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Media type:
E-Article
Title:
Auditor rotations and audit quality : A perspective from cumulative number of audit partner and audit firm rotations
:
A perspective from cumulative number of audit partner and audit firm rotations
Description:
<jats:sec>
<jats:title content-type="abstract-subheading">Purpose</jats:title>
<jats:p>The purpose of this paper is to investigate the association between audit rotation – at the audit partner and audit firm level – and audit quality. As mentioned in the literature, audit rotation has several benefits, and one of them is it can bring a fresh look to audit tasks and subsequently improve audit quality. Moreover, audit itself can help a client to improve its financial reporting. However, ineffective communication between predecessor and successor audit partners or audit firms, and pseudo-rotation can hamper that benefit.</jats:p>
</jats:sec>
<jats:sec>
<jats:title content-type="abstract-subheading">Design/methodology/approach</jats:title>
<jats:p>This study uses multivariate regression analysis to test its hypotheses. Using data from companies listed on the Indonesia Stock Exchange, the sample consists of 688 company-year observations covering the period 2003–2016.</jats:p>
</jats:sec>
<jats:sec>
<jats:title content-type="abstract-subheading">Findings</jats:title>
<jats:p>This study finds that the cumulative number of audit partner rotations is positively associated with audit quality, indicating that rotations at the audit partner level will enhance audit quality. Conversely, it finds that the cumulative number of audit firm rotations is negatively associated with audit quality.</jats:p>
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<jats:sec>
<jats:title content-type="abstract-subheading">Practical implications</jats:title>
<jats:p>The study’s findings may assist regulators in crafting standards regarding audit rotation. As the findings show, audit partner rotation will improve audit quality, but the audit firm rotation will decrease audit quality. As this study tries to explain the decreasing audit quality from audit firm rotation could be a consequence of ineffective communication or pseudo audit firm rotation. Regulators should try to tackle these problems.</jats:p>
</jats:sec>
<jats:sec>
<jats:title content-type="abstract-subheading">Originality/value</jats:title>
<jats:p>Instead of using tenure as a proxy for a rotation, this study creates a new proxy named the cumulative number of audit partner and audit firm rotations to provide evidence on the benefits of audit rotation.</jats:p>
</jats:sec>