Audit partner rotation, and its impact on audit quality: Evidence from India

Mohapatra, Partha S.; Dayanandan, Ajit; Kuntluru, Sudershan; A, Athira

doi:10.1080/23322039.2021.1938379

Cited by 4 publications

(6 citation statements)

References 62 publications

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“…Similarly, Salehi et al (2022) reported that mandatory audit firm rotation did not influence EM estimated under the real activity manipulation (RAM) approach rather than increased discretionary accruals based EM. Furthermore, these findings are consistent with those of Mohapatra et al (2021), who found that auditor switching has no significant impact on audit quality.…”

Section: Additional Control Of Auditor Rotationsupporting

confidence: 90%

“…The role of audit firm tenure. According to the "Knowledge Spillover Hypothesis", the audit firm's tenure enables audit partners to get more experience, knowledge and familiarity with clients businesses, which enables them to improve audit quality (Mohapatra et al, 2021). Similarly, the longer tenure of an audit partner yields better auditor quality as compared to shorter tenure, and this is due to the loss of knowledge after the auditor switches off (Daugherty et al, 2013).…”

Section: 42mentioning

confidence: 99%

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The same network auditor, family business groups and earnings manipulation: an evidence from emerging market

Khan

Kamal

2023

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Purpose This paper aims to examine whether family business groups’ (FBG) having the same network auditor among their affiliates mitigates earnings manipulation (EM). Design/methodology/approach This paper used unbalanced panel data from the years 2010–2019. The sample of the study is composed of 327 nonfinancial listed Pakistan Stock Exchange firms, consisting of 187 FBG-affiliated firms and 140 nonaffiliated firms. The ordinary least square and generalized least square regressions have been used to check the hypothesized relationship. Furthermore, the propensity score matching technique is used to ascertain comparable companies’ features and to control the potential endogeneity problem. Finally, the results are robust to various measures of EM and FBG’ proxies. Findings The findings of the study show that the same network auditor is reducing EM in FBG affiliates. In addition, the BIG4 same network auditors are also instrumental in constraining EM as compared to non-BIG4 audit firms. Overall, the results of this study depict that the same network auditor in FBG’s affiliated firms significantly influences EM. These results are robust with respect to generalized least squares and the endogeneity problem. Research limitations/implications This research study has two important implications for the interested parties. First, although the authors find in this research study that the same network auditor is negatively associated with EM in the FBG-affiliated firms, however, FBG-affiliated firms might use opportunistically the real activity manipulation. Second, regulators highlight the change in audit partner/firm rotation, though the study findings indicate that regulators and practitioners may consider the benefits associated with the same network auditors for FBG. Originality/value This research study adds a new investigation to previous literature by examining the role of the same network auditors in the EM of the FBG’ affiliates. To the best of the author’s knowledge, this is the first study to bring new knowledge by investigating the role played by the same network auditors along with the BIG4 same network audit firms in constraining EM in FBG.

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Section: Additional Control Of Auditor Rotationsupporting

confidence: 90%

Section: 42mentioning

confidence: 99%

The same network auditor, family business groups and earnings manipulation: an evidence from emerging market

Khan

Kamal

2023

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“…With regards to the size of the auditee firms and audit quality, the extant literature finds size of the firm to have a positive influence on audit quality, with large and profitable companies having superior expertise in financial accounting activity and financial resources available for its organizations over small companies (Carp and Istrate, 2021) [4]. Mohapatra et al (2021) document that the larger the size of the firm, higher the audit quality. Similarly, firms with good financial performance (ROA) would be signalling to investors regarding the better state of the firms’ current or future prospects, and one could speculate a positive or negative impact on audit quality.…”

Section: Methodsmentioning

confidence: 99%

“…In India, studies before the MAR enactment also show that a long auditor tenure enhanced audit quality (Jadiyappa et al, 2021). Even after the introduction of MAR, empirical evidence with respect to auditor partner rotation was found to be negative on audit quality (Mohapatra et al, 2021). While the evidence is mixed, overall, it shows that MAR does not increase audit quality.…”

Section: Mandatorymentioning

confidence: 99%

Mandatory auditor rotation and audit quality

Dayanandan

Kuntluru

2023

IJAIM

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Purpose In the post-Enron era around the world, the role of auditor is widely debated. There is an increasing concern that an auditor’s continuous involvement with clients could impair audit quality – the negative view. There is also a positive view that a long auditor tenure leads to accumulation of client-specific knowledge over time, which could lead to high-quality audits. The empirical result with regards to impact of mandatory auditor rotation (MAR) is mixed world-wide. This study aims to examine whether MAR rules implemented in 2017 impact audit quality in India. Design/methodology/approach Using a unique setting in which MAR was required from 2017 to 2018 onwards in India, this study provides empirical evidence of the impact of MAR regulation on audit quality (modified audit opinion). The study uses data for 714 firms (4,284 firms) for six years (three years before MAR and three years after MAR regulation in India). Findings The study found that auditor tenure and MAR had significant negative impacts on audit quality, validating the “positive” view of audit tenure and audit quality. In addition, concentrated ownership had a negative impact on audit quality, implying the control and influence by concentrated ownership on auditors and audit opinion. The analysis shows that MAR regulation has not yielded the intended objective of improving audit quality in India. MAR is not a good template for improving audit quality. Research limitations/implications The findings of the study are useful to policymakers, regulators, managers, investors and users of financial reports. The study calls for public policy on auditor rotation based on objective scientific evidence. In light of the evidence in India that MAR does not lead to better audit quality, the study calls for reset of regulatory policy in India. Practical implications The study provides valuable insights to analysts, regulators and other users of financial accounts about the implications of MAR in India. Originality/value The study is one of the few to report on the impact of MAR, particularly in the context of an emerging market economy such as India.

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“…As per our knowledge, studies have not been done using a JA attribute for the Indian context; the present study attempts to fill this research gap. The second, auditor tenure, has been studied in international studies (Ghosh and Moon, 2005; Gul et al ., 2009; Lim and Tan, 2009; Manry et al ., 2008) but cannot be accepted in Indian legal and economic structures further recent studies conducted in the Indian context by (Jadiyappa et al ., 2021; Mohapatra et al ., 2021) used DA an inverse proxy for audit quality (AQ). Auditor tenure is negatively related to AQ (Jadiyappa et al ., 2021), whereas (Mohapatra et al ., 2021) found that auditor rotation does not impact AQ.…”

Section: Introductionmentioning

confidence: 99%

Do audit attributes impact earnings quality? Evidence from India

Verma,

Dawar,

Chaudhary

2023

AJAR

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PurposeThe present study's goal is to analyze the impact of audit quality (AQ) on earnings quality (EQ) using different audit attributes. The study shows empirical evidence from India, considered an emerging market.Design/methodology/approachThe sample selected represents the 376 non-financial firms listed on the Bombay Stock Exchange (BSE). With a 20-year time frame, the authors used the absolute value of discretionary accruals (McNichols, 2002) (DA) as a proxy for EM, which is inversely related to EQ. The authors analyzed data using OLS, fixed effect (FE), 2SLS and Panel-IV estimators.FindingsThe authors found that most audit attributes positively affect EQ. In the Indian context, joint auditor (JA), auditor size (A_SIZE), auditor fee (A_FEE) and auditor tenure (A_TENURE) have a negative association with EM indicating high EQ. In contrast, auditor rotation (A_ROTATON) positively affects EM confirming low EQ.Research limitations/implicationsThe present study uses Big-4 and its member firms as a proxy of auditor size (A_SIZE); instead, other bases may be taken for it, like the dominant audit firms in a particular industry in sample data, etc. The authors have started audit tenure from the base year, i.e. 2001, which may ignore the association of auditor and auditee just before 2001.Practical implicationsThe study findings would enhance policymakers' willingness to prepare appropriate regulations regarding JAs and auditor rotation, which might improve financial market efficiency and reduce financial fraud among Indian corporates.Originality/valueTo the best of the authors' knowledge, this is the first study to incorporate “Joint Auditor” (JA) as a proxy for audit quality in the Indian context, which might significantly contribute to the literature.

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Audit partner rotation, and its impact on audit quality: Evidence from India

Cited by 4 publications

References 62 publications

The same network auditor, family business groups and earnings manipulation: an evidence from emerging market

The same network auditor, family business groups and earnings manipulation: an evidence from emerging market

Mandatory auditor rotation and audit quality

Do audit attributes impact earnings quality? Evidence from India

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