The mandatory Audit Firm Rotation-term investigated

Abstract

In this research paper the length of the Dutch eight year counting Mandatory Audit Firm Rotation (MAFR)-term is investigated. The MAFR-rule affects the external auditor directly. Before the research question is answered, this paper gives a literature review of why MAFR is implemented at all. Followed by sensitizing concepts that construct an understanding of all actors that influence external audit-firms. There is tension between several actors due to self-interesting behavior that is explained by applying the agency theory. The agency theory adds bounded rationality to all actors, meaning that the external auditor acts in an institutional environment. This led to the creation of a Governance System in which all governance mechanisms and actors/institutions are outlined. Five interviews with external accountants are conducted. Findings conclude that audit quality is enhanced over time, due to firm-specific knowledge, and auditor independence is reduced over time. Because these findings indicate a somehow paradoxal phenomena, it cannot be established whether the eight year MAFR-term should be altered. Although, institutional theory argues that changes at the governance level have a frequency of one to ten years. This indicates the Dutch MAFR-term lies within this frequency, however the range of the frequency is broad.