The impact of auditor rotation on audit quality : A qualitative study conducted with audit companies and public listed companies located in Sweden

Abstract: The collapse of Enron and several other companies, such as Global Crossing and the more recent scandal of Tesco, raised concerns worldwide about auditor independence and audit quality. The scandals have proven that particularly the joint-provision of auditing and nonaudit services (NAS) along with a long-term auditor-client relationship tend to adversely impact auditor independence thus audit quality, triggering the need for a new regulation. In order to solve this problem, the European Union implemented a new regulation requiring public listed entities (PIEs), which are defined as listed companies, credit institutions and insurance undertakings, to rotate their audit firm after a period of 10 financial years. The primary purpose of my master thesis is to gain a deeper understanding of audit firms’ and public listed firms’ perceptions of auditor rotation, meant in the sense of audit firm rotation, and its impact on audit quality. More specifically, I aim to investigate whether audit firm rotation enhances audit quality due to a fresh view brought to the company audited by a new auditor or lowers it because of a new auditor’s lack of knowledge about the client’s industry. Current literature regarding the new EU regulation, audit firm rotation and its impact on audit quality as well as the early stage of implementation of the new EU Directive in Sweden helped me to recognize a research gap. Existing studies similar to mine have not been concerned with getting a deeper understanding about the perception of this topic by audit companies and public listed companies located in Sweden. The research philosophy of my study is based on the constructivist ontological view and interpretivist epistemological perspective. In addition, the deductive approach is used to study the research question, while applying the qualitative research method by carrying out multiple semi-structured interviews with auditors and CEOs (Chief Executive Officers) and CFOs (Chief Financial Officers) of public listed companies based in Sweden. The final results are gained through the combination of primary data gathered from the interviews, and secondary data collected during my literature search. My findings demonstrate that the auditors asked are in favour of audit partner rotation since according to their opinion it positively impacts audit quality because of the prevention of a too close relationship between auditor and client. Nevertheless, they do not see an additional advantage from audit firm rotation as they believe that audit partner rotation has already fulfilled the same purpose. CEOs and CFOs of public listed companies have diverse views regarding this topic. Three from five perceive auditor rotation is increasing audit quality due to the fresh look brought by a new auditor and enhanced auditor independence, while the two others think that the new regulation is reducing audit quality caused by the new auditor´s lack of industry knowledge of the client. Other factors positive influencing audit quality are the separation of NAS and audit, joint-audits, expertise and experience of the auditor, a detailed audit plan, providing of full information by the client and the appointment of the auditor by the client itself. Keywords: auditor rotation, audit firm rotation, EU regulation 2016, audit quality, long-term auditor-client relationship, auditing in Sweden, International Standards on Auditing (ISA), role of auditor, audit firm size, non-audit services and auditor independence.