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The Effect of Auditor Rotation on the Relationship between Financial Manipulation and Auditor’s Opinion

Author

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  • Filipović Ivica

    (University of Split, University Department of Forensic Sciences, Croatia)

  • Šušak Toni

    (University of Split, University Department of Forensic Sciences, Croatia)

  • Lijić Andrea

    (University of Split, University Department of Forensic Sciences, Croatia)

Abstract

Background: Since external auditors possess the expertise necessary for detecting manipulations in financial statements, they should also take into account earnings management that could lead to it. In that context, auditor’s independence, which can be affected by auditor’s rotation, is of utmost importance. Objectives: This paper aims to examine the moderating effect of auditor rotation on the relationship between the extent of financial manipulation and the type of auditor’s opinion for companies listed on the Zagreb Stock Exchange in the Republic of Croatia. Methods/Approach: A panel analysis with logistic regression is conducted to test the research hypothesis. The sample consists of 210 observations during the three years from 2015 to 2017. Results: Results show a significant positive relationship between auditor rotation in a current financial year and auditor’s opinion. Furthermore, there is a negative, but the statistically insignificant moderating effect of auditor rotation in a current financial year on the relationship between financial manipulation and auditor’s opinion, as well as the statistically insignificant moderating effect of auditor rotation frequency over five years on the relationship between financial manipulation and auditor’s opinion. Conclusions: It is not likely that auditors take earnings management into account when generating their opinion on financial statements, and auditor rotation is not proven to be an adequate stimulus in that context.

Suggested Citation

  • Filipović Ivica & Šušak Toni & Lijić Andrea, 2021. "The Effect of Auditor Rotation on the Relationship between Financial Manipulation and Auditor’s Opinion," Business Systems Research, Sciendo, vol. 12(1), pages 96-108, May.
    • Handle: RePEc:bit:bsrysr:v:12:y:2021:i:1:p:96-108:n:3
    DOI: 10.2478/bsrj-2021-0007
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    References listed on IDEAS

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    More about this item

    Keywords

    auditor’s opinion; auditor rotation; earnings management; financial manipulation;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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