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Mandatory audit firm rotation and audit quality

Author

Listed:
  • Andrew B. Jackson
  • Michael Moldrich
  • Peter Roebuck

Abstract

Purpose - The purpose of this paper is to investigate the effect that a regime of mandatory audit firm rotation would have on audit quality. Design/methodology/approach - Using two measures of audit quality, being the propensity to issue a going‐concern report and the level of discretionary accruals, the paper examines the switching patterns of clients in their current voluntary switching capacity, and the levels of audit quality. Findings - The main finding is that audit quality increases with audit firm tenure, when proxied by the propensity to issue a going‐concern opinion, and is unaffected when proxied by the level of discretionary expenses. Given the additional costs associated with switching auditors, it is concluded that there are minimal, if any, benefits of mandatory audit firm rotation. Research limitations/implications - A limitation of this study is that only actual audit quality is examined. While the results suggest that actual audit quality is associated with the length of audit tenure, the perception of audit quality is not addressed, which may increase with audit firm rotation. Originality/value - The results go against the move towards mandatory audit firm rotation, and suggest that other initiatives may need to be considered to address concerns about auditor independence and audit quality.

Suggested Citation

  • Andrew B. Jackson & Michael Moldrich & Peter Roebuck, 2008. "Mandatory audit firm rotation and audit quality," Managerial Auditing Journal, Emerald Group Publishing Limited, vol. 23(5), pages 420-437, May.
    • Handle: RePEc:eme:majpps:02686900810875271
    DOI: 10.1108/02686900810875271
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    Citations

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    Cited by:

    1. Markus Widmann & Florian Follert & Matthias Wolz, 2021. "On the Political Decision of Audit Market Regulation: Empirical Evidence of Audit Firm Tenure and Maximum Durations within the European Union," Economies, MDPI, vol. 9(2), pages 1-24, May.
    2. Munkaila Aminu & Bomi Cyril Nomlala & Kiran Baldavoo, 2024. "Examining Mandatory Audit Firm Rotation and Audit Quality in South Africa: Practitioner and Academic Perspectives," International Journal of Economics and Financial Issues, Econjournals, vol. 14(3), pages 40-47, May.
    3. Abdulkarim Hamdan J. Alhazmi & Sardar Islam & Maria Prokofieva, 2024. "The Impact of Changing External Auditors, Auditor Tenure, and Audit Firm Type on the Quality of Financial Reports on the Saudi Stock Exchange," JRFM, MDPI, vol. 17(9), pages 1-26, September.

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