The Effects of Mandatory Audit Firm Rotation on Audit Quality

University essay from Uppsala universitet/Företagsekonomiska institutionen; Uppsala universitet/Företagsekonomiska institutionen

Abstract: In 2014, the new statutory audit framework proposed by EU was adopted and eventually implemented in Sweden in 2016. The framework included a mandatory audit firm rotation every ten years for public interest entities, with the main objective of enhancing auditor independence. The aim of this study is to examine how mandatory audit firm rotation could affect audit quality. The study is based on a qualitative research method in which auditors were interviewed in order to understand how they perceive the effects of the regulation on the determinants behind audit quality. The study indicates that auditor independence in fact will not be affected by mandatory audit firm rotation, while the perceived independence by the public, i.e. auditor independence in appearance, will be enhanced. The study further suggests that the potential loss of client-specific understanding and knowledge due to shorter audit firm tenures may lead to negative effects on audit quality.

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