An Emprical Study On The Effects Of Mandatory Auditor Rotation To Auditor Quality

For the view that long-term auditor tenure will affect audit quality, many countries implemented mandatory auditor rotation system, China also introduced mandatory auditor rotation of signing CPA on January 1, 2004. Now there is a difference on mandatory auditor rotation in theory, so empirically testing the effects of mandatory rotation of signing CPA on improving audit quality, is of great importance to improving the mandatory rotation policy. In addition, analyzing the different impacts that mandatory auditor rotation had on different enterprises, big and small CPA firms, the important clients and non- important clients, we can fill the gaps of the literature.First using of game theory, through constructing"anti-collusion equilibrium",this paper theoretically analyzed the impacts of mandatory rotation on audit quality, we found that there was a relation between them, but we could not figure out what relation is. Then, the paper empirically studied the impacts of mandatory rotation of signing CPA on audit quality both in cross-section view and time series view. In addition, we also analyzed the different impacts that mandatory auditor rotation had on different enterprises, big and small CPA firms, the important clients and non- important clients. We found that the enforcement of mandatory auditor rotation has improved auditor quality as a whole, and the results illustrate that the effect of mandatory auditor rotation is evidently in long term but not so notable in the short period. Mandatory auditor rotation has improved audit quality when the company is audited by small CPA firms, an important client of the auditors and a private enterprise. In the state-owned enterprises, mandatory rotation lowered audit quality. In the big CPA firms and non-important clients of the auditors, there were not evident effects. The reason why mandatory rotation system can't put into effect in big CPA firms lied in that the long audit term may not affect audit quality. In the state-owned enterprises, controlling shareholders have great control, the other shareholders'ability is relatively weaker, so mandatory rotation lowered audit quality. Finally, we proposed driving the CPA firms becoming bigger and stronger, increasing the collusion costs between auditor and their non-important clients, making corporate governance perfect in the state-owned enterprises and enhancing the culture construction in the CPA firms.