Conservative Reporting and the Incremental Effect of Mandatory Audit Firm Rotation Policy: A Comparative Analysis of Audit Partner Rotation vs Audit Firm Rotation in South Korea

Mali, Dafydd; Lim, Hyoung-Joo

Abstract

In this paper, we take advantage of Korea’s unique experiment with mandatory audit firm rotation (MAFR) and mandatory audit partner rotation (MAPR) to ascertain their influence on audit quality, proxied by conditional conservatism. Overall, we find that the implementation of MAFR did not have the desired effect. Firms that adopted MAFR demonstrate higher levels of conservatism in previous periods, under MAPR (or compared to voluntary adopters). Furthermore, we find that audit tenure increases conservatism levels consistent with the auditor expertise hypothesis. However, whilst evidence suggests MAFR decreases audit quality on the whole, we find that firms that switch from Non-Big4 to Big4 auditors demonstrate higher conservatism because Big4 auditors are more likely to demand conservative accounting practices, consistent with Big4 audit firm knowledge-superiority. Overall, the results suggest that MAFR’s negative effect on audit quality can be mitigated by Big4 auditor supervision.

• Journal Article Type: Article
• Acceptance Date: Sep 1, 2017
• Online Publication Date: Nov 24, 2017
• Publication Date: 2018-09
• Deposit Date: Nov 4, 2021
• Publicly Available Date: Nov 10, 2021
• Journal: Australian Accounting Review
• Print ISSN: 1035-6908
• Electronic ISSN: 1835-2561
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 28
• Issue: 3
• Pages: 446-463
• DOI: https://doi.org/10.1111/auar.12206
• Keywords: Accounting
• Public URL: https://nottingham-repository.worktribe.com/output/6610996
• Publisher URL: https://onlinelibrary.wiley.com/doi/10.1111/auar.12206
• Additional Information: This is the peer reviewed version of the following article: Mali, D. and Lim, H.-j. (2018), Conservative Reporting and the Incremental Effect of Mandatory Audit Firm Rotation Policy: A Comparative Analysis of Audit Partner Rotation vs Audit Firm Rotation in South Korea. Australian Accounting Review, 28: 446-463., which has been published in final form at https://doi.org/10.1111/auar.12206. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions. This article may not be enhanced, enriched or otherwise transformed into a derivative work, without express permission from Wiley or by statutory rights under applicable legislation. Copyright notices must not be removed, obscured or modified. The article must be linked to Wiley’s version of record on Wiley Online Library and any embedding, framing or otherwise making available the article or pages thereof by third parties from platforms, services and websites other than Wiley Online Library must be prohibited.