چرخش شرکت حسابرسی، تخصص حسابرس و کیفیت حسابرسی در زمینه حسابرسی شهری Audit Firm Rotation, Auditor Specialization, and Audit Quality in the Municipal Audit Context

Audit firm rotation has been debated internationally for several decades. It received significant attention in 2011, as evidenced by issuance of a Public Company Accounting Oversight Board concept release (PCAOB 2011), a paper by the U.K. Financial Reporting Council (FRC 2011), and a paper issued by the European Commission (2011). These proposals focused primarily on two types of rotation policies: mandatory rotation and a requirement of periodic auditor assessments or requests for proposal (termed ‘‘retendering’’ in the U.K.) that would force audit committees to consider whether the current audit firm should be retained or replaced. Most recently, in April 2014, the European Parliament approved new preliminary audit regulations requiring most public companies to rotate audit firms every ten years (Tysiac 2014a). Although the U.K. has proposed mandatory retendering of audit engagements, it is reconsidering mandated rotation in light of the European Union regulations (Tysiac 2014b).1 Research directly addressing audit firm rotation is limited, due to the lack of regulatory requirements for rotation policies, combined with the paucity of publicly held organizations voluntarily establishing such a policy.2 As a result, most extant auditor rotation research studies substitute audit firm tenure for rotation, providing only indirect evidence on whether rotation policies influence audit quality proxies. Studies using tenure assume changes in audit firms result from rotation policies; however, audit firm change can be initiated by the audit firm or client for various other reasons, such as the level of audit fees, opinion-shopping, or audit firm portfolio rebalancing based on risk assessments or changes in practice focus. In the government sector it is common for entities to adopt audit firm rotation policies that either mandate rotation of audit firms or require periodic solicitation of bids for audit services to determine whether the current audit firm should be retained or replaced (Wendell, Pearson, and Gregson 1998; Copley and Doucet 1993b; Rubin 1988). A GAO report (U.S. GAO 1987) recommends that governmental entities enter into multi-year contracts with audit firms and establish review or rotation policies for the contract expiration. The report suggests a bidding and evaluation process similar to that discussed in the PCAOB and FRC proposals. Within the State of Florida some, but not all, municipal governments periodically rotate audit firms, either through ordinance or established policies. Research using entities with rotation policies provides a better perspective on the effect of rotation than do studies that use audit firm changes or audit firm tenure as a proxy for rotation. Using a Florida sample, we are able to directly examine the effect of audit firm rotation policies on audit quality to better inform policymakers and other interested parties. We study whether an audit firm rotation policy, specifically a mandatory rotation or a periodic audit firm evaluation requirement, is associated with a higher quality audit, where audit quality refers to the extent to which financial statements comply with professional standards and are not materially misstated due to errors or fraud (U.S. GAO 2003; PCAOB 2011). We find that entities with audit firm rotation policies are associated with higher audit quality; the higher quality appears to be primarily attributable to technical capabilities of the audit firm. In particular, governments with rotation policies select more specialized audit firms, and specialist audit firms are associated with higher quality audits. Although other costs and benefits associated with audit firm rotation should be considered, evidence from the Florida government market suggests that rotation policies positively affect audit quality primarily through audit firm selection. The next section provides background information about audit firm rotation, audit quality, and audit firm specialization, as well as the research hypotheses. The research design is included in the subsequent section, followed by the data analysis and results. Conclusions and policy implications of the study are discussed in the final section.