The effect of mandatory audit firm rotation and the auditing and reporting standards on the auditor competition and audit fees relationship: Evidence from emerging markets

Abstract

This research investigates whether auditor competition is associated with low audit fees and whether a country's implementation of mandatory audit firm rotation requirements as well as strong auditing and reporting standards weaken the negative effect of auditor competition on audit fees. Using 41,811 firm‐year observations from 10 emerging markets—specifically China, India, Malaysia, Pakistan, the Philippines, Poland, Russia, South Africa, Thailand, and Turkey—we find that auditor competition has a decreasing effect on audit fees. We also find that firms from countries with mandatory audit firm rotation requirements and strong auditing and reporting standards have higher audit fees than firms from countries with weak auditing and reporting standards and no mandatory audit firm rotation requirements. In the former countries, the negative relationship between auditor competition and audit fees is weaker than that for firms in the latter countries. Our results are robust to various specification tests, such as those for endogeneity issues, and alternative measures of country‐level institutional features. This study presents significant implications for regulators by providing evidence that both mandatory audit firm rotation requirements and the strength of auditing and reporting standards play an essential role in enhancing audit quality by curbing the negative effect of audit competition.

Relaxation of Access Regulations for Securities Audit and Audit Quality: Evidence from the Implementation of China's New Securities Law

“…In a weak institutional context, particularly in regions with significant government intervention and underdeveloped credit markets, the capital market experiences a shortfall in both demand and supply for audit quality. This reduces investors' and other financial statement users' trust in corporate financial information, thereby diminishing audit quality (Chan et al, 2010;Kamarudin et al, 2022). However, China's capital market is undergoing continuous transformation.…”

Impact of Auditor Turnover on Stock Price Crash Risk: Insights from China's Capital Market

“…The role of accountants in upholding financial report credibility is crucial, as inaccuracies can significantly influence stock prices. Recent studies such as Zhou et al (2023), and Hassan et al (2022) further underscore the impact of accountant turnover on stock price crash risk, particularly in the context of China's market dynamics. Khurana and Raman (2004) highlighted the significant consequences of concealing adverse information within this context.…”

“…If significant negative information is not disclosed, this heightened information asymmetry increases the risk of a stock price crash. While the connection between accountant tenure and audit quality is well-documented, the direct impact of accountant turnover on stock price crash risk remains less explored, especially within unique markets like China, where the potential for information concealment is a concern (Zhou et al, 2023;Hassan et al, 2022). Hypothesis 1: Audit engagement partner turnover is positively associated with stock price crash risk.…”

The Impact of Ethics on the Audit Quality of Firms in Sub-Sahara Africa

“…The discourse about auditor independence (AI) and audit quality (AQ) for many decades has been a focus in many developed and developing economies globally (DeFond and Zhang, 2014;Viana et al, 2021). This has led to a big push to adopt mandatory audit firm rotation (MAFR), which is, "the imposition of a limit on the period of years an accounting firm may be the auditor of record for a particular issuer" (Kamarudin et al, 2022). This debate is due to the mandatory audit firm rotation (MAFR) regulation imposed on audit firms internationally to serve the public interest.…”