Audit quality implications of regulatory change in South Africa

Abstract

PurposeThis paper explores how technical constructions of audit practice are influenced by mandatory audit firm rotation (MAFR) regulations. The paper responds to calls for additional research on how external regulation influences audit quality and supplements the predominately quantitative research dealing specifically with firm rotation and its relevance for audit quality.Design/methodology/approachData are collected from South Africa which is the latest jurisdiction to adopt MAFR (from 2017). Detailed interviews with 49 participants comprising 24 audit partners and 25 non-auditors are conducted to explore how MAFR can impact audit quality. For this purpose, audit quality is defined according to a schematic developed interpretively and based on professional auditing standards and the prior research on audit quality.FindingsThere is no guarantee that MAFR will bolster auditors' independence or contribute to a more thorough audit approach. On the contrary, the effort required by incoming audit firms to gain an understanding of new clients coupled with material tendering costs is expected to decrease the profitability of audit engagements with adverse implications for audit quality. A loss of client experience and staff retention challenges may contribute further to a decline in audit quality. There may be some improvements to audit practice when an incumbent firm's work is going to be scrutinised by a new auditor but audit methodologies, including the nature and extent of testing performed, are not expected to change significantly because of MAFR. In this way, the regulation may be a symbolic response to a perceived decline in audit quality and auditor independence rather than part of an effective strategy to encourage more rigorous audit practice for the benefit of the users of financial statements.Originality/valueThe current paper provides one of the first exploratory accountants of how MAFR is expected to impact audit practice and, in turn, audit quality. The research responds to the call for more field-work studies on the mechanics of the audit process by engaging directly with practitioners instead of relying on inferential testing of broad audit quality surrogates. The study also makes an important empirical contribution by providing primary evidence on how external regulation influences audit practice from a seldom studied African perspective.

Shariah governance disclosure and its effect on Islamic banks' financial performance: evidence from Malaysia and GCC countries

“…More specifically, the Shariah audit element was perceived as the most important by Islamic banks in the GCC nations and the second most important by those banks in Malaysia. The current finding contrasts with those of Ndaba et al (2021), Nguyen and Kend (2021) and Shahar et al (2018Shahar et al ( , 2020. Additionally, Shariah's risk which is part of Shariah compliance was revealed to not have a substantial impact on Islamic banks' financial performance.…”

“…The absence of qualified Shariah auditors can have a negative impact on the quality of the annual report and Shariah compliance (Shahar et al, 2018(Shahar et al, , 2020. High audit quality assures an organisation's financial performance (Ndaba et al, 2021;Nguyen and Kend, 2021). Similarly, a high-quality Shariah audit not only enhances IFIs' accountability but also influences their financial performance (Odia, 2014).…”

SME clients evaluation of audit quality: the roles of auditors' communication effectiveness, rapport and social capital

“…Hence, this study's results support this current policy. As suggested by Ndaba et al (2021), there is no guarantee that mandatory audit firm rotation will enhance audit practice or audit quality.…”

Enhancing Auditor Independence in Developing Countries in Context of Globalization – Evidence in Vietnam

“…Currently, There are many studies on the auditor independence with different approaches in each specific context such as economic approach (Adams, Krishnan, & Krishnan, 2021;DeAngelo, 1981;Geiger, North, & O'Connell, 2005) behavioral approach (Goldman & Barlev, 1974;Mustikarini & Adhariani, 2021) access to risk (Hao, 2021;Johnstone, Warfield, & Sutton, 2001;Turner, Mock, & Srivastava, 2002) framework approach (Bakar, Rahman, & Rashid, 2005;Beattie, Brandt, & Fearnley, 1998;Hoang, Thuong, Minh Duc, & Hoang Yen, 2019;Ndaba, Harber, & Maroun, 2021). However, based on the review results in the research period, there are no studies on the auditor independence from the perspective of international economic integration promote enhancement of auditor independence.…”