Investor Reaction to the Prospect of Mandatory Audit Firm Rotation

• In Event: Multiple Auditor Engagements

Abstract

The PCAOB is currently discussing the implementation of mandatory audit firm rotation in hopes of better aligning auditors’ interests with investors’ interests. Through the receipt of comment letters in response to the August 16, 2011 Concept Release, the Board has heard from important constituents including management of public companies, audit committee members, and audit firms. The PCAOB, however, received very few comment letters from investors. This study provides insight into investors’ views of forced rotation by evaluating the market’s reaction to this potential policy. The results reveal that most investors oppose mandatory firm rotation. In particular, investors are more opposed to forced rotation if the company in which they invest currently employs an industry specialist as an auditor, is a large public issuer, or utilizes a Big 4 auditor. Furthermore, investors appear to be opposed to mandatory rotation regardless of the tenure of the current auditor.

Authors

• Lauren Carse Reid, The University of Tennessee–Knoxville

• Joseph V Carcello, The University of Tennessee–Knoxville