Why Audit Committees Oppose Mandatory Audit Firm Rotation: Interview Evidence from Canada

2016 ◽  
Vol 11 (1) ◽  
pp. P11-P15 ◽  
Author(s):  
Richard Fontaine ◽  
Hanen Khemakhem ◽  
David N. Herda
Keyword(s):  
Audit Committee ◽  
Effective Means ◽  
Auditor Independence ◽  
Audit Committees ◽  
Professional Judgment ◽  
Audit Firm ◽  
Face To Face ◽  
Audit Firms ◽  
Mandatory Audit Firm Rotation ◽  
Audit Partner Rotation

SUMMARY This article summarizes our recent study (Fontaine, Khemakhem, and Herda 2016), which investigates audit committee (AC) members' perspectives on mandatory audit firm rotation (MAFR), mandatory audit partner rotation, ways in which AC members monitor auditor independence, and the costs associated with changing audit firms. We conduct in-person interviews with AC members in Canada to explore our research questions. Our findings reveal that AC members view MAFR as an unnecessary threat to their shareholder-granted authority to make audit firm appointment decisions, and believe their professional judgment and observations are the most effective means of ensuring auditor independence. We explain our findings using self-determination theory. Deep insight into the perspectives of AC members, attained by face-to-face interviews and guaranteed anonymity, should interest audit firms and regulators.

scholarly journals A theoretical approach to auditor independence and audit quality

2020 ◽  
Vol 17 (2) ◽  
pp. 124-141
Author(s):  
Rahman Yakubu ◽  
Tracey Williams
Keyword(s):  
Audit Committee ◽  
Audit Quality ◽  
Audit Fees ◽  
Auditor Independence ◽  
Accounting Scandals ◽  
Audit Firms ◽  
Mandatory Audit Firm Rotation ◽  
The Impact ◽  
Insight Into

Auditor independence and the quality of audit report is of growing concern to regulators, institutional investors and stakeholders as a series of accounting scandals have undermined the professionalism of auditors. The findings from this study produced an insight of how auditor’s independence improve audit quality and that abnormal audit fees is as a result of additional effort for auditor to carry out rigorous audit engagement as a result of wider audit scope; that mandatory audit firm rotation will enhance auditor independence, and that audit committee with nonexecutive independence will promote audit quality. The study also finds that in terms of auditor size, smaller audit firms that belong to professional bodies will provide higher audit quality. The main conclusion of this research is that where an auditor is fully independent in carrying out audit engagement with strong resistance to fees pressure will enhance audit quality. This research provides insight into the impact of IFRS adoption on audit fees.

Do Former Audit Firm Partners on Audit Committees Procure Greater Nonaudit Services from the Auditor?

2012 ◽  
Vol 88 (1) ◽  
pp. 297-326 ◽  
Author(s):  
Vic Naiker ◽  
Divesh S. Sharma ◽  
Vineeta D. Sharma
Keyword(s):  
Audit Committee ◽  
Auditor Independence ◽  
Securities And Exchange Commission ◽  
Data Availability ◽  
Audit Committees ◽  
Future Research ◽  
Corporate Boards ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Nonaudit Services

ABSTRACT: To address potential threats to auditor independence, the Sarbanes-Oxley Act of 2002 (SOX) requires the audit committee to pre-approve nonaudit services (NAS) procured from the auditor. However, the presence of a former audit firm partner (FAP) affiliated with the current auditor on the audit committee could undermine the audit committee's due diligence over the NAS pre-approval process. To alleviate such concerns, the Securities and Exchange Commission approved a three-year “cooling-off” period for appointing audit firm alumni as independent directors. Our analyses show that the presence of both affiliated and unaffiliated FAPs on audit committees does not lead to greater NAS procured from the auditor; rather, FAPs reduce NAS procured from the auditor. Moreover, NAS decline significantly following the appointment of FAPs to the audit committee. Further tests suggest the three-year cooling-off period may not be warranted and deserves further investigation. Our study raises important implications for regulators, policy makers, corporate boards, and future research. Data Availability: Data are publicly available from sources identified in the text.

Does Mandatory Audit Firm Rotation Enhance Auditor Independence? Evidence from Spain

2009 ◽  
Vol 28 (1) ◽  
pp. 113-135 ◽  
Author(s):  
Emiliano Ruiz-Barbadillo ◽  
Nieves Go´mez-Aguilar ◽  
Nieves Carrera
Keyword(s):  
Positive Impact ◽  
Rotation Period ◽  
Empirical Support ◽  
Auditor Independence ◽  
Audit Firm ◽  
Going Concern ◽  
Audit Firms ◽  
Mandatory Rotation ◽  
Mandatory Audit Firm Rotation ◽  
The Impact

SUMMARY: In this study, we document evidence on the impact of mandatory rotation of audit firms on auditor independence using Spanish archival data. Rotation of audit firms every nine years was mandatory in Spain from 1988–1995. Although the rule was never enforced, the Spanish context provides a unique setting to examine the effects that mandatory audit firm rotation has on auditor behavior. We examine audit reports for a sample of financially stressed companies from 1991–2000 to compare audit reporting behavior in a regime with rotation (mandatory rotation period: 1991–1994) and one without rotation (post-mandatory rotation period: 1995–2000). We test two competing hypotheses concerning the impact of mandatory rotation on the likelihood of auditors' issuing going-concern modified audit opinions. We find no evidence to suggest that a mandatory rotation requirement is associated with a higher likelihood of issuing going-concern opinions. Our results suggest that auditors' incentives to protect their reputation have a positive impact on the likelihood of issuing going-concern opinions, while auditors' incentives to retain existing clients did not impact on their decisions in both the mandatory rotation and post-mandatory rotation periods. Overall, our results provide empirical support for the arguments put forward by opponents of mandatory rotation.

scholarly journals Banks’ audit committees, audit firm alumni and fees paid to audit firm

2019 ◽  
Vol 34 (7) ◽  
pp. 783-807 ◽  
Author(s):  
Kim Ittonen ◽  
Emma-Riikka Myllymäki ◽  
Per Christen Tronnes
Keyword(s):  
Earnings Management ◽  
Audit Committee ◽  
Design Methodology ◽  
Audit Fees ◽  
Audit Committees ◽  
Committee Chair ◽  
Content Type ◽  
Audit Firm ◽  
Audit Firms ◽  
Non Audit Services

Purpose This paper focuses on bank audit committees and examines whether audit committee members who are former auditors are associated with the acquisition of audit and non-audit services from their former employers. Design/methodology/approach The study empirically examines a sample of large banks that are included in the S&P Composite 1500. Findings The paper reports significantly lower audit fees and a higher proportion of non-audit fees to total fees when the audit committee chair is an alumnus of the incumbent audit firm. Moreover, additional analysis reveals that these findings are stronger for banks with more earnings management. Research limitations/implications Overall, the findings indicate that audit firms might consider banks using their alumni as audit committee chairs to be less risky or easier to audit, thus requiring relatively less effort from the auditors. The reduced effort required to audit clients with audit firm alumni on their audit committees then has the effect of reducing the audit fees charged. Alternatively, their auditing experience and cognitive proximity might influence the assessment of the need for auditing or the ability to negotiate lower audit fees on the part of audit firm alumni. Originality/value This paper provides empirical evidence of the association between audit firm alumni in influential positions on an audit committee and fees paid to those audit firms in the banking industry. The findings contribute to the literature by suggesting that banks with affiliated former auditors chairing their audit committees not only have significantly lower audit fees but also a higher proportion is spent on non-audit services.

How a Shared Auditor Affects Firm-Pair Comparability: Implications of Both Firm and Individual Audit Styles

2020 ◽  
Vol 39 (3) ◽  
pp. 133-160
Author(s):  
Lili Jiu ◽  
Bin Liu ◽  
Yuanyuan Liu
Keyword(s):  
Accounting Standards ◽  
Financial Statement ◽  
Professional Judgment ◽  
Audit Process ◽  
Personal Style ◽  
Audit Firm ◽  
Market Participants ◽  
Audit Firms ◽  
Audit Reports ◽  
Practical Implications

SUMMARY In this study, we examine the roles of audit firms and individual auditors in improving financial statement comparability. We conduct the study in the Chinese setting, in which the identities of signing auditors are revealed in audit reports and accounting standards are principle based. After controlling for audit firm style, we find that firm pairs with shared signing auditors have incrementally greater comparability. Our results indicate that individual auditors exhibit their own personal style in implementing accounting standards and exercising professional judgment in the audit process. Overall, our study underscores the association between individual auditors and comparability, with practical implications for market participants and policymakers.

The Effect of Office Changes within Audit Firms on Clients' Audit Quality and Audit Fees

2020 ◽  
Vol 39 (1) ◽  
pp. 71-99
Author(s):  
Carl W. Hollingsworth ◽  
Terry L. Neal ◽  
Colin D. Reid
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Additional Analysis ◽  
Audit Firm ◽  
Audit Firms ◽  
Audit Fee ◽  
The Impact ◽  
Audit Partner Rotation

SUMMARY While prior research has examined audit firm and audit partner rotation, we have little evidence on the impact of within-firm engagement team disruptions on the audit. To examine these disruptions, we identify a unique sample of companies where the audit firm issuing office changed but the audit firm did not change and investigate the effect of these changes on the audit. Our results indicate that companies that have a change in their audit firm's issuing office exhibit a decrease in audit quality and an increase in audit fees. In additional analysis, we partition office changes into two groups—client driven changes and audit firm driven changes. This analysis reveals that client driven changes are more likely to result in a higher audit fee while audit quality is unchanged. Conversely, audit firm driven changes do not result in a higher audit fee but do experience a decrease in audit quality.

scholarly journals Non-audit fees and auditor independence: Nigerian evidence

2019 ◽  
Vol 34 (8) ◽  
pp. 1029-1049
Author(s):  
Paul Nnamdi Onulaka ◽  
Moade Fawzi Shubita ◽  
Alan Combs
Keyword(s):  
Audit Fees ◽  
Auditor Independence ◽  
Structured Interviews ◽  
Content Type ◽  
Face To Face ◽  
External Auditors ◽  
Fund Managers ◽  
Expectation Gap ◽  
Audit Firms ◽  
Economic Necessity

Purpose This study aims to investigate the extent to which the provision of non-audit services (NAS) by external auditors to audit clients affects auditors’ independence and the audit expectation gap in Nigeria. Design/methodology/approach The study adopts an interpretivist approach. In total, 30 semi-structured, face-to-face interviews were conducted to explore the views expressed by audit partners and pension fund managers in Nigeria; group responses were evaluated and presented separately. After transcribing the interview audio recordings, a thematic data analysis of the two groups’ responses was performed. Findings Interpretation of the interview responses indicates that the provision of NAS by audit firms to their audit clients is regarded by auditors as a matter of economic necessity. Nevertheless, it is also perceived as impeding auditors’ independence and increasing the gap between the auditor and public expectations. Practical implications This study contributes to the debate surrounding the need for an independent body to oversee auditing standard setting distinct from the current practice to enhance transparency. Originality/value A qualitative analysis of the nuanced responses obtained from the semi-structured interviews reveals starkly the perceived economic pressures on auditors to accept non-audit work. Moreover, it endorses the regulation to restrict non-audit work in support of a sustainable fee level for an independent audit.

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.

Who's Really in Charge? Audit Committee versus CFO Power and Audit Fees

2014 ◽  
Vol 89 (6) ◽  
pp. 2057-2085 ◽  
Author(s):  
Matthew J. Beck ◽  
Elaine G. Mauldin
Keyword(s):  
Audit Committee ◽  
Economic Recession ◽  
Audit Fees ◽  
Auditor Independence ◽  
Negotiation Process ◽  
Data Availability ◽  
Audit Committees ◽  
Exogenous Shock ◽  
Cast Doubt ◽  
Recent Financial Crisis

ABSTRACT Although regulation makes audit committees responsible for determining and negotiating audit fees, researchers and practitioners express concerns that CFOs continue to control these negotiations. Thus, regulation may give investors a false sense of security regarding auditor independence. We utilize the recent financial crisis and economic recession as an exogenous shock that allows us to shed light on the relative influence of the audit committee and the CFO on fee negotiations. During the recession, we find larger fee reductions in the presence of more powerful CFOs, and smaller fee reductions in the presence of more powerful audit committees. We also find the CFO or the audit committee primarily influences fees when their counterpart is less powerful. Our findings suggest a more complex relationship between the CFO and the audit committee than current regulations recognize and cast doubt on the ability of regulation to force one structure on the negotiation process. Data Availability: Data are available from public sources identified in the text.

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