Peter Roebuck

Mandatory Audit Firm Rotation and Audit Quality

This study investigates the effect a regime of mandatory audit firm rotation would have on audit quality in an Australian setting. Using two measures of audit quality, being the propensity to issue a going-concern report and the level of discretionary accruals, the study examines the switching patterns of clients in their current voluntary switching capacity, and the levels of audit quality. We find that audit quality increases with audit firm tenure, when proxied by the propensity to issue a going concern opinion, and is unaffected when proxied by the level of discretionary accruals. We conclude that given the additional costs associated with switching auditors there are minimal, if any, benefits of mandatory audit firm rotation. Other initiatives to address concerns about auditor independence and audit quality therefore need be considered before imposing mandatory audit firm rotation.

Understanding assurance services reports: A user perspective

In 1997 the International Auditing Practices Committee (IAPC) issued an exposure draft (ED) outlining a framework for providing assurance services. It was recommended that the level of assurance provided be expressed on a continuum from absolute to low. The user was to infer this assurance from, among other things, the nature of the engagement and the description of the work undertaken. Using a 2x2 between-subjects research design this study examined whether assurance report users would differ in their identified level of assurance as a result of the description of the nature of the engagement (historical versus prospective) and the amount of work performed (higher level versus lower level). It was found that shareholders desired such assurance reports, but many did not find the format suggested by the IAPC useful for their decision-making. A higher level of assurance was found to be attached to historical compared with prospective reports, but no difference was found for reports attempting to communicate higher versus lower levels of assurance as a result of the description of work performed. These results suggest that the IAPC should consider the use of alternative wording in order to accurately communicate the level of work performed in assurance engagements.