ELSEVIER Mandatory Rotation of Company Auditors: A Critical Examination

Mandatory rotation of corporate auditors has been proposed at EU level in order to improve audit quality. The paper analyses the effect of this requirement on audit cost and quality. The rule is shown to increase audit cost and price through the destruction of specific assets and the distortion of competition. A negative impact on quality is also a highly plausible ffect, as a consequence of the lower technical competence of audi-tors and fewer incentives for independent behaviour--at least for diversified auditors. These conclusions are supported by relevant data on the auditing industry and some empirical evidence on the effect of the rule in the countries where it has been imple-mented. © 1997 Elsevier Science Inc. I. Inu'oduct ion To improve corporate auditing, several regulatory measures have been discussed in recent imes. Among them, mandatory rotation of auditors has received relatively sparse attention in academic ircles, in contrast to the professional nd public debates. In this area there are remarkable differences of opinion, and there is considerable disparity in the legal provisions in different countries. Thus, a periodic rotation of auditing firms is required for Italian listed companies, and rotation rules were also introduced in Greece and Spain, although most legal systems have allowed a free choice of auditors---th