Mandatory Audit Firm Rotation In Indonesia: Comparison Between Before and After Regulation Period

• In Event: Forensic & Investigative Accounting and Audit

Abstract

Differ with many other country, in Indonesia, rotation not only apply to auditor but also to audit firm. This regulation create quasi (unreal) rotation. This research aims to investigates the impact of real firm audit rotation and audit tenure to the audit quality. The audit quality is measured by earning quality (predictive value, timeliness, representational faithfulness and neutrality perspective). The sample data are the public listed companies from period before the regulation (1999-2001) to period after the regulation (2004-2008). This research finds the quadratic relationship between tenure and audit quality (not merely linear relationship as noted in previous research).
In the pre-regulation period, there is no impact of both audit firm tenure and audit rotation to audit quality. In the after regulation period, audit firm tenure has convex relationship with audit quality from neutrality and timeliness perspectives with minimum point at 10 and 8.3 years. As the decrease period is quite long, we can conclude that the relationship between audit firm tenure and audit quality is negative. This research also found that audit firm rotation does not affect audit quality in the after rotation requirement period. Therefore, regulator should consider other requirements to improve audit quality.

Authors

• Fitriany Abdul Mutholib, Universitas Indonesia

• Sidharta Utama, Fakultas Ekonomi Universitas Indonesia

• Dwi Martani, Universitas Indonesia

• Hilda Rossieta, Universitas Indonesia