Regulation on mandatory rotation and social ties between the external auditor and audit committeee

Abstract

In this research the effects of strict legislation on mandatory rotation and employment ties on the financial statement quality is examined in the period before the implementation of the new European Union provision enacted on 16 th 2014. For the panel data regression analysis a sample of 246 firms from 12 European countries was used. As proxy of financial statement quality audit fees and absolute discretionary accruals were chosen. Based on the principal agent theory, the literature research shows that a stricter regulation on mandatory rotation leads to more control, indicating this would lead to a higher quality of financial reporting, and employment ties would lead to less control, indicating that the financial statement quality would decrease when they are present. Research shows no significant effect on stricter regulation on mandatory audit partner rotation, but does show a significant effect on the employment ties for financial statement quality. Unfortunately, no interaction effect between the strictness of mandatory rotation and educational ties was found and the significant results were not robust.