Mandatory audit firm rotation and prohibition of audit firm-provided tax services: Evidence from investment consultants’ perceptions

2018 ◽  
Vol 22 (2) ◽  
pp. 131-149 ◽  
Author(s):  
Ewald Aschauer ◽  
Reiner Quick
Keyword(s):  
Audit Firm ◽  
Mandatory Audit Firm Rotation

scholarly journals Mandatory Audit Firm Rotation for Listed Companies: The Effects in the Netherlands

2020 ◽  
Vol 21 (4) ◽  
pp. 937-966
Author(s):  
Bas de Jong ◽  
Steven Hijink ◽  
Lars in ’t Veld
Keyword(s):  
The Netherlands ◽  
Public Interest ◽  
Audit Quality ◽  
Audit Fees ◽  
Listed Companies ◽  
First Year ◽  
Financial Reports ◽  
Audit Firm ◽  
Negative Effect ◽  
Mandatory Audit Firm Rotation

AbstractThe Audit Regulation was adopted in 2014 to address many of the perceived failings in the market for statutory audits. It introduced mandatory audit firm rotation for public-interest entities, including listed companies, as of 17 June 2020/2023. Mandatory audit firm rotation was also considered by the Dutch legislator in 2012. Therefore, many Dutch listed companies had already switched audit firm in anticipation of the national requirement. In this article, we investigate the effects of mandatory audit firm rotation in the Netherlands by examining the financial reports of Dutch listed firms over the financial years 2012–2016 and by conducting a survey among stakeholders. We conclude that there is broad support for mandatory audit firm rotation in the Netherlands. Although mandatory audit firm rotation was seen as controversial at the time of adoption, it is now considered desirable by various stakeholders, including auditors themselves. However, mandatory audit firm rotation appears to have had some adverse effects. Most notably, our study shows a higher probability of errors in first year audits. The discount in audit fees provided by audit firms to lucrative larger public-interest entities for first year audits—the trophy client effect—may exacerbate the negative effect on audit quality. The Audit Regulation’s goals to improve the market for statutory audits have not been met so far.

Mandatory audit firm rotation: a critical composition of practitioner views from an emerging economy

2020 ◽  
Vol 35 (7) ◽  
pp. 861-896
Author(s):  
Michael Harber ◽  
Warren Maroun
Keyword(s):  
Audit Committee ◽  
Audit Quality ◽  
Unintended Consequences ◽  
Policy Implications ◽  
Chief Financial Officers ◽  
Structured Interviews ◽  
Design Data ◽  
Content Type ◽  
Audit Firm ◽  
Mandatory Audit Firm Rotation

Purpose This study aims to address an acknowledged gap in the literature for the analysis of experienced practitioner views on the effects and implications of mandatory audit firm rotation (MAFR). Design/methodology/approach Using an exploratory and sequential design, data was collected from South African regulatory policy documents, organisational comment letters and semi-structured interviews of practitioners. These findings informed a field survey, administered to auditors, investors, chief financial officers (CFOs) and audit committee members of Johannesburg Stock Exchange (JSE) listed companies. Findings Practitioners expressed considerable pushback against the potential efficacy of MAFR to improve audit quality due to various “switching costs”, notably the loss of client-specific knowledge and expertise upon rotation. In addition, the cost and disruption to both the client and audit firm are considered significant and unnecessary, compared to audit partner rotation. The audit industry may suffer reduced profitability and increased strain on partners, leading to a decline in the appeal of the profession as a career of choice. This is likely to have negative implications for audit industry diversity objectives. Furthermore, the industry may become more supplier-concentrated amongst the Big 4 firms. Practical implications The findings have policy implications for regulators deciding whether to adopt the regulation, as well as guiding the design of policies and procedures to mitigate the negative effects of adoption. Originality/value The participants are experienced with diverse roles concerning the use, preparation and audit of financial statements of large exchange-listed multinational companies, as well as engagement in the auditor appointment process. The extant literature presents mixed results on the link between MAFR and audit quality, with most studies relying on archival and experimental designs. These have a limited ability to identify and critique the potential’s witching costs and unintended consequences of the regulation. Experienced participants responsible for decision-making within the audit, audit oversight and auditor appointment process, are best suited to provide perspective on these effects, contrasted against the audit regulator’s position.

Audit Firm Tenure and Fraudulent Financial Reporting

2004 ◽  
Vol 23 (2) ◽  
pp. 55-69 ◽  
Author(s):  
Joseph V. Carcello ◽  
Albert L. Nagy
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Auditor Independence ◽  
Fraudulent Financial Reporting ◽  
Audit Firm ◽  
Auditor Tenure ◽  
Sarbanes Oxley ◽  
Client Relationship ◽  
Mandatory Audit Firm Rotation ◽  
The U.S

The Sarbanes-Oxley Act (2002) required the U.S. Comptroller General to study the potential effects of requiring mandatory audit firm rotation. The General Accounting Office (GAO) concludes in its recently released study of mandatory audit firm rotation that “mandatory audit firm rotation may not be the most efficient way to strengthen auditor independence” (GAO 2003, Highlights). However, the GAO also suggests that mandatory audit firm rotation could be necessary if the Sarbanes-Oxley Act's requirements do not lead to improved audit quality (GAO 2003, 5). We examine the relation between audit firm tenure and fraudulent financial reporting. Comparing firms cited for fraudulent reporting from 1990 through 2001 with both a matched set of non-fraud firms and with the available population of non-fraud firms, we find that fraudulent financial reporting is more likely to occur in the first three years of the auditor-client relationship. We fail to find any evidence that fraudulent financial reporting is more likely given long auditor tenure. Our results are consistent with the argument that mandatory audit firm rotation could have adverse effects on audit quality.

Auditor Rotation: The PCAOB Considers a New Direction

2011 ◽  
Vol 5 (2) ◽  
pp. C15-C20 ◽  
Author(s):  
Pamela B. Roush ◽  
Bryan K. Church ◽  
J. Gregory Jenkins ◽  
Susan A. McCracken ◽  
Jonathan D. Stanley
Keyword(s):  
Active Participation ◽  
Auditor Independence ◽  
Audit Firm ◽  
The Public ◽  
Auditor Rotation ◽  
Public Company ◽  
Mandatory Audit Firm Rotation

SUMMARY The Public Company Accounting Oversight Board (PCAOB) recently undertook an exploration of the need for mandatory audit firm rotation with its issuance of the Concept Release on Auditor Independence and Auditor Rotation (PCAOB 2011a). The accumulation of evidence from PCAOB inspections of audit engagements over the last eight years has led the Board to consider additional steps to protect auditors' independence. We provide a brief synopsis of these matters based primarily on remarks by the PCAOB's chairman, James R. Doty (PCAOB 2011b, 2011c). In addition, we include relevant observations from prior academic studies and end with a call for the active participation of stakeholders in this important debate.

scholarly journals The relation of auditor tenure to audit quality: Empirical evidence from the German audit market

2013 ◽  
Vol 2 (1) ◽  
pp. 27-43 ◽  
Author(s):  
Patrick Krauß ◽  
Henning Zülch
Keyword(s):  
Audit Quality ◽  
The European Union ◽  
Short Term ◽  
Audit Firm ◽  
Audit Market ◽  
Auditor Tenure ◽  
Client Relationship ◽  
Mandatory Audit Firm Rotation

This study investigates whether and how the length of an auditor-client relationship affects audit quality. Using a sample of 1,071 firm observations of large listed companies for the sample period of 2005 to 2011, the study is one of the first to empirically analyze this auditing issue for the German audit market. The empirical results demonstrate that neither short term nor long term audit firm tenure seems to be a significant factor with regard to audit quality in Germany. In the wake of the ongoing discussion in the European Union regarding the optimal audit tenure length for the quality of the conducted statutory audits, our findings do not support the idea of a mandatory audit firm rotation rule.

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