractThe purpose of this study is providing a framework for understanding the role of audit firm rotation in client expected value. And to explain the principles of client choice by auditor via specified models. We formalize this idea through stakeholder theory. Results show that the owners’ expected outcome is increase in the level of reporting quality, all else held equal. Also client selection is a decrease in function with regard to the factors affecting it. Like the number of sub-branches, probability of good selection, probability of good perceived in a branch point, stages ahead and taking account of investigative intuition. We propose that retain-rotation audit firm vs. good or bad selection client relationship developed based on bid and ask process. Drawing on our analytical framework, we provide directions for further opportunities for research of client and audit firm.

The Influence of Pseudo Auditor Rotation on Audit Quality: New Evidence

The Influence of Pseudo Auditor Rotation on Audit Quality: New Evidence

Auditor’s Professional Specialization Role in Reducing the Potential Negative Effects of Mandatory Audit-Firm Rotation on Audit Quality

This study aims at investigating the effect of professional specialization on audit quality. It examines the relation between professional specialization and the potential negative effects of MAFR on audit quality. Actually, the questionnaire was distributed among auditors and professor of accounting in Egypt confirmed hypothesis: there are statistically significant differences among the categories of inquisitors, the impact of the professional specialization of auditors on audit client choices when the audit client apply the mandatory rotation policy and there is a significant relation between auditor professional specialization and mandatory audit-firm rotation. There is a significant association between auditor professional specialization and reducing the potential adverse effects of mandatory audit-firm rotation. The study has reached auditor rotation can lead to improved audit quality, but when the incoming auditor is the auditor’s professional specialization have significant impact on the potential negative effects of mandatory audit-firm rotation on audit quality.

REDESIGNING THE ASSIGNMENT OF INTERNAL AUDITORS BASED ON AUDITOR UTILITY

This study presents a novel model for assignment of internal auditors to branches of businesses. Previous studies have concerned with minimizing the cost but in this model, aim is maximizing auditor’s utility. For this purpose an integer programming model introduced. The objective is maximizing the auditors’ total utility. Each branch has different impact values for auditors, which indicate auditors’ utility level in terms of location, size and type of branches. Also to keep the balance of auditor’s working days and total gained impact values particular constraints are defined for the integer programming model. This implementation has 3 particular steps; first is quantification of the branches’ effects on the auditors. AHP method is used to define branches’ impact values. The second is simulating the durations of auditing process. To minimize the effect of abnormal situations, durations are simulated. Last step is to reach the rotation of auditors, total working days and the total utility of the auditor; the integer programming model is solved by Python-Gurobi Optimizer.

REDESIGNING THE ASSIGNMENT OF INTERNAL AUDITORS BASED ON AUDITOR UTILITY

This study presents a novel model for assignment of internal auditors to branches of businesses. Previous studies have concerned with minimizing the cost but in this model, aim is maximizing auditor’s utility. For this purpose an integer programming model introduced. The objective is maximizing the auditors’ total utility. Each branch has different impact values for auditors, which indicate auditors’ utility level in terms of location, size and type of branches. Also to keep the balance of auditor’s working days and total gained impact values particular constraints are defined for the integer programming model. This implementation has 3 particular steps; first is quantification of the branches’ effects on the auditors. AHP method is used to define branches’ impact values. The second is simulating the durations of auditing process. To minimize the effect of abnormal situations, durations are simulated. Last step is to reach the rotation of auditors, total working days and the total utility of the auditor; the integer programming model is solved by Python-Gurobi Optimizer.

Developments in France regarding the mandatory rotation of auditors: Do they enhance auditors’ independence?

Mandatory rotation of auditors or of audit firms has been the subject of extensive debate among academics, professionals, and regulators, especially since the financial crisis of the 2000s. Does rotation enhance auditors’ independence and audit quality? The research evidence on the impact of mandatory audit firm rotation on audit quality and auditor independence is inconclusive. This article offers a historical approach to understanding the implementation of mandatory rotation, based on the French case. The auditing profession in France is strongly regulated, with four main provisions designed to reinforce auditors’ independence: prohibitions on a priori and a posteriori incompatibilities, a 6-year audit tenure, a ban on non-audit services, and the use of joint audit. The rotation of auditors was merely an additional and non-compulsory tool. However, in 2014, the European Commission decided to implement the mandatory rotation of audit firms despite the opposition of the French accounting profession and regulators. Does this suggest that the French model was ineffective? It probably does not. In this specific context of France, a mandatory rotation of audit firms would seem unlikely to enhance audit quality.

Does Auditor Rotation Increase Auditor Independence?

This study aims to empirically test the effects of auditor rotation and auditor tenure on an auditor’s independence in companies listed on the Indonesia Stock Exchange during the years 2002-2010. This study using logistic regression estimation technique. The results show that, statistically, the auditor’s tenure has significant negative effects on the auditor’s independence, measured by the tendency to give a ‘going concern’ opinion. Furthermore, the results also show significant differences between the effects of short and long term tenures on the auditors’ independence. Auditor rotation has significant positive effects on the auditors’ independence.

Various Forms of Auditor Rotation and Audit Quality: A Case of UAE

Various Forms of Auditor Rotation and Audit Quality: A Case of UAE

Fatores determinantes da mudança voluntária da empresa de auditoria externa no mercado brasileiro

O presente artigo teve como objetivo estudar os fatores que influenciam na decisão de mudança voluntária da empresa de auditoria. No Brasil há a exigência de substituição compulsória (rodízio) das empresas de auditoria, no mínimo, a cada 5 anos e com intervalos de 3 anos para a sua recontratação. Contudo, durante o período de adoção das normas internacionais de contabilidade, a Comissão de Valores Mobiliários – CVM, suspendeu essa exigência o que torna o período de 2010 a 2014 interessante para a investigação da pesquisa. Estudos que abordam o tema relacionam a decisão de substituição do auditor com variáveis relacionadas às características do auditor e o relacionamento com a empresa cliente; características da empresa e mudanças na alta gestão; e mecanismos de governança corporativa. A presente pesquisa investigou se essas variáveis explicam o respectivo fenômeno no mercado brasileiro, caracterizado pela concentração de controle e baixa proteção ao investidor minoritário. Os resultados sugerem que a emissão de relatório de auditoria modificado, o crescimento da empresa e a listagem no Novo Mercado ou Nível 2 da BM&FBovespa elevam a probabilidade de substituição dos auditores, enquanto a contratação de serviços extraauditoria reduz a probabilidade de mudança do auditor.

The Joint Effects of Multiple Legal System Characteristics on Auditing Standards and Auditor Behavior

AbstractThis paper derives the impacts of legal system characteristics and auditing standards on auditor behavior (audit quality), and analyzes the determination of optimal auditing standards under different legal regimes. Legal regimes are characterized by differences in the uncertainty concerning the outcome of legal proceedings (termed vagueness of legal systems) and differences in the average size of damage awards. Auditing standards as determined by standard setters can vary in both toughness and vagueness. Our analysis provides implications for the adoption of International Standards on Auditing (ISA). Countries, such as the United States, where auditor legal liability is significantly more onerous than the global norm are not likely to adopt ISA, since these standards may not induce auditors to provide the optimal level of audit quality. Conversely, the adoption of ISA by countries, such as China, where the legal system makes the recovery of damages from auditors quite difficult, is not by itself likely to result in a high level of audit quality. Furthermore, our model suggests that auditor rotation can help improve audit quality, but only in certain circumstances.

Audit Partner Tenure and Independence in a Low Litigation Risk Setting

We investigate whether long audit partner tenures impair auditor independence, as proxied by the opinion of the audit report, with a sample of Spanish companies for the period: 2002–2010. The Spanish audit market constitutes an ideal setting in which to address this issue, as it is characterized by unusually lengthy engagements with the audit firm. The motivation relies, on the one hand, on the current discussion about the necessity to reinforce the independence of auditors and, on the other hand, on the very limited available research at the partner level. The main result is the lack of significant effects of partner tenure on independence. This finding is robust to various checks. Unlike prior research, we also address the joint effects of firm and partner tenure on independence. Results indicate that partner tenure does not compromise independence, even under long or extremely long audit firm tenures. These findings might have some interesting policy implications, in particular for the intense current debate on auditor rotation regimes which is taking place within the European Union.

Auditor Tenure and Perceived Earnings Quality

The study examines how auditor tenure affects investors' perception of audit quality. It is motivated by the ongoing debate on the effect of auditor tenure on audit quality and the recent regulation approval on mandatory auditor rotation at the EU level, which is justified by the concern that longer auditor tenure impairs auditor independence and thus lowers audit quality. Perceived earnings quality, as measured by the earnings response coefficient from returns‐earnings regression, is used as a proxy for investors’ perception of audit quality. Using a sample of 2,320 firm‐year observations from German listed firms between 2006 and 2013, the study provides evidence of a non‐linear relationship between auditor tenure and perceived earnings quality. The results suggest that investors perceive lower earnings quality during the early and later years of an auditor–client relationship. This perception does not change during the investigation period. Furthermore, the results show that earnings quality is perceived as highest when auditor tenure is 8–9 years.

Auditor client specific knowledge and internal control weakness: Some evidence on the role of auditor tenure and geographic distance

In this paper we draw on the audit quality and cluster theory literature to examine whether auditor tenure and auditor's geographic proximity to the client (proxies for auditor client specific knowledge) are associated with the incidence of Section 404 internal control weakness (ICW) under the Sarbanes–Oxley Act (2002). Using a large sample of 24,217 firm-year observations for the period 2004–2012, we show that firms with long auditor tenure and in closer geographic proximity to auditors have lower incidence of ICW. Furthermore, we find that the positive association between auditor–client geographic distance and ICW is weaker for firms with longer auditor tenure. Our results suggest that auditor rotation policies could deprive the auditor of client specific knowledge, especially for auditors located further away from their clients. Our results are robust to propensity score matching method and endogenous effects.

Auditor tenure and accounting conservatism: evidence from Greece

Purpose This study aims to examine the relationship between auditor tenure and conservatism for firms in Greece. Greece not only has a high incidence of earnings management but is also required under the new European Commission (EC) regulation to comply with mandatory auditor rotation. Therefore, Greece is an ideal setting in which to study the association between auditor tenure and accounting conservatism. Design/methodology/approach Similar to Jenkins and Velury (2008), this paper uses Basu’s (1997) asymmetrical timeliness of earnings as a measure of conservatism. Following Li (2010), the regression is re-estimated for subsamples based on client importance as measured by the ranking of client sales among all clients audited by the firm. Findings In contrast to Li (2010), the results of this study, which used a sample of firms in Greece, indicate that conservatism decreases as the auditor–client relationship lengthens. Client importance does not appear to affect the relationship between auditor tenure and conservatism, as measured by asymmetric timeliness of earnings. However, when using the accrual–cash flow measure of conservatism (Ball and Shivakumar, 2005), it is found that auditor tenure is positively (negatively) associated with conservatism for less (more) important clients. The results suggest that longer auditor tenure may have a negative impact on audit quality in certain countries where accounting quality has been found to be poor. Therefore, the new EC regulation requiring mandatory auditor rotation may in fact improve audit quality for firms in Greece. Research limitations/implications This study’s sample consists of firms on the Athens Stock Exchange for the period of 1998-2011. This sample was purposely selected because of the unique conditions of rampant earnings management and low incentive in Greece for the auditors to exert effort to detect such practices. Moreover, Greece is subject to the new EC regulations requiring mandatory auditor rotation beginning in 2014. Future studies could examine this issue in alternate settings and over different time periods. Also, other cross-sectional variations among firms which affect the association between auditor–client tenure and audit quality may exist. Practical implications The findings are important to regulators such as the EC and indicate that Greece may be an appropriate setting in which to require mandatory auditor rotation. These results are also useful to auditors who wish to improve the audit quality and the public’s perception of their work. Originality/value Auditor tenure has been the subject of considerable debate, and regulators contend that long auditor tenure reduces audit quality. There may be a valid argument in favor of mandatory auditor rotation in countries particularly susceptible to low accounting quality due to issues such as rampant earnings management. Greece appears to be one such example, and this study provides support in favor of that argument by demonstrating that longer auditor tenure may lead to lower accounting quality in terms of conservatism. Therefore, the recent EC regulation may result in improved audit quality for firms in Greece.

Audit Report Lag , Audit Tenure and Auditor Industry Specialization : Empirical Evidence from Jordan = فترة إصدار تقرير مدقق الحسابات ، فترة الاحتفاظ بالمدقق و وجود التخصص في التدقيق : دليل تجريبي من الأردن

This study examined the association between audit-firm tenure and audit report lag (ARL) and how this association is affected by auditor industry specialization. Using two methods for measuring auditor industry-specialization, the study sample included 691 Jordanian firm year observations listed in Amman Stock Exchange during the period (2009-2013). The data collected was analyzed by using a number of basic statistical techniques such as descriptive statics, correlation and multiple-regression. This study revealed thatthere is no significant relationship between audit report lag and audit tenure. Additionally, industry specializations auditors will not influence on the relation between audit report lag and audit tenure in Jordan. Policy makers and regulators are encouraged to take into consideration that mandatory auditor rotation in Jordan will not result in longer audit report lag. Although audit industry specialization didn’t influence on the relation between audit report lag and audit tenure, auditor industry specialization has a significant effect on audit report lag, therefore, the Jordanian companies are recommended to hire industry-specialized auditors to reduce audit report lag. The researchers also recommend farther researches with different measurements of auditor industry specialization