TY - JOUR

T1 - The link between in- and external rotation of the auditor and the quality of financial accounting and external audit

AU - Velte, Patrick

AU - Freidank, Carl-Christian

PY - 2015/10/13

Y1 - 2015/10/13

N2 - The European Commission (EC) regulation draft of 2011 contains theexternal mandatory auditor rotation (audit firm rotation) as a reform measure toincrease auditor independence. The external auditor firm rotation could Supplement the internal mandatory rotation (auditor rotation) by the 8th EC directive. This article presents an agency theoretical foundation of rotation. In this context, the main influences on low balling and on the expectation gap will be presented. The total effect of the rotation on financial accounting and audit quality is theoretically uncertain, because the rotation can also lead to a decreased independence in a low balling situation and is connected with interrupted or lost learning and knowledge effects by the auditor or the audit firm. Then, a state of the art analysis of empirical research results with regard to auditor and audit firm rotation is focused. In contrast to the assumption of the EC, the majority of the empirical results don’t lead to an increased financial accounting and audit quality by audit firm rotations. Furthermore, the positive effects of the internal rotation period of 7 years and the cooling off period of 2 years by the 8th EC directive are not empirically proved yet.

AB - The European Commission (EC) regulation draft of 2011 contains theexternal mandatory auditor rotation (audit firm rotation) as a reform measure toincrease auditor independence. The external auditor firm rotation could Supplement the internal mandatory rotation (auditor rotation) by the 8th EC directive. This article presents an agency theoretical foundation of rotation. In this context, the main influences on low balling and on the expectation gap will be presented. The total effect of the rotation on financial accounting and audit quality is theoretically uncertain, because the rotation can also lead to a decreased independence in a low balling situation and is connected with interrupted or lost learning and knowledge effects by the auditor or the audit firm. Then, a state of the art analysis of empirical research results with regard to auditor and audit firm rotation is focused. In contrast to the assumption of the EC, the majority of the empirical results don’t lead to an increased financial accounting and audit quality by audit firm rotations. Furthermore, the positive effects of the internal rotation period of 7 years and the cooling off period of 2 years by the 8th EC directive are not empirically proved yet.

KW - Management studies

KW - Audit Quality

KW - Auditor Rotation

KW - Audit regulation

KW - Accounting policy

KW - Audit quality

KW - Auditor independence

KW - Empirical audit research

KW - Expectation gap

KW - Low balling

UR - http://www.scopus.com/inward/record.url?scp=84941421296&partnerID=8YFLogxK

U2 - 10.1007/s10657-012-9361-0

DO - 10.1007/s10657-012-9361-0

M3 - Journal articles

VL - 40

SP - 225

EP - 246

JO - European Journal of Law and Economics

JF - European Journal of Law and Economics

SN - 0929-1261

IS - 2

ER -