Restoring public confidence in capital markets through auditor rotation

Sandra K. Gates, David Lowe, Philip Reckers

Research output: Contribution to journalArticle

23 Scopus citations

Abstract

Purpose To determine the effect of audit firm rotation and/or audit partner rotation on individuals' confidence in the quality of audited financial statements. Design/methodology/approach Two separate behavioral studies were conducted with participants from the business and legal communityMBA and law students. In each study, one-way analysis of variance was conducted using a between-subjects approach. The independent measure was auditor rotation the dependent measure was participants' responses to questions regarding company earnings. Because an experimental approach was utilized, the stimulus materials excluded potentially relevant information for this task. In addition, the participants were not held accountable for their decisions, nor was there any explicit motivation provided. Future research could explore other richer more complex case scenarios that provides some explicit motivation for participants. Findings Results revealed that even in an environment of strong controls for corporate governance, audit firm rotation incrementally influenced individuals' confidence in financial statements. However, audit partner rotation did not have a similar effect. Originality/value Little if any research examines both audit firm rotation and audit partner rotation. This research fills this void by addressing both concepts. The results suggest that rotating the audit firm will, contrary to GAO assumptions, better advance the goal to enhance auditor independence and audit quality and to restore investor confidence in the capital markets.

Original languageEnglish (US)
Pages (from-to)5-17
Number of pages13
JournalManagerial Auditing Journal
Volume22
Issue number1
DOIs
StatePublished - Dec 2006

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Keywords

  • Auditors
  • Corporate governance
  • Laws and legislation
  • Regulation

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)
  • Economics, Econometrics and Finance(all)

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