Auditor firm rotation, social ties and audit quality
This study explores the association between auditor switching, social ties and audit quality. A global call for improved audit quality created a debate around mandatory auditor rotation. Proponents argue that long auditor tenure impairs the auditor’s independence and will be harmful to audit quality. Meanwhile, opponents claim that it is auditor switching that is harmful to audit quality, since the auditor lacks industry- and client-specific knowledge in a new audit engagement. Current research empirically examining the benefits and costs of auditor rotation provides mixed results. This study argues that these mixed results might be due to the fact that none of these studies took social ties between the auditor and firm’s management into account. These social ties might impair the auditor’s independence and harm audit quality. Using a unique dataset of 88 listed Dutch firms in the 2007-2015 period and accrual levels as a proxy for audit quality, this study finds some indications of a negative effect of auditor switching on audit quality. This would provide support for mandatory rotation opponents. However, no statistically significant effects were found between an auditor switch and audit quality. This study discusses these findings and their implications.
Faculteit der Managementwetenschappen