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

Fontaine, Richard; Khemakhem, Hanen; Herda, David N.

doi:10.2308/ciia-51650

Cited by 5 publications

(4 citation statements)

References 7 publications

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“…As discussed in Section 5.2 and iterated by the discriminate analysis, both groups do not believe that MAFR is necessary and doubt its effectiveness. These results are contrary to Hussey and Lan (2001), who found that UK-based CFOs are more optimistic about MAFR and support more recent findings on audit committees' views on MAFR by Fontaine et al (2017).…”

Section: Differences Between Auditors and Non-auditorscontrasting

confidence: 51%

“…Our findings show that key decision-makers, across various roles in the audit industry, do not generally believe quality will be improved and the regulation will have unintended consequences. At the client level, consistent with Fontaine et al (2017) and Williams and Wilder (2016), preparers were concerned about the additional time and resources expended to engage with auditors who would be unfamiliar with the intricacies of their business model. Similarly, audit committees believed that the cost of implementing MAFR would be material and unnecessary.…”

Section: Discussionmentioning

confidence: 99%

“…The authors survey finance directors in the UK to offer some evidence in support of MAFR. Similarly, Fontaine et al (2017) interview 19 audit committee members in Canada, showing considerable pushback against MAFR, with the view that it will be detrimental to audit quality. There are also examples of content analysis being used to explore the views expressed in the US debate over auditor rotation from letters sent to the PCAOB (for example, Roush et al, 2011;Williams and Wilder, 2016)).…”

Section: Prior Research On Mandatory Audit Firm Rotationmentioning

confidence: 99%

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Mandatory audit firm rotation: a critical composition of practitioner views from an emerging economy

Harber

Maroun

2020

MAJ

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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.

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Section: Differences Between Auditors and Non-auditorscontrasting

confidence: 51%

Section: Discussionmentioning

confidence: 99%

Section: Prior Research On Mandatory Audit Firm Rotationmentioning

confidence: 99%

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Mandatory audit firm rotation: a critical composition of practitioner views from an emerging economy

Harber

Maroun

2020

MAJ

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“…The interviewees were provided with the script before the interview so that they had the opportunity to think about the questions that would be raised (Hermanson et al, 2012). The number of interviewees is similar to Nath et al (2020), with 15 interviews and slightly fewer than the Sormunen (2014), Fontaine et al (2017), Segal (2019) and Fontaine et al (2013), with 18, 19, 20 and 20 interviews, respectively, all within the audit field. We considered 14 interviews to be sufficient, as we have designed the script with the input of four additional partners who agreed on the topics to be covered.…”

Section: Methodsmentioning

confidence: 99%

Effects of the 2014 European reform on audit activity, the audit outcome and the audit market: the auditors’ view

Castillo-Merino,

Garcia-Blandon,

Rodríguez-Pérez

2024

MEDAR

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Purpose This paper aims to examine the effects of the 2014 European regulatory reform on auditors’ activity, the audit outcome and the audit market, with a focus on the Spanish market. Design/methodology/approach The research is based on in-depth, semistructured interviews with partners of the main audit firms operating in the Spanish market. This qualitative approach provides a precise identification of the cause-effect relationships of the new measures introduced by the European audit regulation. Findings The findings indicate that, based on auditors’ opinions, the costs of the main regulatory changes outweigh the benefits. The European Union (EU) Audit Regulation imposes more demanding provisions, such as an extended auditor’s report, mandatory audit firm rotation, more banned nonaudit services and stricter quality controls, resulting in substantial side effects on audit activity and the audit market. This could undermine the objective of enhancing the quality of audit services. Originality/value To the best of the authors’ knowledge, this is the first study to analyze the effect of the 2014 EU regulatory reform on audit activity, audit market and audit outcome based on auditors’ perceptions. The findings may be of interest to academics, professionals and regulators alike, as they offer valuable insights for assessing the effectiveness of the new audit provisions. Additionally, the qualitative methodology used facilitates a causal analysis of the key elements introduced by the regulations, potentially paving the way for future research avenues.

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Costs and benefits of mandatory audit firm rotation: initial engagement experience of audit committee chairs and engagement partners

2022

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Audit regulators remain divided on whether the costs of mandatory audit firm rotation (MAFR) will be outweighed by the benefits of the regulation. Existing research provides mixed results in support of the benefits of MAFR. This paper aims to complement these studies by examining what costs and benefits are experienced during the initial engagement after a MAFR. Interviews were conducted with dyads of South African audit committee chairs and audit partners involved in the same appointment process and initial audit engagement following a MAFR. While many audit committee chairs remained opposed to MAFR, most were impressed by the better-thanexpected benefits of the fresh perspective and challenge offered by a newly appointed audit firm, and the less than expected costs of losing the incumbent auditor's knowledge. By comparison, most audit partners expressed support for MAFR after their experience with the regulation and believed the policy would improve public perceptions of independence but raised concerns about the significant start-up costs their firms had been forced to absorb. As a result, while the findings suggest that the primary arguments against MAFR may be overstated, there is a risk that MAFR may compromise auditor independence by pressurising auditors to appease their new clients to retain the engagement and recover these initial costs. This paper provides insights for policymakers considering the costs and benefits of implementing MAFR, and for audit committees and auditors who seek to maximise the benefits while minimizing the costs of their next MAFR event.

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

Cited by 5 publications

References 7 publications

Mandatory audit firm rotation: a critical composition of practitioner views from an emerging economy

Mandatory audit firm rotation: a critical composition of practitioner views from an emerging economy

Effects of the 2014 European reform on audit activity, the audit outcome and the audit market: the auditors’ view

Costs and benefits of mandatory audit firm rotation: initial engagement experience of audit committee chairs and engagement partners

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