SUMMARY 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 lowballing. 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.

No abstract

No abstract

No abstract

The objective of this research is to highlight the determinants of audit fees in the Italian audit market. As described later, Italy is not directly comparable with other countries where these kinds of studies have been conducted. Furthermore, the Big Italian audit firms were condemned by the Italian Antitrust Authority for price fixing in 2000. A fee model for the Italian market is developed. Consistent with previous studies, findings show that the size, the complexity of auditee, and audit risk have an impact on the audit fee paid by Italian clients. Moreover, auditor size is also relevant. After performing further tests, it was found that large auditor premium could be attributed only to KPMG. So although the Italian Antitrust Authority condemned all the Big Six, the results support the idea that these auditors as a group did not accrue a general premium.