Auditor Rotation and audit quality in Europe

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2016-06-29
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en
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Abstract
Mandatory auditor rotation has been proposed as a mechanism to enhance auditors’ independence and ultimately improve the quality of audits. Proponents claim that as the auditor-client relationship increases the auditors’ independence will decrease, affecting the quality of their work. Opponents, however, state that the benefits do not outweigh the costs, namely destroyed industry and client-specific expertise. New auditors need time to understand the client’s business, operations and risks. This study examines the effects of auditor rotation on audit quality, by focusing on European companies for the period 1995-2014. Similar studies focusing on European companies are rare. Based on prior studies it is hypothesized that audit quality will decrease on the short term after rotation, but will increase on the long term. Also a differential effect between voluntary and mandatory rotation is hypothesized. Three different measures of audit quality are used; discretionary accruals, abnormal working capital accruals, and the ratio of loss avoidance. The results are mixed as dependent on the measure of audit quality there is supporting or contradicting evidence. The first two hypotheses are not supported nor rejected by the data, as the evidence is only indicative. The second hypothesis is rejected, however the results are not robust.
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Faculteit der Managementwetenschappen
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