The effect of Mandatory audit rotation on the audit quality: evidence from Indonesia

Abstract

Auditors’ reputations have been damaged by numerous accounting scandals during the last decades. It started with the collapse of one of the world’s top audit firms, Arthur Andersen, due to the Enron scandal in 2002. The credibility of audited financial reports, audit quality and independency of auditors were questioned by different stakeholders. There has been an assumption that the auditors’ independence could be harmed by unnecessary ties built during long audit engagement due to over-familiarity and lack of auditors’ awareness and effort. Therefore, audit rotation is made as an attempt to restore public trust and improve audit quality. Nevertheless, there are some arguments against the regulation of the mandatory audit rotation. They assumed audit rotation will only cause loss of knowledge, deficiency cost and time consuming. Both of these perspective have been a long debate with mixed results from proponent and opponent sides. Thus, with the intention to contribute additional clarification points to the current debate, this thesis aims to provide a study which investigate the actual impacts of long audit tenure and mandatory audit rotation to audit quality with empirical evidence from Indonesia in 2009 - 2016.