Mandatory Audit Firm Rotation And Big4 EffectudOn Audit Quality: Evidence From South Korea

摘要

In South Korea, due to concurrent fnancial scandals, Korean legislators implementedudtwo major audit policies in the 2000s; the mandatory audit “partner” rotation policyudin 2000 and the mandatory audit “frm” rotation policy in 2006. The mandatory auditud“frm” rotation policy was introduced as a mean to improve audit quality based onudthe auditor entrenchment hypothesis. In this paper, we compare the audit quality ofudfrms subjected to mandatory audit “frm” rotation with two benchmark groups, audsample that adopted the policy voluntarily; the second group consists of the mandatoryud“frm” rotation sample in years prior, a period frms were subject to mandatory auditud“partner” rotation. Using accrual-based measures as proxies for audit quality, we fndudevidence that audit quality of the mandatory rotation frm sample is lower compared toudfrms that voluntarily adopted the policy. Furthermore, we fnd evidence that audit qualityudof the mandatory rotation frm sample is lower compared to the mandatory audit partnerudfrm sample. Additionally, we also fnd evidence that the mandatory audit frms rotationudsample whose auditors were rotated from Non-Big4 to Big4 are generally associated withudlower levels of abnormal accruals consistent with the argument that the audit quality ofudBig4 accounting frms is superior to Non-Big4 frms. Finally, longer audit tenure andudswitches to Big4 audit frms generally have a positive effect upon audit quality. Theseudfndings suggest that extended audit tenure improves audit quality due to accounting frm’s