Audit firm rotation and audit firm tenure, improvement or deterioration of the financial reporting quality for Dutch listed firms?

Abstract

The effects of audit firm rotation and audit firm tenure on financial reporting quality is analysed by using data of Dutch public firms listed on the AEX, AMX or ASCX from 2002 to 2015. Two measures of financial reporting quality are applied: Accrual based earnings management and real earnings management. Results suggest that audit firm rotation does not have an immediate effect on financial reporting quality but short audit firm tenure (three years or less) does have a positive effect on financial reporting quality relatively to medium audit firm tenure (between four and eight years) which suggests audit firm rotation eventually leads to a higher financial reporting quality. Firms with audit firm rotation do not show more use of earnings management and there is no evidence that a longer audit firm tenure from 9 years or longer affects the financial reporting quality. However, changing the cut off to 10 years does show an indication of increased real earnings management. This thesis supports the argument for mandatory audit firm rotation.