Conservative reporting and the incremental effect of mandatory audit firm rotation policy: a comparative analysis of audit partner rotation vs audit firm rotation in South Korea

MALI, Dafydd and LIM, Hyoung-joo (2017). Conservative reporting and the incremental effect of mandatory audit firm rotation policy: a comparative analysis of audit partner rotation vs audit firm rotation in South Korea. Australian Accounting Review.

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Official URL: https://onlinelibrary.wiley.com/doi/abs/10.1111/au...
Link to published version:: https://doi.org/10.1111/auar.12206
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    Abstract

    In this paper, we take advantage of Korea's unique experiment with mandatory audit firm rotation (MAFR) and mandatory audit partner rotation (MAPR) to ascertain their influence on audit quality, proxied by conditional conservatism. Overall, we find that the implementation of MAFR did not have the desired effect. Firms that adopted MAFR demonstrate higher levels of conservatism in previous periods under MAPR (or compared to voluntary adopters). Furthermore, we find that audit tenure increases conservatism levels consistent with the auditor expertise hypothesis. However, whilst evidence suggests MAFR decreases audit quality on the whole, we find that firms that switch from non‐Big 4 to Big 4 auditors demonstrate higher conservatism because Big 4 auditors are more likely to demand conservative accounting practices, consistent with Big 4 audit firm knowledge superiority. Overall, the results suggest that MAFR's negative effect on audit quality can be mitigated by Big 4 auditor supervision.

    Item Type: Article
    Identification Number: https://doi.org/10.1111/auar.12206
    Depositing User: Dafydd Mali
    Date Deposited: 19 Jul 2018 14:44
    Last Modified: 22 Aug 2018 14:47
    URI: http://shura.shu.ac.uk/id/eprint/21953

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