How do various forms of auditor rotation affect audit quality? Evidence from China
Document Type
Journal article
Source Publication
The International Journal of Accounting
Publication Date
3-1-2012
Volume
47
Issue
1
First Page
109
Last Page
138
Publisher
Pergamon Press
Keywords
Mandatory audit partner rotation; Mandatory audit firm rotation; Voluntary rotation; Market and legal institutions; Modified audit opinion
Abstract
The Enron/Arthur Andersen scandal has raised concerns internationally about auditor independence, audit quality, and the need for regulatory action such as mandatory auditor rotation. China's unique institutional features provide a setting in which we can compare comprehensively the various forms of auditor rotation at different levels (partner vs. firm) and in different settings (voluntary vs. mandatory). In addition, institutional conditions vary dramatically across China, which provides us with an opportunity to test whether the development of market and legal institutions affects the impact of rotation on audit quality. We expect that auditors are less (more) constrained by market forces and less (more) self-disciplined to maintain audit quality in regions with less (more) developed market and legal institutions. Therefore, mandatory rotation may play a more (less) important role in less (more) developed regions. Using auditors' propensity to issue a modified audit opinion (MAO) as a proxy for audit quality, we find that firms with mandatory audit partner rotations are associated with a significantly higher likelihood of an MAO than are no-rotation firms. However, this effect is restricted to firms located in less developed regions. We find similar evidence for voluntary audit firm rotation although the significance level is much weaker than for mandatory partner rotation. Other forms of auditor rotations (i.e., mandatory audit firm rotation and voluntary audit partner rotation), have no effect on MAOs.
DOI
10.1016/j.intacc.2011.12.006
Print ISSN
10944060
E-ISSN
22133933
Publisher Statement
Copyright © 2012 Published by Elsevier Inc.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Firth, M., Rui, O. M., & Wu, X. (2012). How do various forms of auditor rotation affect audit quality? Evidence from China. The International Journal of Accounting, 47(1), 109-138. doi: 10.1016/j.intacc.2011.12.006