Potential Outcomes of Mandatory Audit Firm Rotation in the US Audit Market

• In Event: Continental Breakfast and Research & Education Forum
  In Roundtable Session: Table 5: Effects of Auditor Transitions

Abstract

I theoretically demonstrate the existence of an optimal mandatory audit firm rotation (MAR) cycle with minimum audit costs, even though MAR increases audit costs for auditors. Any form of MAR is likely to go against current auditors’ incentive to avoid incremental costs of MAR. The simulation results of MAR suggest the following: MAR will result in (a) an increase in Big-4 concentration by increasing demand for Big-4 auditors, (b) less variation in audit quality measured by clients’ utility across auditor tiers, and (c) decrease in audit fees. The market share outcomes reveal a structural hole in the audit industry and suggest an entrepreneurial opportunity for auditors to serve clients likely to be mismatched under MAR.

Author

• Han-Up Park, Temple University