The Influence of Pseudo Auditor Rotation on Audit Quality: New Evidence

Abstract

The objectives of this research are twofold, to test the audit quality of companies that change their auditors either voluntarily or mandatorily and to test the financial characteristics as a factor for an accounting firm to engage in pseudo mandatory rotation. Since 2002, Indonesia has had legislation mandating companies to rotate their auditor after six years of consecutive engagements (five years prior to 2008). However, auditors sometimes seem to find their own way to deceive the mandatory regulation by a tactic called "pseudo" mandatory rotation. Thus, we divide mandatory rotation into two categories, pure and pseudo mandatory rotation.The results of the data we collected since the Ministerial decree became effective in 2003 indicate companies that rotate their auditors mandatorily have higher audit quality than that of companies voluntarily rotating auditors. However, we cannot find evidence that pseudo and pure mandatory rotation have different audit qualities. The results also indicate that switching among bigger accounting firms have the highest audit quality rather than switching between smaller audit firms which have lower audit quality. Lastly, the motives of an accounting firm to engage in pseudo or pure mandatory rotation are related to the financial size of their clients. Future research must consider the limitation stated in this study. AbstractThe objectives of this research are twofold, to test the audit quality of companies that change their auditors either voluntarily or mandatorily and to test the financial characteristics as a factor for an accounting firm to engage in pseudo mandatory rotation. Since 2002, Indonesia has had legislation mandating companies to rotate their auditor after six years of consecutive engagements (five years prior to 2008). However, auditors sometimes seem to find their own way to deceive the mandatory regulation by a tactic called "pseudo" mandatory rotation. Thus, we divide mandatory rotation into two categories, pure and pseudo mandatory rotation.The results of the data we collected since the Ministerial decree became effective in 2003 indicate companies that rotate their auditors mandatorily have higher audit quality than that of companies voluntarily rotating auditors. However, we cannot find evidence that pseudo and pure mandatory rotation have different audit qualities. The results also indicate that switching among bigger accounting firms have the highest audit quality rather than switching between smaller audit firms which have lower audit quality. Lastly, the motives of an accounting firm to engage in pseudo or pure mandatory rotation are related to the financial size of their clients. Future research must consider the limitation stated in this study. 6JEL Classification: G38, M42, L51.

Assessment of joint audit mission quality in Tunisia

“…The length of service in the office indicates a positive and significant relationship with joint audit. Hence, our results are consistent with those found by Febrianto et al. (2017).…”

“…The term duration is a significant item having a dual impact, and it can negatively influence independence. In fact, the longer the term is, the closer the relationship between the mission head and the client is (Mautz and Sharaf, 1961; Febrianto et al. , 2017; Garcia-Blandon et al.…”

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“…The essence of auditor switching is to limit, if not to cut, the dependency of the auditors to their client. This means that auditor switching would prevent auditors from becoming too aligned with managers a situation that would impact on their independence (Febrianto, Dini, Audina, Yuskar & Juita, 2017;Weiner, 2012;Jackson et al 2008). Tiamiyu, Bamidele and Soyemi (2019) measured auditor switching as a dichotomous variable of 1 where the firm changed auditor during the period and zero if otherwise.…”

“…Simple regression analyses conducted show that audit tenure has a significant positive effect on three measures of audit quality employed by the study. Febrianto et al (2017) investigated the influence of audit rotation on audit quality. Results of their study indicate companies that rotate their auditors mandatorily have higher audit quality than that of companies voluntarily rotating auditors.…”

Audit Quality and Several of Its Determinants

“…Khasharmeh and Desoky, 2018); the audit firm category, respectively Big 4 or non-Big 4(Abid et al, 2018); the manner of auditors" rotation and switch to another category of audit firm(Febrianto et al, 2017); the manner of auditors" rotation (voluntary or mandatory), the membership of the audit firm to Big 4 and the auditor tenure(Choi et al, 2017). Other factors were also identified, such as: time to complete the engagement, the auditors" gender, position within the firm and experience, number of clients, size of the local office and audit firm(Broberg et al, 2017); the category of firms in the case of joint audit(Lobo et al, 2017); the audit team members" response to stress (Yan and Xie, 2016); the level of knowledge of the auditing standards and the degree of auditors' loading(Brown et al, 2016); the quality control of the audit supervision(Löhlein, 2016); the disciplinary sanctions imposed by the professional organizations (De Fuentes et al, 2015); the auditor tenure (Gonzalez-Diaz et al, 2015); the change of the organization form of the audit firm(Wang and Dou, 2015); the client firm's governance(Beisland et al, 2015); the membership in an association of small audit firms(Bills and Cunningham, 2015); the auditor tenure and fees for non-audit services(Bell et al, 2015) and the previous audit failure (Francis and Michas, 2013).…”