Disciplining Role of Auditor Tenure and Mandatory Auditor Rotation PDF Download
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Author: Aysa Dordzhieva
Publisher:
ISBN:
Category :
Languages : en
Pages : 51
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Book Description
This study addresses the international debate over whether the rotation of audit firms should be mandatory. Mandatory rotation rules have been adopted by the European Union, but have not been established in the United States. Proponents of the policy believe that a long tenure auditor-client relationship leads to the auditor building an excessive economic bond with the client which erodes auditor independence. Motivated by this claim, I build a theoretical model that compares auditor incentives to issue independent reports under the regimes with and without mandatory rotation. The model demonstrates conditions under which mandatory rotation could actually impair auditor independence, contrary to the popular view.
Author: Aysa Dordzhieva
Publisher:
ISBN:
Category :
Languages : en
Pages : 51
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Book Description
This study addresses the international debate over whether the rotation of audit firms should be mandatory. Mandatory rotation rules have been adopted by the European Union, but have not been established in the United States. Proponents of the policy believe that a long tenure auditor-client relationship leads to the auditor building an excessive economic bond with the client which erodes auditor independence. Motivated by this claim, I build a theoretical model that compares auditor incentives to issue independent reports under the regimes with and without mandatory rotation. The model demonstrates conditions under which mandatory rotation could actually impair auditor independence, contrary to the popular view.
Author: Mara Cameran
Publisher:
ISBN:
Category :
Languages : en
Pages : 39
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Book Description
Mandatory auditor rotation was recently proposed for the European Union and is also under consideration in the United States. There has been little research into either the benefits or costs of rotation in a true mandatory setting that could inform intelligent policy making. Our paper helps fill this gap by examining Italy where mandatory rotation of auditors has been required since 1975. We find that outgoing auditors do not shirk on effort (or quality), but final year fees are 7 percent higher than normal which may indicate opportunistic pricing. The fees of incoming auditors are discounted by 16 percent even though they have abnormally higher engagement hours in the first year (17 percent), which is suggestive of low balling. However, subsequent fees are abnormally higher and exceed the initial fee discount. Thus the costs of mandatory rotation are nontrivial. Higher costs could be acceptable if rotation improves audit quality, but we find evidence of the opposite. Namely, the quality of audited earnings is lower in the first three years following rotation, relative to later years of auditor tenure. Since rotation is costly and earnings quality improves with longer auditor tenure, the evidence from Italy does not support the case for mandatory rotation.
Author: Wally Smieliauskas
Publisher: Routledge
ISBN: 0429854129
Category : Business & Economics
Languages : en
Pages : 269
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Book Description
Auditing has become an essential component in market societies and the need for auditing skills has risen in line with globalization. This textbook provides a comprehensive overview of the role of financial statement auditing in contemporary society, including the auditor’s role in evaluating the financial reporting of an auditee—a topic of central concern in the recent comprehensive review of the auditing profession in the Brydon Report (2019). The experienced authors provide insight into auditing research to help readers understand its function, regulation, and role in theory and practice. With focus on private sector financial statement auditing and its regulation, the book includes perspectives on social theory, history, and the importance of professional standards. The thought-provoking final chapter challenges students to consider the effectiveness of auditing in evaluating increasingly risky and complex accounting estimates involving assumptions about future events. A fundamental approach to auditing theory, this textbook will be useful reading for advanced undergraduate and postgraduate students across business and accounting fields.
Author: Gene F. Ott
Publisher:
ISBN:
Category :
Languages : en
Pages : 112
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Book Description
Author: Hassan El Hajj
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Author: Jianqiang Wang
Publisher:
ISBN:
Category :
Languages : en
Pages : 152
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Book Description
Author: Dan Li
Publisher:
ISBN:
Category : Accounting firms
Languages : en
Pages :
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Book Description
Accounting regulators are concerned about the potential threat of long-term auditor-client relationships on auditor independence, leading to lower audit quality. The main objective of this study is to examine the association between auditor tenure and an important feature of accounting, namely conservatism. Following Basu (1997) and Ball, Kothari and Robin (2000), I define conservatism as the quicker recognition in earnings of bad news about expected future cash flows. I investigate whether long-term auditor-client relationships are associated with less timely recognition of earnings to bad news, and a lower rate of reversal of negative earnings changes. The overall results strongly show that conservatism decreases as auditor tenure lengthens. The results are robust across various measures of conservatism and a series of sensitivity tests. However, auditors' litigation exposure appears to be able to mitigate the adverse impact of auditor tenure. In additional tests, I find that the reduced conservatism is not driven by the larger clients that auditors have incentives to retain. Moreover, I find that even industry specialists could not avoid the negative impact of longer auditor-client relationships on conservatism. The study provides some support to the regulators who are concerned about the potential negative impact of auditor tenure on audit quality and the rule of mandatory audit firm rotation.
Author: Kathleen Harris
Publisher:
ISBN:
Category : Accounting
Languages : en
Pages :
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Book Description
This study investigates whether mandatory auditor rotation rules are associated with changes in audit quality using available data from three countries that have adopted mandatory auditor rotation (MAR) rules. Consistent with prior literature, I assume that earnings management measures capture the various methods employed by corporate insiders to exercise their discretion to manage earnings that is not constrained by the audit firm. The more discretion, ceteris paribus, in earnings, the lower the audit quality. First, I investigate the debonding effect of an MAR policy. Debonding describes the effect that is often the primary motivation for adopting MAR rules. That is, end the possibility of long-term audit engagements and the economic bond of audit firms to their clients will be broken (by enhancing auditor independence and objectivity). In the sample after adoption of MAR rules, the data show evidence of less earnings management, less managing to earnings targets, and more timely loss recognition compared to the sample before adopting MAR rules. From these results, I conclude that audit markets appear to improve, on average, from enactment of MAR rules. I then investigate the allowed discretion in the year before and the year after auditor changes in which rotation rules have been adopted (termed the low client-specific knowledge effect). I find evidence of lower audit quality in both years. These results highlight the importance, particularly to regulators of audit markets, of considering ways to mitigate the erosion of audit quality when making the transition to new auditors under MAR rules (e.g., the use of detailed handover files between predecessor and successor audit firms or "four-eyes principle" in years of initial audits).
Author: Andrew B. Jackson
Publisher:
ISBN:
Category :
Languages : en
Pages : 28
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Book Description
This study investigates the effect a regime of mandatory audit firm rotation would have on audit quality in an Australian setting. Using two measures of audit quality, being the propensity to issue a going-concern report and the level of discretionary accruals, the study examines the switching patterns of clients in their current voluntary switching capacity, and the levels of audit quality. We find 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 accruals. We conclude that given the additional costs associated with switching auditors there are minimal, if any, benefits of mandatory audit firm rotation. Other initiatives to address concerns about auditor independence and audit quality therefore need be considered before imposing mandatory audit firm rotation.
Author: Li Zheng Brooks
Publisher:
ISBN:
Category :
Languages : en
Pages : 68
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Book Description
We propose that audit quality is likely to increase in the earlier years due to a Learning Effect and in later years it decreases due to a Bonding Effect. Adopting a quadratic model, we find that the average turning point is between 12 to 16 years for a large sample of U.S. firms. With an average tenure of 9 years in our sample, these findings imply that mandatory auditor firm rotation may not be necessary. Further, we find that the turning point varies by auditor - it is longer for non-Big N auditors, non-specialist auditors, and auditors with high client importance, and the deterioration of audit quality exists in low litigation industries only, consistent with the Bonding Effect explanation. Moreover, we find the turning point gets longer in the post-SOX period. Our results have implications for the current debate on mandatory audit firm rotation.
