How Do Various Forms of Auditor Rotation Affect Audit Quality? Evidence from China

By Michael Firth, Oliver M. Rui, Xi Wu. 2012

179 citations recorded by the source corpus.

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.

Subfields: Accounting, Sociology and Political Science

View Paper: https://www.semanticscholar.org/paper/27b410133ef810303a45cb46bc10d4b048cf3c45

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In Accounting

1. M. Cameran
2. Annalisa Prencipe
3. M. Trombetta
4. A. Miihkinen

In Sociology and Political Science

1. M. Cameran
2. Annalisa Prencipe
3. M. Trombetta

Citations in the corpus

• Mandatory Audit Firm Rotation and Audit Quality (2016, background): “Firth et al. (2012) focus on China, a setting where different kinds of rotations (i.e. audit firm and audit partner) are mandatory.”