Disciplining Role of Auditor Tenure and Mandatory Auditor Rotation

Abstract

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 these rules 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 may then erode auditor independence. Motivated by this claim, I build a theoretical model that compares auditor incentives to issue independent reports under regimes with and without mandatory rotation. The model demonstrates conditions under which mandatory rotation could actually impair auditor independence, contrary to the popular view.

Regulatory Oversight and Reporting Quality: Evidence from SEC Office Assignment Change

“…However, this does not necessarily imply that the SEC should change office assignment more often because the potential "fresh-look" benefits will be lower and new offices will have to spend more time and resources to acquire firm-specific knowledge. Also, recent theory works on auditor rotation show that mandatory rotation may change auditors' incentives and effort before rotation (Dordzhieva 2022;Patterson et al 2019). These results may also imply to filing review office change.…”

Kualitas Audit Sebuah Systematic Literature Review

“…• Audit Fees 36 (Gayaa et al, 2017) Big4 & Non Big4 37 (Abid & Dammak, 2022) Audit Fees 38 (Blankey et al, 2014) • Relative staffing per issuer client • Audit Fees 39 (Fu et al, 2015) • Internal quality control systems • Independence practices • Continuing education • Partners' remuneration structures 40 (Francis et al, 2013) Abnormal accrual 41 (Xiao et al, 2020) Discretionary accruals 42 (Porumb et al,2021) Abnormal accrual 43 (Griffith et al,2015) Audit judgments (experimenta research) 44 (Dordzhieva, 2022) • Audit tenure • Mandatory audit rotation 45 (Fathi et al, 2021) • Auditor's Independence 46 (AlQadasi et al, 2018) Audit Fees Sumber: data diolah (2023)…”

Monitoring with career concerns

“…See, for example,Hermalin and Weisbach (1988),Shleifer andVishny (1989), andZwiebel (1996) for references on the entrenchment problem. On term limits for politicians, see, for example,Maskin and Tirole (2004),Alesina and Tabellini (2007), DalBó and Rossi (2011); for auditors, seeDordzhieva (2018),Lu and Sivaramakrishnan (2009),Patterson et al (2019); and for corporate boards seeVafeas (2003),Bonini et al (2017), andHuang and Hilary (2018).5 Halac and Prat state that they cannot solve their model with a forward-looking agent (their p. 3119). In an online Appendix, they numerically compute a particular equilibrium with a forward looking agent.…”