Audit Firm Rotation, Audit Firm Tenure and Earnings Conservatism

Abstract

This study aims to contribute to the debate around the possibility of mandating audit firm rotation. Specifically, it examines conservatism as an attribute of earnings quality, which has not attracted particular attention in the auditor rotation research. Applying regression analyses on a sample, which consists of U.S. firms for the period 1980-2006, our findings indicate that conservatism in reported earnings increases after the rotation of the audit firm. However, our results lack significance. Moreover, our results indicate that conservatism in reported earnings decreases as the tenure of the audit firm lengthens. Consequently, mandating audit firm rotation might have a positive impact on conservatism and thus on the quality of reported earnings. However, additional analysis shows that this impact might not have existed in the later part of the sample period.