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Mandatory audit firm rotation and prohibition of audit firm‐provided tax services: Evidence from investment consultants’ perceptions

Mandatory audit firm rotation and prohibition of audit firm‐provided tax services: Evidence from... The European Union has discussed and recently implemented both audit‐firm instead of audit‐partner rotation and a restriction against audit‐firm‐provided tax services in order to improve auditor independence and audit quality. This study provides experimental evidence of the effects of the rotation system, the impact of audit‐firm‐provided tax services, and, for the first time, the interplay between both regulatory measures. Based on the assessments of 140 professional investment consultants from credit institutions, the results show that an audit‐partner rotation regime which allows audit‐firm‐provided tax services generates the lowest assessments of auditor independence and audit quality. While investment consultants view both audit‐firm rotation and a prohibition against audit‐firm‐provided tax services as beneficial, the joint implementation of a prohibition against audit‐firm‐provided tax services and audit‐firm rotation leads to no additional benefits in either the appearance of independence or the perceived audit quality. Besides the theoretical contribution, we discuss the practical implications of our findings, in particular that more regulation does not automatically lead to higher audit quality. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Auditing Wiley

Mandatory audit firm rotation and prohibition of audit firm‐provided tax services: Evidence from investment consultants’ perceptions

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Publisher
Wiley
Copyright
© 2018 John Wiley & Sons Ltd
ISSN
1090-6738
eISSN
1099-1123
DOI
10.1111/ijau.12109
Publisher site
See Article on Publisher Site

Abstract

The European Union has discussed and recently implemented both audit‐firm instead of audit‐partner rotation and a restriction against audit‐firm‐provided tax services in order to improve auditor independence and audit quality. This study provides experimental evidence of the effects of the rotation system, the impact of audit‐firm‐provided tax services, and, for the first time, the interplay between both regulatory measures. Based on the assessments of 140 professional investment consultants from credit institutions, the results show that an audit‐partner rotation regime which allows audit‐firm‐provided tax services generates the lowest assessments of auditor independence and audit quality. While investment consultants view both audit‐firm rotation and a prohibition against audit‐firm‐provided tax services as beneficial, the joint implementation of a prohibition against audit‐firm‐provided tax services and audit‐firm rotation leads to no additional benefits in either the appearance of independence or the perceived audit quality. Besides the theoretical contribution, we discuss the practical implications of our findings, in particular that more regulation does not automatically lead to higher audit quality.

Journal

International Journal of AuditingWiley

Published: Jan 1, 2018

Keywords: ; ; ; ;

References