Audit Firm Rotation : Increasing or Decreasing Audit Quality?

Abstract: This study examines the effects of voluntary audit firm rotation on actual and perceived audit quality among Swedish listed firms between 2008-2014. The accruals based performance adjusted modified Jones-Model is used as a proxy for audit quality and the coefficients of returns-earnings for perceived audit quality in multiple regression models. The study finds no support that audit firm rotations affect actual or perceived audit quality. Some evidence is found supporting that actual and perceived audit quality increases in rotations where the incumbent firm is a non Big 4 audit firm. The results indicate that auditors act closer to what is predicted under Stewardship theory rather than Agency theory, with regards to auditor biases. One implication of the results is that the expected frequency increase in audit firm rotations under future mandatory rotation regulation will not substantially affect actual and perceived audit quality, implying that any intended improvement to audit quality must be carried by the mandatory aspect of future audit firm rotations.