Audit firm rotation, investor protection and audit quality

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2017-07-07

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en

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This study explores the relationship between audit firm rotation, investor protection, and audit quality. Existing research on this topic provides mixed results. One factor that could explain these mixed results is investor protection. Using a dataset consisting of 196 listed firms from eight European countries in 2014-2016 and both absolute discretionary accruals and audit fees as proxies for audit quality, the results show that audit firm rotation does not influence audit quality for both strong- and weak investor protection countries. Further, investor protection is found to negatively influence audit quality based on accruals, but only in countries with weak investor protection. This negative effect disappears when a strong level of investor protection is obtained. Finally, the combined effect of audit firm rotation and investor protection is found to decrease audit quality based on accruals and audit fees, but only for the companies in weak investor protection countries. The findings suggest that countries with strong investor protection, in contrast to countries with weak investor protection, protect outside investors enough with their laws and regulations currently in place and guarantee a sufficient level of audit quality. Thus, the introduction of mandatory audit firm rotation is suggested to be reconsidered, especially for countries with weak investor protection. Further, a possible adaptation of other options such as SOX regulation should be examined. Finally, the difference between strong- and weak investor protection countries should not be ignored in future research.

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Faculteit der Managementwetenschappen

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