Research On The Influence Of Mandatory Auditor Rotation On Audit Quality

Resent years, a succession of financial fraud cases make audit independence andcredibility are seriously questioned by the publics, and the improvement of audit qualityhas once again become the focus of public attention.Long audit tenure make accounting firm or CPA and the audited company colludewith and depend on each other. The loss of auditor independence is considered the mainreason which lead to the decrease of the audit quality or audit failure, so people put theirhopes in the audit system of rotation. However, whether the system of rotation caneffectively improve the audit quality is doubted by academics and practitioners. Whilemany foreign literatures hold the opinion of the rotation of accounting firm, and thedomestic carried out the mandatory rotation of the signature CPAs currently. Moreover,for the vast majority of research wasn’t concluded under the background of mandatoryrotation whether the conclusion can be used for mandatory rotation is widely distrusted.This article utilizes the method of combination of analysis and empirical research.First, the author adopts a review of the existing literature, and uses “rational economicman” hypothesis, the principal-agent theory and institutional economics theory toanalyze the effectiveness of mandatory rotation. Then compares the earnings quality ofthe first year after mandatory rotation of signature CPAs, the first year after the voluntaryreplacement of the accounting firm, the first year after the voluntary replacement ofCPAs with the previous year; carries out a empirical test to inspect whether the system ofmandatory rotation of auditors can improve audit quality better than the other three forms;and tests whether the audit quality of the former accounting firm changing after fiveyears of services is different from those less than five years in the voluntary accountingfirm rotation sample at the same time.The results showed that: the audit quality is improved after the compulsoryrotation of signature CPAs than before; the audit quality of first year after the mandatoryrotation of signature CPAs is significantly higher than the first year after the voluntarysignature CPAs rotation; the audit quality of first year of the mandatory rotation issignificantly low than the first year after the voluntary firm replacement and the formeraccounting firm changing after five years’ service is no significant difference with thoseless than five years. Finally, divides the manipulation of the profits into positive andnegative directions for further examination, and the test results also support the former conclusion.All the consequences support the hypothesis of this article. And also obtain that CPAswill pay more attention to positive earning action. The main contribution of this paper istrying to provide some empirical evidence for the effect of the implementation ofmandatory rotation and whether to proceed rotation in firm-level. And it has practicalsignificance.