The Question of Mandatory Audit Firm Rotation

Would Investors Benefit?

Brian Daugherty, PhD, CPA, and Denise Dickins, PhD, CPA, CIA, and Julia Higgs, PhD, CPA, and Kay Tatum, PhD, CPA

Regulators worldwide continue to debate the value of mandating periodic rotation of the audit firms of publicly traded companies in order to enhance auditor independence, and thus improve financial reporting quality. Several countries currently require such rotation (e.g., Brazil, India, Italy, Singapore, South Korea), and the European Commission has proposed mandatory audit firm rotation after six years, with certain exceptions (http://ec.europa.eu/internal_market/auditing/reform/index_en.htm). Spain, on the other hand, revoked its mandate; this likely resulted from a lack of enforcement, rather than from a judgment of the mandate as ineffective (Nieves Gomez-Aguilar, Emilio R. Barbadillo, Nieves Carrera, Christopher Humphrey, “Mandatory Firm Rotation in Spain: A Policy That Was Never Applied,” working paper, 2006, http://latienda.ie.edu/working_papers_economia/WP06-21.pdf).