Date of Award
Bachelor of Arts
There is controversy between regulators and audit firms over the policy of mandatory audit firm rotation. Many regulators favor mandatory audit firm rotation whereas audit firms are against such a policy. Regulators argue that mandatory firm rotation would improve audit quality while audit firms claim that audit quality increases with audit tenure. Typically, regulators and audit firms refer to academic research that supports their position. One early paper on mandatory audit firm rotation that is commonly cited by academics and opponents of mandatory rotation is Carcello and Nagy (2004), which finds that longer audit tenure does not reduce audit quality. This Honors Thesis reevaluates the methodology and conclusions drawn by Carcello and Nagy. I find that the sample of audit failures used in that study is not well suited for drawing conclusions about the effect of audit tenure on audit quality. Also, I find that the paper’s lack of transparency regarding the sample firms included in the statistical analysis makes the paper’s research design difficult to evaluate or replicate.
Stern, Courtney, "The Controversy of Mandatory Audit Firm Rotation: Has Quantitative Accounting Research Misinformed us about the Relationship between Audit Tenure and Audit Quality?" (2015). Accounting. 18.