Mandatory Audit Rotation: An International Investigation

dc.contributor.advisorWhisenant, J. Scott
dc.contributor.committeeMemberLobo, Gerald J.
dc.contributor.committeeMemberLu, Tong
dc.contributor.committeeMemberRamchand, Latha
dc.creatorHarris, Kathleen 2012
dc.description.abstractThis study investigates whether mandatory auditor rotation rules are associated with changes in audit quality using available data from three countries that have adopted mandatory auditor rotation (MAR) rules. Consistent with prior literature, I assume that earnings management measures capture the various methods employed by corporate insiders to exercise their discretion to manage earnings that is not constrained by the audit firm. The more discretion, ceteris paribus, in earnings, the lower the audit quality. First, I investigate the debonding effect of an MAR policy. Debonding describes the effect that is often the primary motivation for adopting MAR rules. That is, end the possibility of long-term audit engagements and the economic bond of audit firms to their clients will be broken (by enhancing auditor independence and objectivity). In the sample after adoption of MAR rules, the data show evidence of less earnings management, less managing to earnings targets, and more timely loss recognition compared to the sample before adopting MAR rules. From these results, I conclude that audit markets appear to improve, on average, from enactment of MAR rules. I then investigate the allowed discretion in the year before and the year after auditor changes in which rotation rules have been adopted (termed the low client-specific knowledge effect). I find evidence of lower audit quality in both years. These results highlight the importance, particularly to regulators of audit markets, of considering ways to mitigate the erosion of audit quality when making the transition to new auditors under MAR rules (e.g., the use of detailed handover files between predecessor and successor audit firms or “four-eyes principle” in years of initial audits).
dc.description.departmentAccountancy and Taxation, Department of
dc.format.digitalOriginborn digital
dc.rightsThe author of this work is the copyright owner. UH Libraries and the Texas Digital Library have their permission to store and provide access to this work. Further transmission, reproduction, or presentation of this work is prohibited except with permission of the author(s).
dc.subjectAudit quality
dc.subjectAudit tenure
dc.subjectMandatory audit rotation
dc.titleMandatory Audit Rotation: An International Investigation
dc.type.genreThesis T. Bauer College of Business and Taxation, Department of Administration of Houston of Philosophy


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