Affiliation:
1. Mara Cameran is a Researcher at Bocconi University, Jere R. Francis is a Professor at the University of Missouri and is a Distinguished Professor at the University of Technology, Sydney, and Antonio Marra and Angela Pettinicchio are Assistant Professors, both at Bocconi University.
Abstract
SUMMARY
Mandatory auditor rotation was recently proposed for the European Union and is also under consideration in the United States. There has been little research into either the benefits or costs of rotation in a true mandatory setting that could inform intelligent policy making. Our paper helps fill this gap by examining Italy, where mandatory rotation of auditors has been required since 1975. We find that outgoing auditors do not shirk on effort (or quality), but final-year fees are 7 percent higher than normal, which may indicate opportunistic pricing. The fees of incoming auditors are discounted by 16 percent even though they have abnormally higher engagement hours in the first year (17 percent), which is suggestive of lowballing. However, subsequent fees are abnormally higher and exceed the initial fee discount. Thus, the costs of mandatory rotation are nontrivial. Higher costs could be acceptable if rotation improves audit quality, but we find evidence of the opposite. Namely, the quality of audited earnings is lower in the first three years following rotation, relative to later years of auditor tenure. Since rotation is costly and earnings quality improves with longer auditor tenure, the evidence from Italy does not support the case for mandatory rotation.
Publisher
American Accounting Association
Subject
Economics and Econometrics,Finance,Accounting
Reference43 articles.
1. Board characteristics, accounting report integrity, and the cost of debt;Anderson;Journal of Accounting and Economics,2004
2. The conservatism principle and the asymmetric timelines of earnings;Basu;Journal of Accounting and Economics,1997
3. The impossibility of auditor independence;Bazerman;Sloan Management Review,1997
4. What do client firms think of their auditors? Evidence from the Italian market;Cameran;Corporate Reputation Review,2010
5. The effect of audit firm mandatory rotation rule;Cameran;Vers Quelle Régulation de l'Audit Faut-il Aller?,2011
Cited by
106 articles.
订阅此论文施引文献
订阅此论文施引文献,注册后可以免费订阅5篇论文的施引文献,订阅后可以查看论文全部施引文献