Audit Quality from a Client Company Perspective -Drivers of audit quality and the effects of a voluntary audit firm rotation

Abstract: Background and Problem: Auditing failures in the last decades have sparked a discussion regarding audit quality, which has resulted in a new EU requirement regarding mandatory audit firm rotation. The discussion has been obstructed by the lack of a standard definition of audit quality. Research has shown that the definition is dependent on user perspective and research on client company perspective is scarce. The new requirement of mandatory audit firm rotation may increase the frequency of companies rotating audit firms, which would increase the value of a definition of audit quality from a client company perspective for both audit firms and their clients. Aim of study: The aim with the thesis is to describe how three Swedish listed companies defines audit quality and what factors they identify as drivers of audit quality and how these are affected by a rotation of audit firm. The authors also seek to examine the listed companies’ experiences in relation to the most common arguments put forth in the debate regarding mandatory audit firm rotation. Methodology: In order to obtain a client company perspective semi-structured interviews were conducted with CFOs and audit committee members at three Swedish listed companies that had experienced an audit firm rotation within recent years. Due to the lack of previous research the questions were of an open nature. The interviews were coded to enable interpretation of key concepts. Analysis and Conclusion: It is concluded that the general descriptions found in previous research does not give a detailed description of client companies’ perception of audit quality. A model is presented illustrating that the companies’ perceptions are based on personal attributes in combination with practical functions being met. Drivers of this combination are personal qualities of the auditor resulting in trust in the auditor. The model could help client companies evaluate audit quality. The level of quality declined in the years following a rotation of audit firm. It is also concluded that the companies’ experiences of firm rotations support the arguments against the requirement of mandatory audit firm rotation.