The effect of companies’ employment of their ex-auditors on their Audit Quality: Evidence from UK

Abstract

The UK regulatory bodies mandated two years cooling off period before the former audit team members can hold a managerial position within the client firm. The pertinent literature indicates mixed results around the implications of the companies' employment of their exauditors or what is called Auditor to Client Revolving Door practise (ACRD) on the audit quality. The aim of this paper is to examine the effect of ACRD hires on the audit quality for UK FTSE100 companies for the period from 2008 to 2018. Using the Kothari et al. (2005) model to calculate the absolute value of abnormal accruals, the paper finds that companies with ACRD hires demonstrates lower levels of the absolute accruals compared to other companies with no ACRD hires. This indicates the positive, rather than negative, effect of ACRD employment on the audit quality. Further insights on the corporate hierarchal positions of the ACRD hires reveals that the affiliated non-executive directors that are members in the audit committees significantly reduce the levels of the absolute accruals, highlighting their oversight and governance role. The paper also finds the inescapable of the cooling-off period in enhancing the audit quality for the companies with affiliated compared to those with non-affiliated hires.