Auditor rotations and audit quality

Abstract

Purpose The purpose of this paper is to investigate the association between audit rotation – at the audit partner and audit firm level – and audit quality. As mentioned in the literature, audit rotation has several benefits, and one of them is it can bring a fresh look to audit tasks and subsequently improve audit quality. Moreover, audit itself can help a client to improve its financial reporting. However, ineffective communication between predecessor and successor audit partners or audit firms, and pseudo-rotation can hamper that benefit. Design/methodology/approach This study uses multivariate regression analysis to test its hypotheses. Using data from companies listed on the Indonesia Stock Exchange, the sample consists of 688 company-year observations covering the period 2003–2016. Findings This study finds that the cumulative number of audit partner rotations is positively associated with audit quality, indicating that rotations at the audit partner level will enhance audit quality. Conversely, it finds that the cumulative number of audit firm rotations is negatively associated with audit quality. Practical implications The study’s findings may assist regulators in crafting standards regarding audit rotation. As the findings show, audit partner rotation will improve audit quality, but the audit firm rotation will decrease audit quality. As this study tries to explain the decreasing audit quality from audit firm rotation could be a consequence of ineffective communication or pseudo audit firm rotation. Regulators should try to tackle these problems. Originality/value Instead of using tenure as a proxy for a rotation, this study creates a new proxy named the cumulative number of audit partner and audit firm rotations to provide evidence on the benefits of audit rotation.

The Effects of Audit Firm Size, Audit Tenure, and Audit Rotation on Audit Quality

“…The results of this study are in line with previous research conducted by (Syahputri, 2021), (Agustini & Siregar, 2020) (Palalangan et al, 2019a), and also (Paputungan & Kaluge, 2018). However, this is not in line with research conducted by (Firth et al, 2012), (Purwanto, 2021), (Hai et al, 2019), (Kalanjati et al, 2019), and (Garcia-Blandon & Argiles-Bosch, 2017), who have found the effect of audit rotation on audit quality.…”

“…Some of these cases have caused a loss of public trust in an audit firm and poorly assessed the quality of the audit produced by the audit firm due to the lack of competence possessed by the auditor (Palalangan et al, 2019a). (Kalanjati et al, 2019) further found that the cumulative number of audit partner rotations is positively related to audit quality. Conversely, the cumulative number of audit firm rotations is negatively associated with audit quality.…”

Pengaruh Fee Audit, Rotasi Audit, Reputasi Auditor dan Spesialisasi Auditor terhadap Kualitas Audit

“…Rotasi auditor adalah perputaran atau pergantian Akuntan Publik (AP) dan Kantor Akuntan Publik (KAP) yang memberikan jasa audit kepada kliennya (Permatasari & Astuti, 2019). Penelitian Kalanjati et al (2019) menyatakan bahwa rotasi audit mempunyai pengaruh terhadap kualitas audit sedangkan hasil berbeda ditemukan pada penelitian Ismi Fauziyyah (2020) yang menyatakan tidak ada pengaruh rotasi audit terhadap kualitas audit.…”

“…Pengaruh Rotasi Audit terhadap Kualitas Audit Menurut Sari et al (2019) mengatakan rotasi audit tidak mempunyai pengaruh terhadap kualitas audit. Sedangkan hasil penelitian Kalanjati et al ( 2019) yang mengatakan rotasi audit mempunyai pengaruh atas kualitas audit. .…”

The Affecting Factors of Audit Quality with Earnings Surprise Benchmark Approach as a Measure of Audit Quality

“…The financial statement contains pieces of information about company finance, the financial statement must have excellent quality, such as reliable, relevant, and can be compared with similar reports, and must be easy to understand by financial statement users to get the benefits from it [3] and [4]. Financial statements must be audited, so the result from the report can influence the decisions of financial statements users [5].…”