Auditor Tenure And Mandatory Auditor Rotation

With the successive exposure of financial scandals in America in the early of this century, people were led to pay common attention to the detrimental effect of longer auditor tenure on auditor independence or audit quality again, and at the same time auditor rotation also became the focus of the discussion as before. In spite of this heated argument, few scholars had done systematic research on auditor tenure and mandatory auditor rotation from the angle of audit quality, which had greatly reduced the cogency of this argument. Just under this research background, for the first time this dissertation systematically analyses the problems of auditor tenure and mandatory auditor rotation from the angle of audit quality in theory, and after making use of the unique disclosure of the name of each signed CPA in audit report and the policy of mandatory CPA rotation in our country, empirically examines the relationships among auditor tenure, mandatory auditor rotation and audit quality from the perspective of CPA tenure.This study firstly makes a representative of America and reviews the appearance, development and current state of the concept of auditor rotation through history evolution. Then it makes a detailed and deep analysis of the problems of auditor tenure and mandatory auditor rotation from the angle of audit quality in theory, and compares the costs with the benefits of the implementation of mandatory auditor rotation policy. Subsequent to these, this study uses the year of 2003, when the policy of mandatory CPA rotation began to implement, as the dividing point and detailedly describes the overall situation of auditor tenure and mandatory CPA rotation in our auditing market. On the basis of the above, this study respectively chooses whether auditors issue going-concern opinions for financially distressed companies, whether auditors issue modified audit opinions and earnings response coefficients from returns-earnings regressions as measures of auditor independence, actual audit quality and perceived audit quality, and examines the relationships between auditor tenure, auditor independence and audit quality before the implementation of mandatory CPA rotation policy from the perspective of CPA tenure, providing empirical support for the rationality of this policy. Similarly, this study also uses whether auditors issue modified audit opinions and earnings response coefficients from returns-earnings regressions as measures of actual audit quality and perceived audit quality, and analyses the effectiveness of the mandatory CPA rotation policy which has been carried out so as to determine the feasibility of the policy.On the whole, this study finds that on the one hand, both auditor tenure's and mandatory auditor rotation's impact on audit quality are not sure in theory, and on the other hand, longer auditor tenure lowers auditor independence and further harms audit quality both in appearance and in essence before the implementation of mandatory CPA rotation policy in our country, which provides empirical support for the rationality of the policy. However, the results of the actual effectiveness of the policy indicate that it has not improved audit quality in appearance or in essence and is not feasible. According to these conclusions, this study provides some policy suggestion including revising the current mandatory CPA rotation policy so as to make the most of it, and considering other measures when this policy's effect is really limited, such as mandatory audit firm rotation policy and mandatory auditor retention policy for companies with shorter tenure. Undoubtedly, these research will help people to think the problems of auditor tenure and mandatory auditor rotation more rationally from the angle of audit quality.